When I became chairman of the Federal Deposit Insurance Corp., in 1981, the FDIC's financial statement showed a balance at the U.S. Treasury of about $11 billion. I decided it would be a real treat to see all of that money, so I placed a call to Treasury Secretary Don Regan.
Isaac: Don, I'd like to come over to look at the money.
Regan: What money?
Isaac: You know, the $11 billion the FDIC has in the vault at Treasury.
Regan: Ah, well, you see, Bill, that's a bit of a problem.
Isaac: I know you're busy. I don't need to do it right away.
Regan: Ah, well, you see it's not a question of timing. I don't know quite how to put this, Bill, but we don't have the money.
Isaac: Always the jokester, aren't you?
Regan: Not really. You see, the banks have been paying money to the FDIC, the FDIC has been turning the money over to the Treasury, and the Treasury has been spending it on missiles, school lunch programs, water projects, and the like. The money's gone.
Isaac: But it says right here on this financial statement that we have over $11 billion at the Treasury.
Regan: In a sense, you do. We owe that money to the FDIC, and we pay interest on it.
Isaac: I know this might sound pretty far-fetched, but what would happen if we should need a billion or so to handle a bank failure?
Regan: That's easy, we'd go right out and borrow it. You'd have the money in no time.
Isaa: Let me see if I've got this straight. The money the banks thought they were storing up for the past half-century, sort of saving it for a rainy day, is gone. If a storm begins brewing and we need the money, Treasury will have to borrow it. Is that about it?
Isaac: Just one more thing. Why do we bother pretending there's a fund?
Regan: I'm sorry, Bill, but the President's on the other line. I'll get back to you on that.
Deficit Reduction Scheme
Once upon a time, there was indeed an FDIC fund. During the Johnson administration, someone had the bright idea to put the FDIC into the budget to reduce the deficit. (This was in the good old days when the FDIC always had a surplus.)
The modern-day reality is that there is no FDIC fund. FDIC outlays to handle a bank failure must be borrowed by the Treasury, in a process that adds to the federal deficit. That's true whether the FDIC's nominal balance at the Treasury is positive or negative.
Premiums paid to the FDIC today are nothing more than a tax to compensate the government for putting its full faith and credit behind bank deposits.
The nominal balance in the FDIC's account at Treasury is irrelevant - except that, over time, we would like the banks to pay the government at least as much as the guarantee of deposits costs the government.
Staying Above Water
The operative words are "over time." It doesn't matter if the FDIC's nominal balance at Treasury is negative at any particular point.
Which leads me to wonder why official Washington seems so preoccupied with imposing crushing FDIC tax increases on the banks at a time when the industry can least afford them.
I know of no responsible economist who would advocate a general tax increase in the midst of a recession. A tax increase on the banks is even worse than a general increase.
When we raise taxes on individuals, a dollar collected by the government is a dollar that doesn't get spent or invested in the private sector. But for every dollar taken from banks to put into the FDIC, we reduce by a multiple of 10 or so the amount of loans banks can make.
A Terrible Idea
I can't imagine why we would want to do that a time when the President is desperately seeking ways to encourage banks to increase their lending in order to stimulate the economy.
The deposit insurance tax rate on banks has increased threefold since 1985, and there is serious talk of yet another substantial increase in 1992. It brings to mind the actions by the Federal Reserve in the 1930s to tighten the money supply in order to protect the gold standard, which helped turn a serious recession into the Great Depression.
The nation is paying a pretty stiff price to maintain the myth of an FDIC fund. Let's not make it worse.