There’s a Reason for Deposit Insurance

New York Times ^ | 03/15/2013 | ROGER LOWENSTEIN

[SeekAndFind]

FOR all the criticism of bailouts since the financial crisis struck, virtually no one has suggested that depositors in banks be made to suffer along with their investors, employees and customers. Until this week, when the euro zone proposed that, in return for a bailout of the failing banking system in Cyprus, depositors pay a “tax” of 6.75 percent of their deposits — 9.9 percent for deposits above 100,000 euros.

Because bank deposits in Cyprus, and virtually everywhere, are insured, the plan shocked many people who figured that this insurance was the one financial safety net that was still truly “safe.”

The Cypriot Parliament shot down the plan, though a smaller hit to depositors — many of whom are wealthy foreigners — was still in the offing late last week. Yet the tempest in the eastern Mediterranean is a reminder that depositors, in fact, are also creditors of banks and are potentially at risk.

In the United States, deposit insurance is viewed as sacrosanct. But even here, such plans haven’t always worked, and at least until recent times they have been contentious.

If the nation has a father of bank insurance, it is Joshua Forman, one of the promoters of the Erie Canal. Early in the 19th century, New York State had a string of bank failures, and Martin Van Buren, then governor, asked him to restructure the banking industry. Forman’s insight was that banks were vulnerable to chain-reaction panics. As he put it — in a line unearthed by the Harvard Business School historian David Moss — “banks constitute a system, being peculiarly sensitive to one another’s operations, and not a mere aggregate of free agents.”

[C210N]

FDIC will ALWAYS FOREVER and EVER cover the funds in our banking accounts!

... up until the day that it does not. and from that point in time, it will never cover those "funds".

[Diogenesis]

It is all a scam already.

In the USA, the FED has kept rates ~ 0%, which has
led to a 5% loss per year in all deposited accounts.

Over 3 years, this has been a 15% loss due to the
governments failure to give a normal budget
as the Congress has destroyed the fabric of America
(for themselves and al Qaeda).

[C210N]

Indeed. If the Cypriot banks had the foresight that their American counterparts had and have, they would have been shaving off 5% of their depositors funds every year for the last 3+ years, thus staving-off the need for this drastic measure.

[PGalt]

BUMP! BUMP!

(insurance = socialization of risk...another socialist scam)

“Everything about socialism is sham and affectation.” - 23.11 Ch23; Evil; Economic Harmonies; Frederic Bastiat 1801-1850

[KarlInOhio]

But since Cyprus no longer has its own currency it can’t just create money out of thin air to steal a portion of every dollar in existence like the US government and Federal Reserve can. That way your money can be swiped even from under you mattress.

[DManA]

I’d be interested to hear how the class of people that own the Cypriot banks are “suffering”. Let’s have a story about the suffering of the upper managerial class whose decisions drove their companies into the toilet. Suffering?

Have any of these incompetent managers even been fired?

What fraction of the owners and managers personal wealth did they keep in their own banks? I’m guessing they are a LOT smarter when dealing with their own wealth than they are with OPM.

[sickoflibs]

RE :”The Cypriot Parliament shot down the plan, though a smaller hit to depositors — many of whom are wealthy foreigners — was still in the offing late last week. Yet the tempest in the eastern Mediterranean is a reminder that depositors, in fact, are also creditors of banks and are potentially at risk.”

Wealthy foreigners who wont be saving there anymore.
Raiding your own state's bank accounts sure sounds suicidal.
Its stuff like this that allows the US to continue to run up debts with low interest rates.

[SampleMan]

When/if U.S. banks have a mass failure the FDIC will act in a totally political manner.

1. There isn’t enough money to cover the losses.

2. The FDIC will hold off on paying and finally come up with a scheme that smells like Cyprus:
a. Cover 100% the first $1000
b. 75% up to $5000
c. 50% up to $50,000
d. 25% up to $100,000
e. 0% over $100,000

[ziravan]

“Indeed. If the Cypriot banks had the foresight that their American counterparts had and have, they would have been shaving off 5% of their depositors funds every year for the last 3+ years, thus staving-off the need for this drastic measure.”

It’s not the banks directly; it’s government policy at the behest of the banks. The US Gov’t isn’t actually shaving accounts: it’s implementing policy favorable to its favored businesses and debt load that comes at the expense of savers.

Currency isn’t changing hands, only value. While it is true that the government is printing money hand over fist, that money is being tied up with servicing the debt, mortgages and deficit spending. In the case of the first two, the “new” currency is illiquid. In the case of the last, it crowds out private capital. As a result, none of Uncle Daddy’s printing press-orgy makes it way back into the main economy in liquid or positive ways.

This is the main problem with Central Banks/Socialism in the first place: central planners view the end users of their manipulations as problems to be handled instead of opportunities for mutual benefit. Depositors/savers are generally viewed as suckers compared to the obviously more hip and savvy bankers/borrowers. There is a scam here and savers are the marks.

These scams in these forms wouldn’t help Cypress. To the main point, Cypress couldn’t implement Fed-like Bernankeisms even if they wanted to do so. They don’t control their own currency. That is the point of the problem and exactly why the People of Cypress are at the mercy of foreigners.

If Cypress controlled their own currency, they almost certainly WOULD be following Uncle Daddy’s example.

[BfloGuy]

As a result, none of Uncle Daddy’s printing press-orgy makes it way back into the main economy in liquid or positive ways.

I'll agree with the "positive" part, but the Fed's purchasing of government debt returns to the economy to the tune of hundreds of billions of government spending in wages and purchases each year. It's quite liquid.

[Wuli]

I believe banks SHOULD be required to OFFER the option of having an “insured” savings account, and they, the banks and their customers (through what banks shave off the savings rate to pay for the insurance) should buy the private insurance for them.

Private insurers, with their own skin in the game, will demand to look at the segregation of the accounts, the leverage of the accounts and where the money from the accounts is invested, adjusting the inurance rates they will charge a bank in accordance with the risks they believe the bank is taking against the accounts covered by the insurers policy. Low and behold - banks would no longer invest the deposits from their customers insured savings accounts in risky things like sub-prime mortgages or “deriviatives” based on sup-prime mortgages.

That would also greatly increase the rates that sub-prime mortgages would have to obtain, to find lenders for them, which would vastly reduce their offerings in the mortgage market, helping to reduce how much of the mortgage market such mortgages would be able to reach.