The FDIC

[Burke]

Before the FDIC, bank depositors needed to wonder about 2 things when picking a bank to put their money in: how safe their money would be in the bank they chose and what interest rate they would be getting.

After the FDIC, they only had to worry about the interest rate, because the FDIC was guaranteeing their deposits.

In order to pay high interest rates, banks must get higher interest rates on the loans they make. In order to get higher interest rates, they must make riskier loans.

Is it necessary for me to explain that this is a recipe for disaster?

Something else. The FDIC is funded by all banks which must pay into a pool to repay depositors of failed banks.

This means that in times of real trouble, when a lot of banks are failing, these bad banks can drag good banks down with them. I might add that good banks are forced to make risky loans to compete with bad banks for customers, a fact that makes it harder for good banks to stay in business.

This is called a systemic failure.



And guess who picks up the tab for that?

[rivergator]

yes, I think we all remember those wonderful days in 1929 before the FDIC existed.

[wgbgator]

Yeah, we havent had a good bank run in awhile.

[Burke]

When you create a system that rewards imprudence and forces prudent and responsible people to subside them, what's going to happen?

Virtually everything the govt does in the economy amounts to just that.

[rivergator]

Originally Posted by Burke

When you create a system that rewards imprudence and forces prudent and responsible people to subside them, what's going to happen?

Virtually everything the govt does in the economy amounts to just that.

what happened before the FDIC was created?

[cocodrilo]

I switched to a credit union three or four years ago. And one of the banks where I had done business failed (taken over by another bank). Credit unions have their own deposit insurance, I forget the acronym, but I'm trusting they're safer than banks. At least they don't have bankers' bad reputation. (No one accuses credit unions of ruling the world.)

[Burke]

River,

Before the FDIC, banks that made bad loans went broke and depositors that chose to use them lost their money.

Not yours and mine.

Just as it should have been.

[rivergator]

Originally Posted by Burke

River,

Before the FDIC, banks that made bad loans went broke and depositors that chose to use them lost their money.

Not yours and mine.

Just as it should have been.

I'm not sure the depositers are at fault here. Besides, with no FDIC, you get runs on banks because people get scared. And even a stable bank doesn't have enough cash on hand to return every deposit. So then what?
That did create a bit of a problem in 1929.

[Burke]

The 1929 crash was caused by Hoover increasing taxes, signing the Smoot-Hawley tarriff, the Fed tightening up the money supply suddenly after a period of loosening, and other things.

In a free society, choosing a bank is an investment decision.

And no one is entitled to have their investments guaranteed by others.

[gatorman_07732]

Originally Posted by cocodrilo

I switched to a credit union three or four years ago. And one of the banks where I had done business failed (taken over by another bank). Credit unions have their own deposit insurance, I forget the acronym, but I'm trusting they're safer than banks. At least they don't have bankers' bad reputation. (No one accuses credit unions of ruling the world.)

Did that to until it turn into a federal credit union and basically a bank. I just decided to go with a small bank and if they get bought Then I pull out and go to another small bank (which I haven't had to do).

[rivergator]

Originally Posted by Burke

The 1929 crash was caused by Hoover increasing taxes, signing the Smoot-Hawley tarriff, the Fed tightening up the money supply suddenly after a period of loosening, and other things.

In a free society, choosing a bank is an investment decision.

And no one is entitled to have their investments guaranteed by others.

Smoot-Hawley was signed in 1930. The tax hike in 1932.

[Burke]

In a free market system, some businesses are going to fail. Their assets are going to be picked up by smarter, more responsible people who will use them more wisely.

That's the way it works.

When you force the smarter people to subsidize the dumber people, it is a prescription for catastrophe.

The dummies end up running the show.

Which is what we have now.

[Burke]

Okay, you're right, I was thinking about the depression that followed.

The Fed created the stock market crash with its loose money policies.

Just like we will be seeing soon again.

[oragator1]

Originally Posted by Burke

The 1929 crash was caused by Hoover increasing taxes, signing the Smoot-Hawley tarriff, the Fed tightening up the money supply suddenly after a period of loosening, and other things.

In a free society, choosing a bank is an investment decision.

And no one is entitled to have their investments guaranteed by others.

Other things being a bubble caused by loose money, which in part was because of banks.

And the problem with bank runs is that good safe banks go under due to wider panic, misattributed rumors and sometimes as little as a couple of big names pulling their money for perfectly valid reasons. When a bank goes under now they get sold in a way thats almost a liquidation, there is no reward for bad behavior, bank runs stop making the financial system more secure and liquid, and investors are more likely to utilze them, meaning there is more money for lending, helping the economy, offsetting the short term loss the banks have paying in to the system.
But imagine what would have happened in 2008 without it? Holy cow don't even want to think about it, we wouldn't have a banking system.

[gatorman_07732]

Originally Posted by oragator1

Other things being a bubble caused by loose money, which in part was because of banks.

And the problem with bank runs is that good safe banks go under due to wider panic, misattributed rumors and sometimes as little as a couple of big names pulling their money for perfectly valid reasons. When a bank goes under now they get sold in a way thats almost a liquidation, there is no reward for bad behavior, bank runs stop making the financial system more secure and liquid, and investors are more likely to utilze them, meaning there is more money for lending, helping the economy, offsetting the short term loss the banks have paying in to the system.
But imagine what would have happened in 2008 without it? Holy cow don't even want to think about it, we wouldn't have a banking system.

Ora, I think you honestly know the banks were (for lack of a better word) encouraged by our own government to provided loose money standards.

[bluelang]

Banks don't have to make risky loans to get back more than they take in on bank accounts. First of all, 99% of bank accounts don't pay interest in the first place, and secondly, all they need to do is pay less in interest than they take in. They could be paying out 1% to savings accounts and making 1.5% on loans or investments and still turn a profit.

[bluelang]

Not to mention that what you called a recipe for disaster was a recipe for trillions of dollars of profit over almost a hundred years of prosperity, and is a cornerstone of capitalism. Risk is required. Risk is good. You know what lacks risk? Socialism.

[Burke]

The FDIC insures both savings accts and CDs, which pay interest. In certain cases, for large depositors, I understand they sonetimes even pay interest on checking accts.

All the FDIC has done is make all banks equally trustworthy in the eyes of depositors.

Which means they normally deal with the bank that pays the highest interest rates.

Which is usually the least solvent bank.

What we have been doing for decades is obliterating the difference between good banks and bad banks.

And the chickens are coming home to roost.

[rivergator]

Originally Posted by Burke

Okay, you're right, I was thinking about the depression that followed.

The Fed created the stock market crash with its loose money policies.

Just like we will be seeing soon again.

Basically, you have decided it was the government's fault and then just change the facts to suit your conclusion. It was the tariffs .. it was the taxes ... no, wait, it was ....

[Burke]

Basically, I decided that the govt has caused virtually all our economic problems with its interference.

I knew that Hoover's tax increase and tariff had come after the stock market crash, but I was making a general comment about all our problems in that era, the crash, the depression, everything.

Albeit I was not very precise about the sequence of events.