What's wrong with expanding FDIC coverage "temporarily" like the Irish have done?

[grapejelly]

http://www.iht.com/articles/ap/2008/09/30/business/EU-Ireland-Bank-Guarantee.php

Shares in Irish banks surged Tuesday after the government issued a sweeping guarantee to insure deposits and bank borrowings against a potential collapse.

The government unveiled an unlimited guarantee on deposits at six banks one day after the Irish Stock Exchange suffered its greatest fall in history — and rumors spread that millionaire depositors were withdrawing their savings from Irish institutions.


Investors embraced the government's dramatic intervention and Irish bank shares jumped, reclaiming most of Monday's losses.
Finance Minister Brian Lenihan said all deposits in Ireland's six domestically owned banks would be taxpayer-guaranteed if any failed. The guarantee does not apply to foreign-owned banks in Ireland, because they are subject to their own parent nation's protections.

Yes I can understand why investors in banks would jump for joy.


Why is this a bad idea?


Because it encourages investors to take money out of productive purposes such as investing in bonds of productive companies and in stocks of good companies, and put it in the bank where it is not productive.


Banks used to be productive but now they are giant hedge funds. They manufacture great gobs of money and speculate with it, or lend it to hedge funds.


The real purpose of guaranteeing bank deposits beyond the FDIC limits would be the original purpose of granting the Fed the monopoly on printing money: the banks could buy more government treasurys to shore up their balance sheet.


Oh wow. I'm excited about that prospect :rolleyes:


This is another panicked misguided and very, very bad decision and it will spread here to the US. Cramer already called for it and I expect this idea will gain broad currency because "it won't cost the taxpayers any money."


Wanna bet on that?

[Starving Steve]

Re: What's wrong with expanding FDIC coverage "temporarily" like the Irish have done?

Helping savers by insuring their savings is a GOOOOOOOOOOOOOD idea.
Now how about rewarding savers with HIGH INTEREST????????????? And then, maybe how about changing tax policies to stop taxing interest on savings? Maybe tax consumption instead of taxing thrift?

Why is common-sense so radical these days? :rolleyes:

[Tulpen]

Re: What's wrong with expanding FDIC coverage "temporarily" like the Irish have done?

Why is this a bad idea?

It is a bad idea if the banks do not want to cover the losses and expect the government to pay for it.

We have to understand what is fair here. If you keep cash at the bank do you expect to do that without any cost? In the case of a regular cash account the bank puts that money to work. This will cover the cost of checking, on-line services, ATMs and after the bank takes a profit it is often able to return you an interest on your cash. Now each investment, even the very conservative ones, contain an element of risk. That it how it should be IMHO. To reduce that risk the banks collectively have an insurance fund to payout account holders in case one of their banks fail. So a higher insured amount will obviously mean a higher premium that each bank has to pay to the fund, which means lower total returns on the cash investments, which translates in a lower interest rate for the bank's clients.

If you do not like that risk you can rent a safety box at the bank but your protection obviously comes at a cost. And even then it is not totally safe, the bank could be robbed.

It is all a matter of risk.

[sunskyfan]

Re: What's wrong with expanding FDIC coverage "temporarily" like the Irish have done?

It is a very bad idea. There are leveraged securities running around like viruses trying to attach themselves to something real to gain legitimacy. This provides a path for them to the people's money. This is "bailout" from a different direction. Let's make one big FDIC insured bank that also happens to also own the toxic securities and they both disappear in a Gamma ray flash. Oh sh*t ... that is called the US Government.

[c1ue]

Re: What's wrong with expanding FDIC coverage "temporarily" like the Irish have done?

Steve,

The main problem with an overly high FDIC guarantee limit is the moral hazard.

Or more specifically, why wouldn't banks offer ever higher rates of interest and then use the deposits for high risk investments - knowing that when the worm turns big mommy Bair will make it all right?

You'll note that WaMu and Wachovia both were offering some of the highest deposit interest rates - hence my mother moving into them - just before they failed.

I understand your goal of rewarding savers, but the best reward for savers is a net positive sum of interest rates minus inflation.

The present sum is very very VERY negative, and having 5% or 7% interest is worthless if inflation is 10%.

Continued and growing FDIC expenses also drive inflation up as more and more Treasuries are created to refill the FDIC fund.

[Kimmons]

Re: What's wrong with expanding FDIC coverage "temporarily" like the Irish have done?

Bad Idea in the first place. It only applies to a few people, anyhow. There's the smart people who already moved all their crap into smaller accounts, there's the people who don't have over $100K to protect (maybe 90% of all people), then those who have a bucket load more. The only people who have perceived value here are those people who have more than 100K, less than $250 in one place.

Reminds me of the increases in loan limits for mortgages (FHA)...looked good on paper...but so few people fit that demographic, to think it would give any support to the market was faulty thinking.

IMHO same here. A token gift.

[rj1]

Re: What's wrong with expanding FDIC coverage "temporarily" like the Irish have done?

You'll note that WaMu and Wachovia both were offering some of the highest deposit interest rates - hence my mother moving into them - just before they failed.

LMAO. As a person with a savings account at Wachovia for the last four years, Wachovia's interest rate was just one notch higher than jacksh*t.


One question about the Irish. They're guaranteeing double the worth of their entire economy. They do not control their currency as they are in the eurozone. So, if push comes to shove, how are they going to pay for it? Even for something like 5% or 10% failure? It's not like they can print money, they don't control the printing presses. The only way I think they can would be dump the euro and reintroduce the Irish pound as a kind of "Rentenmark".

I have no problem with the FDIC increasing deposit insurance to $250k, but I don't think they have enough money to back the $100k they're doing now.