Posted on 08/10/2005 5:17:41 AM PDT by OESY
Remember the 1980s savings-and-loan crisis? By the time it had all played out, taxpayers were on the hook for $125 billion. Yet members of Congress who play a central role in regulating the banks seem to be suffering from a severe case of collective amnesia....
That's the only conclusion to be drawn from the recent 413-10 vote in the House of Representatives in favor of legislation that would recreate some of the same perverse conditions that magnified the taxpayer cost of the S&L bailout. The bill would increase federal deposit insurance to $130,000 from $100,000 per account and double the insurance for retirement accounts to $260,000.
...Back in 1980 the insurance limit was raised to $100,000 from $40,000 during the notorious "midnight maneuver" by then-Banking Committee Chairman Freddy St Germain....
Many Americans still cling to the belief that deposit insurance is necessary.... But bank runs and closures were mostly the result of Depression-era banking regulations that prevented interstate banking and risk diversification. Most of those regulations have been overturned.... As a consequence, banks are financially healthy, even thriving. Federal Reserve Board data indicate that small and community banks, which are supposedly most in need of higher deposit insurance limits, are fiscally sound and are growing faster than the large bank conglomerates.
The gradual erosion of the value of the deposit-insurance limit has had a positive impact on investment behavior and sound banking practices. A larger share of Americans' savings is now parked in non-federally insured accounts -- much of it in equities and mutual funds with higher rates of return. This trend has helped foster the explosion of the investor class -- now a vibrant 100-million-strong, worker-shareholder movement. Raising the deposit-insurance limit could have the undesirable effect of diverting funds away from stock ownership into low-return bank deposits....
(Excerpt) Read more at online.wsj.com ...
Generally, when a bank goes bust, they ignore the insurance cap anyway. So the only thing we're doing by limiting the insurance cap to $100,000 is we are telling the bank that it won't have to pay for the full cost of the deposit insurance, and that the taxpayer will pick up the difference.
I can't see why that is a good idea. Might as well increase the limit to $500,000 and collect a little more money from the banks for the cost of the insurance. Afterall, if they are doing so well right now, as the article says, then they can afford it.
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
"Back in 1980 the insurance limit was raised to $100,000 from $40,000 during the notorious "midnight maneuver" by then-Banking Committee Chairman Freddy St Germain..."
...(D-RI). I don't see what the big deal is about raising the limit to even $500K. Banks don't fail that often, but just in case...that's what insurance is for.
That said, I don't see the point in keeping more than $10K on deposit to cover your checking account and have some cash on hand. Interest on a pass book savings account minus inflation works out to a net loss. You'll be better off investing your money prudently.
***The bill would increase federal deposit insurance to $130,000 from $100,000 PER ACCOUNT and double the insurance for retirement accounts to $260,000. *** Emphasis added.
I may be wrong, but I think the insurance is for each person in each bank, and not per account.
FROM the FDIC site:
***FDIC insurance will cover your deposit accounts, dollar for dollar, including principal and any accrued interest, up to the insurance limit.***
From the FDIC site;
***The FDIC insures deposit accounts such as /snip/ and certificates of deposit (CDs). The basic insurance limit is $100,000 PER DEPOSITOR PER INSURED BANK*** Emphasis added.
The writer of the article has it wrong when he says it's for EACH ACCOUNT. In other words, you can't have two or more accounts totaling more than $100,000 in ONE bank and be insured for all of them.
"..(D-RI). I don't see what the big deal is about raising the limit to even $500K. Banks don't fail that often, but just in case...that's what insurance is for."
The big deal is why should the taxpayer underwrite that risk ... let the rich people underwrite their own risk of investment.
I guess every one's forgetting the S&L days. The insurance level was raised, financial institutions paid above market interest for deposits to increase their lending ratios, loaned out lots of bad loans, went belly up, but everyone was happy because they were insured. The depositor was completely indifferent to the quality of the banking institution since they were protected. They simply shopped for the best interest rate. And as shown with the bond market, the more financially unsound you are, the higher the interest rate you pay. So the worst S&Ls paid higher interest rates which drew in more assets. The equivalent of getting to buy a portfolio of junk bonds and yet having the protection if they go bankrupt.
The point of my post was that rich people don't keep their savings in banks; they invest it. The FDIC is for everyone else. This stat is from a site called Unclaimed Money:
"There has been at least one bank failure every year since 1934, with more than 1,400 banks and 700 savings institutions closing between 1982 and 1992 alone."
Rhody in particular had loose banking laws. In fact, the state's banking system collapsed in 1991: "The day before Bruce Sundlun was to take office as governor he learned that the Rhode Island Share and Depositors Insurance Corporation (RISDIC) was going into receivership. RISDIC provided depositor insurance for more than thirty banks, savings and loan institutions, and credit unions in the state. The failure of RISDIC meant that the funds deposited in those institutions were no longer insured. By state law the institutions could not continue to operate without insurance.
"As a result, among Sundlun's first official acts as Governor on January 1, 1991, he ordered the immediate closing of the banking institutions insured by RISDIC. They were to remain closed until such time as they could obtain federal insurance from the Federal Depositors Insurance Corporation (FDIC) or the National Credit Union Association (NCUA). Until they could obtain federal insurance, the funds of depositors in those institutions were frozen and unavailable to the depositors. Many of the RISDIC insured institutions were able to obtain federal insurance very quickly and reopen in a matter of days. Others, including many of the largest institutions, were unable to do so." source
It wasn't just that the insurance level was raised. It was ignored. It was completely ignored because the FDIC was afraid that it would cause a run on the banks if it told millionaires who lost a million bucks that they would get only $100,000 back. So if you're going to ignore the limit anyway, then why have one? And if you're not going to have a limit, then why charge the banks only enough for the insurance to cover losses up to only $100,000?
Agreed. They need to adjust the insurance rates to account for differences in credit worthiness of the individual financial institutions. But that would be unfair and too difficult in the eyes of the government.
But you have to admit, someone with more than $100,000 in a single savings account is far from poor.
Yes, good summary.
The S&L Crisis is an example akin to what happens in Gresham's law:
http://en.wikipedia.org/wiki/Gresham's_Law
Bad money chases out good money.
Bad risks chase away good risks that dont pay as well.
Socializing risk but privatizing reward is a great way to rape the taxpayer.
IMHO we would be better off eliminating FDIC except for the mothers-n-orphans level savers. Most investors today are taking fully privatized risks in money markets, stocks and bond accounts; they dont need a taxpayer bailout.
BTW there are a lot of interest-only 5 year loans out there today on people's homes that may have trouble re-fi-ing in the near future. Deja Vu all over again. ;-)
...but far from rich, as well.
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