Monday, September 21, 2009

And now the banks bail out the FDIC

How crazy is THIS ?

Apparently the FDIC which is broke is going to borrow money from ...drum roll please ... The banks.


Isn't the FDIC supposed to insure the deposits of the banks. So if bad loans make the bank fail, the FDIC is there to pay back depositors. But what if the FDIC itself makes up those loans? What if the FDIC can't pay back those loans and makes the bank fail which then needs the FDIC to bail out depositors?

Won't this mess up the whole space time continuum?

Well not really. The FDIC is not like a regular borrower. It is a borrower with an almost infinite ability to raise revenue kind of like the government itself. They can raise insurance premiums on the banks (just like a tax really) and eventually pay back whatever they borrow. Really this is all about extending the period over which the losses are taken. If they raise insurance premiums now to collect the money, this will hurt bank profitability and put more downward pressure on banks. So they just borrow the money and will raise premiums on banks in the future. More reasons why banks in the future will be less profitable. The price of not failing now is less profits over the next decade.

This all works because of the way the Federal reserve can print money out of nowhere and force interest rates to zero making banks very profitable and able to absorb losses.