Who Insures The FDIC?

Posted on 07. Oct, 2008 by Money Talks News in Blog

Stacy, You keep educating people on how to check to see if their banks are FDIC-insured but make no mention of how little money and assets the FDIC actually has… They have less than 2% in assets to cover the accounts they are supposedly insuring. 2%. That’s insane. The FDIC isn’t insurance at all. It’s just an illusion of safety. Why are you promoting this?

As for the amount of assets the FDIC actually has: while that’s an interesting number, it’s irrelevant. The FDIC is a government agency and therefore enjoys the full faith and credit of the US Government. So it doesn’t really have to maintain a certain level of cash to be fiscally solvent. The US government has the ability to raise money: first, by extracting taxes from its citizens under penalty of law, and ultimately, if all else fails, by simply printing the currency to repay depositors. So the FDIC can never default on its obligations any more than the US Treasury would ever default on the trillions of dollars it owes to bondholders all over the world.

Another way of looking at this: very few people with a mortgage have more than a few percent of the amount they’ve “guaranteed” on hand in cash. But the lender is nevertheless comfortable because the borrower proved to the lender’s satisfaction they had the ability to repay the debt with their income. In the same way, the FDIC should make depositors comfortable because they have a very high probability of being able to repay depositors. That’s because, despite their having a small amount of cash on hand, their guarantor, Uncle Sam, has the wherewithal to either raise it or otherwise create it.

In summary, the FDIC is more than an “illusion of safety.” It’s the epitome of safety, at least in as much as any paper currency can be deemed safe. (As students of World War II can attest, hyper-inflation of the type that arises from the excess printing of bank notes can render any currency virtually worthless.) But as the only other alternatives to currency are canned food and guns, for today at least I’ll take the FDIC.

And btw, for future reference: those with commercial axes to grind “promote.” Journalists “report.” I’m not a shill for the FDIC or anyone else.