No. All Deposits Under $250,000 Aren’t ‘Covered’
I assumed this was obvious, but it's clear from some reader feedback that it needs reiterating: Bank runs tend to beget more bank runs, which is why you can't have bank runs. During the course of America's latest financial crisis (which will be three weeks old as of Wednesday), more than a few readers have suggested that "all" banks could theoretically fail and the vast majority of Americans wouldn't have anything to worry about. Small deposits are insured by the government, after all. In the
6 thoughts on “No. All Deposits Under $250,000 Aren’t ‘Covered’”
So, the government will run out of dollars?
You wanted the math, now you have it. And that’s the last response you’re going to get from me on this topic. I don’t care how many comments you leave.
In case you haven’t heard, they already have. Because the thin majority in the House wants to “put it to” the other side, it has allowed us to reach and breach the debt ceiling and unless this is remedied soon, the Treasury will begin defaulting on existing obligations, putting our standing as a reserve currency in jeopardy and opening the door to the Chinese to step in.
The question was largely facetious. H knows well that the government can’t run out of money unless, as you pointed out, it’s voluntary. As such the answer, in a worst case scenario, would appear to be money creation. Maybe not the worst solution in a scenario where velocity would be crashing through the floor.
The FDIC has essentially completely emptied itself and when it did banks were pretty much on their own. As a result of that mess nearly half of all small banks were closed or acquired. The insurance premiums banks paid tripled immediately and it was all hands on deck for the remaining banks. I was working for a bank CEO as a strategy consultant when this happened and our profits took a pretty big hit trying to do our part to fix this. No government help.
Here’s the way to view this. Deposits are an asset to an individual who has an account. I currently have nine of these at various places and of various types. To the bank deposits are a liability they owe you. They are not, as some believe, a product. A product produces revenue, and/or assets. Deposits do none of this, per se. Neither the Treasury nor the regulators care much about your assets. There is no mandate for anyone to prop up the asset markets. That is a private sector problem which, in a market system, is expected to take care of itself. The FDIC is an insurance agency that was established to protect depositors, after many lost everything during the depression. Banks couldn’t pay depositors because their assets (loans of various types) were mostly worthless. They couldn’t pay depositors because borrowers couldn’t pay them. No government stepped in directly. Originally, FDIC covered 25k per depositor. In the huge S&L crisis in the early eighties the amount of insurance was raised to 250k while bank failures were running amok. Again, no bailout ensued, but FDIC premiums skyrocketed to keep the fix, fixed. This bailout idea came into being during the great unpleasantness in 2008 when we messed up too much. We can’t let our banking system fail because there would be no money. However, we can’t really keep propping up asset markets because that’s not our system, and no there isn’t enough money.
FDIC Insurance was increased from $100K to $250K per depositor in October 2008. It was initially a temporary increase that was later made permanent.