Creature From Jekyll Island by G. Edward

"fair share" of the fund's protection. Moral hazard, therefore, is built right into the system. As with protection against parking tickets, the FDIC increases the likelihood that what is being insured against will actually happen. It is not a solution to the problem, it is part of the problem.

REAL INSURANCE WOULD BE A BLESSING

A true deposit-insurance program which was totally voluntary and which geared its rates to the actual risks would be a blessing.

Banks with solid loans on their books would be able to obtain protection for their depositors at reasonable rates, because the chances of the insurance company having to pay would be small.

Banks with unsound loans, however, would have to pay much higher rates or possibly would not be able to obtain coverage at any price. Depositors, therefore, would know instantly, without need to investigate further, that a bank without insurance is not a place where they want to put their money. In order to attract deposits, banks would have to have insurance. In order to have insurance at rates they could afford, they would have to demonstrate to the insurance company that their financial affairs are in good order.

Consequently, banks which failed to meet the minimum standards of sound business practice would soon have no customers and THE NAME OF THE GAME IS BAILOUT

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would be forced out of business. A voluntary, private insurance program would act as a powerful regulator of the entire banking industry far more effectively and honestly than any political scheme ever could. Unfortunately, such is not the banking world of today.

The FDIC "protection" is not insurance in any sense of the word. It is merely part of a political scheme to bail out the most influential members of the banking cartel when they get into financial difficulty. As we have already seen, the first line of defense in this scheme is to have large, defaulted loans restored to life by a Congressional pledge of tax dollars. If that should fail and the bank can no longer conceal its insolvency through creative bookkeeping, it is almost certain that anxious depositors will soon line up to withdraw their money—which the bank does not have.

The second line of defense, therefore, is to have the FDIC step in and make those payments for them.

Bankers, of course, do not want this to happen. It is a last resort.

If the bank is rescued in this fashion, management is fired and what is left of the business usually is absorbed by another bank.

Furthermore, the value of the stock will plummet, but this will affect the small stockholders only. Those with controlling interest and those in management know long in advance of the pending catastrophe and are able to sell the bulk of their shares while the price is still high. The people who create the problem seldom suffer the economic consequences of their actions.

THE FDIC WILL NEVER BE ADEQUATELY FUNDED

The FDIC never will have enough money to cover its potential liability for the entire banking system. If that amount were in existence, it could be held by the banks themselves, and an insurance fund would not even be necessary. Instead, the FDIC

operates on the same assumption as the banks: that only a small percentage will ever need money at the same time. So the amount held in reserve is never more than a few percentage points of the total liability. Typically, the FDIC holds about $1.20 for every $100

or covered deposits. At the time of this writing, however, that figure had slipped to only 70 cents and was still dropping. That Weans that the financial exposure is about 99.3% larger than the safety net which is supposed to catch it. The failure of just one or 38 THE CREATURE FROM JEKYLL ISLAND

two large banks in the system could completely wipe out the entire fund.

And it gets even worse. Although the ledger may show that so many millions or billions are in the fund, that also is but creative bookkeeping. By law, the money collected from bank assessments must be invested in Treasury bonds, which means it is loaned to the government and spent immediately by Congress. In the final stage of this process, therefore, the FDIC itself runs out of money and turns, first to the Treasury, then to Congress for help. This step, of course, is an act of final desperation, but it is usually presented in the media as though it were a sign of the system's great strength.

U.S. Neivs & World Report blandly describes it this way: "Should the agencies need more money yet, Congress has pledged the full faith and credit of the federal government."1 Gosh, gee whiz. Isn't that wonderful? It sort of makes one feel rosy all over to know that the fund is so well secured.

Let's see what "full faith and credit of the federal government"