Unlimited FDIC coverage
At the end of the day, the current banking crisis is about people's confidence that the money that they put into banks will be kept safe. The average American saves up roughly $450k for retirement, which is way more than the current 250k limit.
Also, some article also recently said that everyone has been made whole in the USA banking system from any issues for a long time, effectively meaning that the true FDIC insurance limit is much higher than 250k.
What if the federal government announced unlimited FDIC coverage, with lots of stipulations for banks, among lots of other things: they must not help facilitate tax evasion, they can't help fund out enemies, following all the rules, etc etc etc.
What would be the downside of this?
Just to facilitate conversation and get everyone's minds turning on the potential downsides...
Why is a certain level of debt considered healthy in a company?
If you can take on some low cost debt to help a business grow it can be a good move.
You do realize that most people's "$450K average retirement" isn't covered under the FDIC? That's SIPC which has a $500K limit ($250K of which an be cash)
It's impossible in practice for something like this to ever work because US banks do not have reserve requirements since they were removed during Covid. That means deposits have infinite risk since they'll just lend out to someone and it'll all get deposited right back. Yellen was in an interview the other day and some guy representing community banks (or asking questions on their behalf?) brought up how what the Fed essentially just did was put massive pressure onto community banks and credit unions, telling all their biggest depositors they have no need for risk management and can centralize all their deposits IF it's with one of the SIBs or whatever the new designation is for the SVB/Signature events. I'll try and find the clip later. Needless to say, this was a terrible course of action for small financial institutions. And it encourages even more risky behavior across the board from banks. I expect many more failures this year, and that they will accelerate if we continue down the rate hike path (which we need to fight inflation). All around just a big fucking L to the current admin and the American people.
Edit:
This is the Yellen clip I was talking about on twitter
People NEED to watch this. I have never seen her put so completely out of depth by a very basic set of questions that would obviously be on the docket given the current course of action from her own office.
This premise isn’t a certainty and was directly refuted by Yellen recently. She was directly asked in Congress if the Fed/FDIC/Treasury is now backstopping all deposits and she said no and would only provide SVB like treatment to any particular bank if its failure was deemed a systemic risk.
Feds did raise interest today. Yellen did mention that banks are covered as well.
Wouldn’t this lead to more risky lending that can’t be sustainable?
Would this lead to even more rate hikes due to the government stepping in?
Yes and yes. Who needs risk management when the all powerful Fed Put is in play?
The Bernanke Put is back in play folks! It just came off the bench in a line change, let's see how it does,
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