Thursday, October 2, 2008

An FDIC Catch 22

I am sure you have all heard about the bail out plan ad noseum over the last week or two. I am also sure a lot of us are unsure what to exactly make out of the plan, never mind understanding where all the money could and would go and whether this is a good thing. I myself, have wavered about whether this is a good thing or not. In general, I tend to believe the economic folk in charge (I am looking at you Ben Bernake). So, if they say the economy needs this, I will tend to believe you know your stuff. After all, if you are sick, you tend to listen to what the doctor says. If you want to double check what the doctor thinks, you get 2nd and 3rd opinions. In this case, 2 big heads of the economy, Bernake and Henry Paulson say we need this. So, I tend to lean towards listening to their opinion, especially Bernake who should not care who carries the election. My only request is that we add some regulation, or at least some oversight, to the banks so that this does not happen again.

One item I do want to bring up is related to the talk about increasing the FDIC (Federal Deposit Insurance Corporation) limit on bank deposits from $100,000 to $250,000. The reasoning behind this is to stop people with large deposits (currently anything over $100,000) in banks from withdrawing their funds. In other words, by raising the FDIC limit to $250K, people's bank deposits would be insured up to that dollar ammount. The result would, in theory, be that people with large bank deposits would leave their money in the bank so that the bank can then turn around and lend the monies to someone else, thus helping the credit situation.

One catch with raising the FDIC limit, is that since the FDIC is an insurance, raising the coverage from $100,00 to $250,000 should result in an increase in the premium charged to the banks. In doing so, the banks would have to dole out more money to pay for the increased coverage as opposed to having that money to lend it out to businesses and people. As such, there has been some talk about increasing the FDIC coverage without increasing the premiums for the banks. However, doing so could be tragic in a future economic crisis as the FDIC would likely not have enough funds to cover all the deposits.

While I now believe some federaly sponsored aid is needed, I just hope that legislators do not remove so many safeguards/oversight measures now to help banks that in a few years we find ourselves in a bigger hole that we currently find ourselves in.

2 comments:

Nate M. said...

An interesting point on the $100K FDIC limit- apparently there is some concern that there will be so many mergers that people with lots o' cash will find themselves in a position where the money they had safely spread out in multiple banks will now be in a single bank, and hence, less of their worth will be insured. If you're using regional banks, you might not even realize that those mergers have occurred. Of course, as someone with nowhere near $100K to my name, these sorts of changes won't affect me directly.

Regarding your last point, if the DNC picks up seats in both houses and if Obama wins as well, I think you're likely to see significantly more regulations on banks than we've had since 1999.

mainou said...

It sure will be interesting to see what happens. I just hope Obama pulls ahead for good because Palin scares the beejeeves out of me.