Are the FDIC’s Commitments Higher Than Thought?
We here about the FDIC, which guarantees deposits in institutions. Indeed, the FDIC recently increased the amount of money it insures to $250,000 per account. However, there are some concerns about whether or not the FDIC would be able to cover this amount. Additionally, some think that commitments the FDIC already has could be higher than reported.
This graph from Option ARMageddon shows the problem that the FDIC may have in the future:
Rolfe Winkler, an author on Option ARMageddon also makes this points about how things actually work in terms of credit markets and balance sheets:
Conventional wisdom says that financial companies are having trouble borrowing because credit markets are broken. This is dangerously wrong. The credit market itself is fine. It’s balance sheets that are broken. They have so little equity relative to their assets, there’s no cushion to protect creditors from losses. With few good borrowers available and with the price of credit being capped by government, naturally creditors have little inclination to lend. Washington’s solution is to “guarantee” all manner of risky investments, to use the public’s balance sheet to absorb trillions of dollars worth of private sector losses.
It’s an interesting point. Indeed, taxpayers are taking on quite a bit of risky debt. Some wonder if things might have recovered faster if some banks were just allowed to go under, and the FDIC covered what it was originally committed to. Now, though, it may be that the FDIC has bitten off more than it can chew. Add this to the fact that banks spent 10 years not paying their premiums, and the FDIC may be in trouble.
Of course, even so the government is likely to just keep borrowing money to cover its shortfalls if the FDIC is pressed to come up the money. It’s not the best state of affairs, and it will be interesting to see how long this state of affairs can last.
