Is the FDIC in Trouble?

In a recent release the FDIC listed 416 banks as being on the problem bank list. These banks have deposits totaling over $300 billion, but the FDIC balance of funds on the same day of that release was barely over $10 billion. Quite a mismatch.

The FDIC was created in 1933 as a confidence booster for a public that was badly shaken by the Great Depression. The idea was that a government insurance program would allow citizens to have enough confidence in banks to use them again, and the program worked extremely well. Today the FDIC guarantee is proudly displayed at nearly every bank you walk in to, stating that deposits are protected up to $100,000. But is that true?

The FDIC runs numbers and creates formulas to determine how much cash it needs to keep on hand to bail out banks that fail. These formulas are based on historical averages. Unfortunately, the problem we are dealing with today doesn't track to historical averages, so the FDIC funds are much lower than what is needed.

I'm not afraid of losing my money at the bank. The white house will issue emergency funds to replenish the FDIC money if needed (which will happen yet this year), but I am concerned about how we do it. As the government prints more money to bail out failed banks, it devalues all of the money in the entire system, causing all of us to suffer.

The illusion of guaranteed safety in banks is a vital underpinning to our entire system. Unfortunately, there is no such thing as comprehensive guarantees for all of our deposits, but as long as the illusion holds we don't have to deal with that ugly truth. Instead, we just need to print enough money to deal with the troublemakers. But the price we pay is inflation.

Thanks to my good friend Tim C. for calling attention to the material for this post!