Question

Steve,

Sorry, I meant to comment on your last post but got side tracked by a wave of intense revulsion for camera hogs.

I've got a question for you about what you said which (I think) is going to require both of us to put on our thinking caps and see if we can get beyond philosophy and into practical solutions. I'll admit in advance I don't have an answer to this. Here's the deal:

The FDIC, an arm of the Federal Government insures bank deposits. A bank takes those deposits and invests them in risky ventures. Those investments go south and the bank then becomes insolvent. The Fed moves in, sells the bank assets and makes up the difference, in the form of deposit insurance payments, to the bank's depositors. What's wrong with this picture?

As you know, the FDIC was established during the Great Depression to restore depositor confidence and mitigate the effect of runs on banks, which were all too common at the time. Things have changed a little since then, but only in terms of scale. We now have fewer banks, but larger ones. And all of them, no matter what their size, have access to FDIC insurance, so long as they follow the rules.

Which brings up a crucial question. By guaranteeing bank deposits and not restricting risk, is the Federal Government in essence not just insuring against the loss by depositors, but also losses by the banks themselves?

In other words, is government saying, "Here, go over to the roulette wheel. If you win, you keep the money. If you lose, we'll cover your loses."

And how much sense does that make? So, think this through. I am absolutely certain you, Steve Green, would not keep your money in a bank which was not FDIC insured. Neither would I. In fact I doubt any bank could attract the first depositor without it. But here's the rub: exactly how much should the Federal Government have to say in regulating bank investments when it is in fact agreeing to cover the banks losses if they fail?

Should we do away with the FDIC - and (potentially) leave depositors high and dry? You seem to favor in your post the value of personal responsibility. How far are you willing to go with that?

-Chris