The FDIC is a Faith-based Depositors’ Insurance Company

Fund has -0.02% of insured reserves on hand

Originally published in Western Free Press

In the PBS nature documentary of our financial system, the forest fire of 2008 was quickly put out by agents of the federal government after cries of help from the endangered Bear Stearns. Now, spring has come again to Yellowstone. The camera pans across lush, green foliage backlit by the sun shining in a clear blue sky. There have been bumps in the road, sure, but the recovery is imminent, as evidenced by still shots of rabbits, squirrels, and youthfully energetic Chevy Volts frolicking in the grass to the pastoral theme from

Except, despite every attempt by the media to cast this as a typical economic recession functioning on a time frame as cyclical as the seasons, the reality is that bailing out the financial system did not allow nature to run its course. Reality is missing the part of the movie where the fire incinerates the dead wood and overcrowded subprime mortgage underbrush to make room for new growth.

One very good example of an institution that should have gone up in flames during the crisis is the FDIC. The FDIC — aren’t they just the people who insure deposits up to $125,000, or something like that? What’s the big deal?

The point of the Federal Deposit Insurance Corporation is to do just that, provide insurance for bank deposits. The rationale for its creation as part of FDR’s New Deal was to prevent bank runs by guaranteeing deposits up to $2,500. Thanks to the disastrous Dodd-Frank Act, that figure has now permanently ballooned to a minimum of exactly 100 times what it originally was — $250,000. There is one very basic problem with the insurance being provided by this government-run company: right now, it doesn’t actually exist.

The FDIC’s Deposit Insurance Fund has run a negative balance for several years on end as a result of the financial crisis. Without borrowing additional funds from the U.S. Treasury, it would seem as if the company cannot provide for any of its potential liabilities with cash reserves. This presents an obvious immediate problem as the U.S. approaches the so-called “debt-default date”: if a bank fails, the FDIC may not be able to access the capital needed to meet its legal obligations and provide stability to the financial system. A total of 44 banks have failed so far in 2011, and the FDIC classifies nearly 900 banks as “problem institutions”. It is not entirely impossible that the FDIC could find itself in a serious crisis as the August 2nd deadline draws nearer.

The federal government is currently attempting to operate solely on immediately-collected revenue, a situation which would seem to leave very little flexibility for backing up deposits at failed banks with “the full faith and credit of the United States Government”. Ultimately, that is the purpose of FDR’s government-owned bank insurance corporation, vested with the power to take over institutions it deems unstable: to ensure forevermore that banking and government remain one and inseparable. As long as the government can borrow money, every bank is “too big to fail” under the blatantly socialist New Deal-era programs.

There are multiple problems with this.

The first is that no private company could ever claim to be an insurance agency if they did not have the funds to meet with the claims that their clients were bringing in. As with all government trust funds, the FDIC’s revenue goes into the U.S. Treasury’s general fund to pay for wars, Social Security, infrastructure repairs, and other things wholly unrelated to the goal of providing insurance on bank deposits. Its expenses are met with money borrowed from that same fund. With no direct link between the FDIC’s assessments and the benefits it can guarantee at any given time, its fees would then seem to be little more than an arbitrary tax ultimately paid by banking customers and investors. The FDIC is less a government-owned insurance company and more a faith-based one. There is literally no way it can independently operate with -0.02% reserve capacity, yet apparently the public is supposed to have blind trust in its ability to keep our savings secure.

Secondly, it is because of interventions like the FDIC that the federal government is rapidly becoming overleveraged. The oft-repeated description of state-run enterprise as a system that “privatizes the profits and socializes the losses” fully applies here, as the FDIC exposes taxpayers to all risk experienced by the financial system, without giving taxpayers a share of the Goldman Sachs holiday bonus. Had the fire of the 2008 financial crisis been allowed to reduce institutions that misallocated resources to dust and ashes on the forest floor, it seems unlikely that this relationship would have remained intact. Instead, then, as now, taxpayers and the U.S. Treasury remain on the hook for every mistake made by the banking industry.

Now, as the August 2 deadline for a deal over the debt ceiling draws nearer, the sparks may fly toward the FDIC once again. Congress should not shy away from asking the difficult questions about how much risk taxpayers are being exposed to through the FDIC’s theoretically infinite power to bail out or take over failed banks. Long-term policy changes should also be explored, such as closing the FDIC entirely to force banks to clean up their lending portfolios. Overall the federal government must seek to extricate itself from its tightly-entwined relationship with the world of finance to end the need for costly bailouts.