Thursday, April 22, 2010

FDIC Deposit Insurance: A Blast From The Past

I'd be surprised if anyone thought that banks would be happier without deposit insurance these days.  We (they!) need deposit insurance to avoid panic and bank runs when depositors get nervous, and we need it now more than ever because of the highly suspicious state of the banks' balance sheets, and the increasingly levered nature of our financial world (compared to that of prior generations).

Thus, I found Paul Kedrosky's link today, to the 1933 TIME magazine reaction to the initial instituting of deposit insurance, to be fascinating (emphasis mine):

"Through the great banking houses of Manhattan last week ran wild-eyed alarm. Big bankers stared at one another in anger and astonishment. A bill just passed by both houses of Congress would rivet upon their institutions what they considered a monstrous system of guaranteeing bank deposits. Such a system, they felt, would not only rob them of their pride of profession but would reduce all U. S. banking to its lowest level. They saw their deposits which they had spent a lifetime to build up and protect with their good names confiscated by the Government to pay for the mistakes and dishonesty of every smalltown bankster."


disclosures:  short XLF, long insured deposits


Andrew said...

KD, doesn't seem like you realize Obama used this excerpt from the 1933 Time story in his speech on financial reform today to great effect. See here, near the end:

Kid Dynamite said...

thanks for the heads up, Andrew.

i won't debate Obama on the claim that the FDIC "has successfully secured the deposits of generations of Americans," even though the FDIC's deposit insurance fund is bankrupt.

i'm all in favor of deposit insurance - i would have all of my money under the mattress if it didn't exist - but I still find the paradigm shift in banker attitude (which was the point of this post) over the last 75 years to be fascinating.

Anonymous said...

It's not a shift.

Most human beings have no clue what they are talking about. When the tribe is lost in the woods, without a thought half reject any suggested change of direction and half embrace any suggested change of direction.

We call this the two-party system.

I think it was Australia that I read has no deposit insurance, though they instituted a temporary one during the height of the crisis.

oddlot said...

Deposit insurance robs the banking profession of its dignity.

A wise man once said:
"The government sucks"

Kid Dynamite said...

JCH - the shift i was talking about is that back in the old days, the banks' REPUTATION and more importantly, SOUND BUSINESS PRACTICES used to be all the insurance that they needed. read the quote! it's amazing... The Rockefellers and JP Morgans of the world built their businesses on their reputation, and that business was marginalized by deposit insurance. That's clearly no longer the case

Anonymous said...

I was joking, KD. Yes, it is a very interesting quote.

EconomicDisconnect said...

I brought this point up discussing the Panic of 1907; I wrote:
All the usual suspects were aligned for calamity. A planned short squeeze (in United Copper) went badly for the instigator Otto Heinze and this was the start of the contagion. The creep up the banking chain was fast and the first bank to go belly up was Otto's Brother's (F. Augustus Heinze) bank in Butte Montana.

The problem was in the old days reputation meant not just something, but everything. F. Augustus Heinze was involved heavily is several large banks and the word that he was involved in such a play spooked depositors and trading partners. He was forced to resign all banking interests to stave off a panic. Poor fellow, he should have been born later when losing money is not exactly a problem for Bankers anymore!"
Unreal when you think of it. Things used to be worse because people actually understood when they were getting screwed, now they are oblivious.

As far as deposit insurance goes I offer another quote:
"We can guarantee cash, but we cannot guarantee purchasing power."
Alan Greenspan, 2005.

The cash will be there, whetehr that helps is still up in the air.

EconomicDisconnect said...

many in the office today (those that showed up) were a wreck after the Bruins marathon last night.

Anonymous said...

There was kinda a debate in the economics world about the value of insurance. The argument was that having nervous depositors kept the banks more or less honest. One also has to wonder when more of the money raised by the banks is on the wholesale market - at least in the UK - and less in retail deposits whether the FDIC can be shown to have that beneficial an effect on the banking system.


Daniel said...

I'm sure you know at least one Harvard alum. Get in touch with him/her and have them get you a copy of this months Harvard magazine. Read the article about executive compensation. Corporations used to have a societal construct. They don't appear, through the eyes of society, as anything more than a money making enterprise, with no expectation of conscience.