Wednesday, March 11, 2009

Dilbert Land

Everything about this is so Dilbert. The FDIC mechanism, the fact that the FDIC did not collect premiums for the last 10 years, and Calculated Risk's reaction to this. First, the crime:
WASHINGTON - The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.

The Federal Deposit Insurance Corporation, which insures deposits up to $250,000, tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized - and that bank failures were so infrequent - that there was no need to collect the premiums for a decade, according to banking officials and analysts.
To which Calculated risk was shocked shocked! "Hoocoodanode?"

Who cares?

FDIC means that the Government assumes responsibility for bank liabilities (deposits) up to $100K, and now $250K. The Govt collected a "premium" to put in a "rainy day fund" to be able to make the depositors whole.

But the Government is the monopoly currency issuer. It does not need a "rainy day fund" anymore than a bowling alley needs to keep "points" stockpiled. So, all the "premium" did was tax banks, no money was set aside anywhere, it was simply "uncreated" to the extent the Government chose to enforce its own rules at all. By why maintain this ludicrous fiction in the first place? If the Government wants to tax banks, it should simply tax banks. FDIC should be eliminated, and the Govt should simply back all commercial bank deposits. Not only would this be True, but it would also get rid of the abominable money market fund, a destabilizing scam if there ever was one. Banks do not need deposits to make loans, in fact, bank lending creates deposits. Use capital requirements to control credit. Back deposits to eliminate runs.


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