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U.S. May Loan FDIC to Insure Banks   March 5th, 2009
A bailout by any other name...       

 
QUICK OBSERVATIONS

More observations...
 

It was reported yesterday that the FDIC--which insures bank customers against loss if their bank fails--could face insolvency this year as it was holding only $18.9 billion to insure trillions of dollars of deposits. Never fear, it looks like the Federal Government may bail out the FDIC.

The story from yesterday about potential insolvency:

Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures, as she responded to an industry outcry against new fees approved by the agency.

'Without these assessments, the deposit insurance fund could become insolvent this year,' Bair wrote in a March 2 letter to the industry.


Having never met a bailout he didn't like, Senate Banking Chairman Christopher Dodd effectively proposed another one:

Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department...

The FDIC would be able to borrow as much as $500 billion until the end of 2010 if the FDIC, Fed, Treasury secretary and White House agree such money is warranted. The bill would allow it to borrow $100 billion absent that approval. Currently, its line of credit with the Treasury is $30 billion.


Sure, why not? It's only half a trillion. Chump change at this point.

So it was $700 billion for TARP, then $789 billion for Obama's spending bill, then a $410 billion appropriation for FY2009, then a $3.6 trillion FY2010 budget, and now a $500 billion bailout for the FDIC. We're popping spending bills and bailouts like M&M's at this point. The various spending bills and bailouts just mentioned amount to $6 trillion. That's spending proposals and obligations equal to about 60% of the national debt in six months. And it doesn't even include the trillions that have effectively been loaned or guaranteed by the Federal Reserve.

Now when it comes to bailouts, I'll agree that insuring that the FDIC doesn't go bankrupt is one of the better uses of bailout money. The only reason people aren't hoarding cash is because they have at least a certain amount of confidence that the FDIC really will insure their funds. The news that FDIC could be insolvent was unsettling, to say the least, and we don't need a run on perfectly stable banks because the FDIC (not the banks!) is insolvent!

Imagine that... a massive run on perfectly healthy banks causing those perfectly healthy banks to fail--not because the banks did something wrong, but because (drum roll) a government agency is insolvent! And we're supposed to believe that the government is the solution to our problems?

The FDIC is potentially on the verge of causing a run on all FDIC-insured banks! The FDIC should have been self-funded for decades to prepare for this kind of crisis, because that's when the FDIC is needed the most. But they were apparently ill-prepared and lacked the foresight to plan for a banking crisis. And that was their job!

Yet we are to believe that that same government knows how to best spend trillions of our dollars and potentially nationalize banks and the auto industry; all so that they can run those entities as effectively as... the FDIC?

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