McCain and Obama both want to increase the FDIC coverage of bank deposits from $100,000 to $250,000. Obama says that this will help shore up the economy. McCain emphasised the desire to change the terminology from "bailout" to "rescue". Can't say that I blame him.
This is all smoke and mirrors, folks. Increasing the FDIC will hurt banks, as well as the people who have money in their federally insured bank accounts.
Why? Because the amount of federally insured money in accounts today is around $4.5 Trillion (that's Trillion, with a capitol T). The amount of money in reserve to cover this amount under the FDIC is about $56 billion (note the small b).
$56 billion to cover $4.5 trillion. That's about 1.25% coverage. Only the first 1.25% of money lost can expect to be recovered in a claim against the FDIC. Subsequent losers will likely be out of luck. If these candidates are successful in getting the current amount of coverage raised, that percentage (1.25%) can only go down. Whatever premiums banks pay to the FDIC will have to increase in order to cover the higher insurance coverage. You can check the numbers on the FDIC's own website here .
These two starry-eyed hopefuls are hell-bent on making a bad thing worse.
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Yes, but you are assuming that every single person withdraws every penny from every bank account at the same time. That is just unrealistic--impossible even.
I'm not presuming to know much about how the whole system works, but I do have an opinion based on personal experience. We were victims of losing money due to the $100,000 cap when our bank, IndyMac collapsed. My husband's mother has her name on all her kids' accounts so she can easily deposit money in them, make transfers, or assist with any of their banking needs. She and her husband also had their own accounts there. Just by having her name on our accounts, she was considered to have more than the FDIC insured amount of $100,000, and we all lost money ($13,000 in total).
So, we are definitely in favor of better protections somehow--even if it means a slightly lower interest rate, or a small fee for the account. It's a small price to pay when you face losing thousands of dollars. It's insurance. That's the whole point of insurance. You pay for that "just-in-case" scenario. Maybe a better solution would be to allow consumers to choose their level of protection based on a sliding fee scale--just like other forms of insurance.
My point was that their proposal is a non-solution. You could have prevented the loss if you split your money among different accounts. You could have 5 separate accounts today, with 5 separate FDIC institutions and have your money fully insured that way. It doesn't take every single person to make a withdraw to cause problems. These are wierd economic times, and people are panicing. Only 1.25% of the money is covered.
FDIC insurance is designed to try to prevent a run on banks. Of course they cannot afford to pay out on every policy at the same time. No insurance company can afford to do that. I doubt that most "individuals" would be affected by increasing the coverage to $250,000. One group that may see this as a benefit is small businesses, especially those that have to meet a payroll and have irregular cashflow. With lines of credit drying up (for new businesses a line of credit may be impossible to get) small businesses may need to keep more cash on reserve.
Otherwise, I don't see that it makes much difference either way. If one bank fails, there are reserves to cover the accounts. If banks begin to fail one after another, you will have a better chance of getting money from under the couch cushions than from the FDIC.
That was my primary point. That the candidates are pandering this solution for an economic crisis, and not just to address an issue with, say , small businesses. This is no solution to a large-scale crisis.
I agree. It is no solution, nor was the $700 billion dollar bailout plan. Thank God that craziness was defeated.
What we don't need is another trillion dollars in government debt.
What's all the fuss about whether it's a bailout or a rescue? The definition of bailout is "coming to a rescue".
Remember the good ol' days when we thought Hillary Clinton was the worst thing that could happen to the country.
Aaaah yes. The good ol' days. We can still write her in, right?
So good......
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