The Federal Deposit Insurance Corporation (FDIC) has been losing money and a few days ago announced that the decline in the fund for the year may reach $3 billion. A good way to protect the FDIC, some observers have been suggesting, would be to reduce the amount of depositors' money that is protected.
It's a good notion, if you're a banker. But what would it mean to depositors?
* As a depositor, you would need to study your bank's balance sheets quarterly to determine (if you can) how secure it is.
* You would have to follow changes in bank accounting rules -- and learn what the Federal Reserve Board is telling banks to write off.
* Many of you would take your money out of the banks, cutting down on the nation's supply of capital.
But we were told we have to do this because otherwise the FDIC will have to charge all banks higher premiums or itself take a dive. It seems any time the public is asked to accept bad news it is told there is no choice. Yet, a few days ago the FDIC board voted to increase the premiums banks pay by 30 percent.
The claim that there is no other way to avoid a bank disaster except a taxpayer bailout is widely accepted because we tend to have short memories. We overlook the lessons of the great bank crisis of 1933 -- a crisis far larger in relation to the economy than any before or since. Many people lost their life savings in uninsured bank failures (there was no FDIC). Lines formed outside surviving banks as panicked depositors rushed to withdraw their money.
After President Franklin Roosevelt declared a bank holiday to stop the runs on the banks, the Reconstruction Finance Corporation (RFC), created in 1932 at the suggestion of Republican President Herbert Hoover, made loans to those banks that were in trouble. Whatever conditions were necessary were imposed. At the end of the holiday the banks reopened and the crisis was over. The RFC made money.
This, of course, suggests a very disturbing question: Why wasn't the 1933 model used in the S&L crisis instead of the taxpayer bailout? The semi-official explanation is that the S&Ls might not be able to repay the loans.
Choosing the taxpayer bailout had several consequences quite different from the central bank or RFC loan approach of 1933:
* Some people had a chance to become very rich. They were allowed to buy a bank with very little of their own money. In return for their buying it, the taxpayers assumed the losses.
* From the point of view of those conservatives who want to cut social spending (Medicare, food stamps, education and the like) the taxpayer bailout made the federal deficit bigger, so domestic spending cuts became more urgent.
* From the opposite point of view, for Democrats who have wanted President Bush to go back on his pledge of "no new taxes," the taxpayer bailout was just the ticket.
Of course, the public doesn't necessarily benefit from either cuts in service or higher taxes as a result of the bailout. So why did the public accept it? Beginning in 1980, the focus of public
attention was on taxes, budgets, spending cuts and deficits. It remained focused elsewhere when the savings and loans began to weaken. Now we are facing a bigger problem -- the basic
banking system itself is at risk.
During the go-go era of banking, how many unscrupulous people bought banks like hotels on a Monopoly board and made loans to their own cohorts? We may never know, but we can learn from the past, avoiding additional losses by using taxpayer money to subsidize new leveraged purchases of the bailed-out banks and S&Ls.
Then we can start a new game -- with the same board.
NEXT: How to determine if your thrift institution is sound