The FDIC (Federal Deposit Insurance Corporation) fails across the board.
- The FDIC benefits the federal government--not the public--because the FDIC enables an inflationary monetary policy's inflation tax to be palliated by paltry bank interest. If the public distrusted banks, it would demand a sound, stable, non-inflationary money supply (and would use banks only occassionally for transfers (e.g. checks) a la Western Union, rather than as a desperate attempt to preserve the real value of personal savings against the inflation thief).
- The FDIC makes us poorer. Markets work best when people act rationally but the FDIC encourages people to keep pouring money into failing banks, making the final taxpayer cleanup more expensive. The FDIC subsidizes wealth destruction and moral hazard, financed by you (FDIC charges banks an insurance premium, a cost which banks pass on to customers). You get to pay TWICE, first through FDIC-imposed higher banking costs, and second through taxpayer-funded bailouts.
- The FDIC is supposed to impose these costs on us in exchange for the stability of preventing bank runs, yet the FDIC's takeover of IndyMac bank CAUSED a bank run (or at least worsened a run), so we get the worst of both worlds, first the risk-blind malinvestment of funding failing banks, followed by a destabilizing bank run anyway, with police being called to restore order.
- The FDIC's preemptive-war policy DEstabilized the market. The FDIC did NOT takeover a failed bank. It took over IndyMac BEFORE it failed, which means it took over a non-failed bank. The FDIC's heavy-handed tactics shocked and steamrollered customers by seizing and shutting IndyMac's main branch 3 hours early in the middle of normal business operations, "leaving customers stunned and upset. One woman leaned on the locked doors, pleading with an employee inside: 'Please, please, I want to take out a portion.' All she could do was read a two-page notice taped to the door." Even if IndyMac would have failed eventually, the FDIC's preemptive-war policy not only raises concerns about causing unnecessary problems but also creates a pernicious "crowding out" effect by preempting market solutions/buyouts with government hostile takeover of market share.
- The FDIC undermines the rule of law with vague, arbitrary changes and double standards that echo Watergate-style abuse of power. The FDIC warned banks that federal Regulation Z of the Truth in Lending Act might prevent banks from protecting their depositors and shareholders by preventing banks from issuing blanket freezes on borrowers' Home Equity Line Of Credit (HELOC) (FDIC letter Financial Institution Letters FIL-58-2008 6/26/08). Then, FDIC seizes IndyMac and one of its first actions is a blanket HELOC freeze BEFORE beginning case-by-case reviews. The FDIC apparently operates under the Nixonian Watergate-scandal I'm-above-the-law principle that, if the FDIC does it, it's not illegal.
- The FDIC failed as depositor insurance when it began trying to subsidize debtors at savers’ expense. FDIC Chairwoman Sheila Bair pushed partial defaults (“debt forgiveness” or “mortgage modification with principal write-down”) instead of preventing foreclosure by offering lower payments over a longer term at the price of a higher total paid. FDIC spin that giving away your savings is for your own good is professional fraud (fiduciary fraud or defalcation), like having your own defense attorney working for the prosecution to convict you. FDIC veered further into guaranteeing debt rather than savings with its new corporate welfare to subsidize corporate debt (FDIC backs Goldman Sachs’ $5 Billion in bonds, hat tip: Comrade Swan to Anonymous Monetarist). Why is FDIC insuring debtors instead of depositors? Sheila Bair does not even know what agency she works for and does not understand that the D in FDIC stands for deposit(s) (savings), not debt (not bond investors either). Someone should tell her at her exit interview after she is fired.
- The FDIC is supposed to police banks into prudence but the FDIC is itself a subprime lender. FDIC seized Illinois Superior Bank FSB in 2001 yet the FDIC continued to sell subprime loans. According to Wall Street Journal (WSJ), "It turns out that the U.S. government itself was one of the lenders giving out high-interest, subprime mortgages, some of them predatory, according to government documents filed in federal court. . . . With FDIC people supervising day-to-day operations, Superior funded more than 6,700 new subprime loans worth more than $550 million, according to federal mortgage data. . . . Hundreds of borrowers who took out Superior subprime loans on the FDIC’s watch — some with initial interest rates higher than 12% — have lost their homes to foreclosure, data on the loans indicate."
- The FDIC is now trying to muscle in on the payday-loan market with a pilot program of interest rates up to 36%, an interest rate that many laws and consumer advocates consider/considered usurious or predatory. (e.g. Section 687.02(1), Florida Statutes, provides that contracts for the payment of interest exceeding 18 percent per annum are usurious. Interest exceeding 25 percent per annum is criminal usury).
- The FDIC failed in its psychological purpose of preventing animal-spirits speculative panics by offering government guarantees, as evidenced by (1) customer ignorance, confusion, and frustration about what is or is not insured, and (2) other banks refusing IndyMac checks even after the FDIC takeover: "MacPhee said a WaMu manager told her that under a new corporate policy, the bank was not accepting IndyMac checks. If a customer insisted on depositing the check, it could be eight weeks or more before the full amount would be accessible, she said she was told."
- The FDIC's guarantee failed because WaMu refused to cash the FDIC's check. The private bank IndyMac ceased operations on Friday 7/11 and the US federal government absorbed and replaced it with a new government entity, IndyMac Federal Bank: "'Come Monday morning, it will be business as usual for all insured customers,' said [FDIC Chief Operating Officer] John Bovenzi, who was placed in charge of IndyMac -- now named IndyMac Federal Bank -- after regulators seized the firm Friday." If Ms. MacPhee got her check Tuesday 7/15, she got a FEDERAL bank check--and WaMu refused it.
So much for the "full faith and credit" of the US government.