Don't Worry About the FDIC

Chris Whalen is quoted in a Bloomberg story today about the FDIC. But he's no fan of the story, or any other story which implies that there's any chance at all the FDIC could run out of money. He emails:

In the chaos of the last few days, a lot of erroneous press reports are coming out about the FDIC and the deposit insurance fund. It is important for people to understand that the deposit insurance fund, like all federal trust funds, is simply an accounting entry with the US Treasury. There is no separate fund.

He has a broader point, too, about whether the FDIC fund should even be written about at all:

The FDIC does not and will not run out of money. Like all federal trust funds, the FDIC's insurance "trust fund" does not exist. The reserves shown in the fund simply evidence the amount of money contributed by the banking industry into the fund. Like all federal trust funds, the cash raised by FDIC insurance premiums goes into the Treasury's general fund. When the agency needs cash, then the Treasury makes the money available. When the positive balance shown in the FDIC insurance fund is depleted, the FDIC simply runs a negative balance with the Treasury, a loan that the banking industry will repay over time...
Every time a member of the media writes about this they seem to get it wrong. Indeed, I have come to the conclusion that it would be better if members of the media did not write about this subject matter at all. The government runs on CASH. The Treasury does not "invest" cash. It simply manages receipts vs. payments and uses debt to make up the difference. The editors and managers at Bloomberg, the AP and other news organizations need to decide if they are part of the problem or part of the solution.
WHEN YOU WRITE NEWS STORIES ABOUT THE FDIC RUNNING OUT OF MONEY, YOU ARE SPREADING PANIC AND FEAR AMONGST THE GENERAL POPULATION -- INCLUDING YOUR OWN FRIENDS, COLLEAGUES AND FAMILIES. HOW IS THIS SERVING THE NEEDS OF THE COMMUNITY THAT ALL RESPONSIBLE WRITERS ARE SUPPOSED TO SERVE WITH ACCURATE, FACTUAL NEWS REPORTING? PLEASE STOP WRITING ABOUT THE FDIC.

The UK faced a similar issue during the Northern Rock meltdown. The long lines of people outside the bank trying to withdraw their money were newsworthy, to be sure -- but the news coverage itself was probably more systemically dangerous than any initial mini bank run.

Coverage of the FDIC fund isn't that dangerous. But this kind of thing, from Bloomberg, is not exactly reassuring:

It won't take many more failures before the FDIC itself runs out of money. The agency had $45.2 billion in its coffers as of June 30, far short of the $200 billion Whalen says it will need to pay claims by the end of next year. The U.S. Treasury will almost certainly come to the rescue.

"Runs out of money"? "Almost certainly"? That kind of language is unhelpful, during a crisis.

On the other hand, if I may add a tiny bit of fuel to the fire (trusting my readers to be grown-ups here), there can be a big difference between money on deposit at your local bank, on the one hand, and having money on deposit at a bank which has been taken over by the FDIC, on the other. Waking up one morning to discover that you don't have a bank account is not exactly fun, even if you do get a check for your entire deposit two days later from the FDIC. That's why in the vast majority of cases accounts simply get transferred to another institution: the FDIC really does try its hardest to make things as painless as possible for depositors.

But what should you do if you're still worried about going out on the town next weekend only to find your ATM card isn't working any more? (FDIC takeovers always happen on a Friday.) How do you know which banks are safe and which aren't? The simple answer is that you can't know for sure. But if you move your money to a publicly-listed bank with a high nominal share price (over $15, say), that's probably the safest place it can be.

Update: Jeff has the FDIC's response to the Bloomberg story.

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