The FDIC - Brightwork Research & Analysis

Table of Contents: Select a Link to be Taken to That Section

Executive Summary

The FDIC was brought into existence to stabilize the US banking system.

Introduction

The FDIC was part of the US banking crisis reforms of the 1930s to insure deposits in private banks. However, the FDIC is only necessary because the US Government lost control over its money creation function. If the US Government regained this function, there would be no need to fund an FDIC. Under a system of public banking, there are no private banking accounts to insure. The government stands behind all loans, and not for a specific limit (as per the FDIC) but for whatever is the loan amount.

The Benefits and Problems With FDIC Insurance

As Thomas Piketty explains in Capital in the Twenty-First Century, the time between the Great Depression and the 1970s marked a unique period in world history of relative equalities of wealth and remarkable economic growth. Surely, sustained economic growth contributed to a stable and successful banking system. And so did the federal deposit insurance fund, which succeeded in finally ending the confidence-destroying runs that had historically wreaked havoc on banks. Ironically, deposit insurance and some of the other banking reforms, which were meant to control and limit bank power, actually sowed the seeds that would lead to increased government support of a large banking sector and a lopsided bank-government contract.

While good for the overall banking system, private profit maximizing banks increasingly began to take advantage of the government insurance program.

A Government Agency or Controlled by the Fed?

The problem with the FDIC is that while they are a government agency, they are to a great deal remotely controlled by the Fed, which is not a government agency.

Source: How the Other Half Banks

https://www.amazon.com/How-Other-Half-Banks-Exploitation/dp/0674286065

This is explained in the following quotation.

The directors of the FDIC did not want to cross swords with the Federal Reserve System, and they most assuredly did not want to be blamed for tumbling the entire world economic system by allowing the first domino to fall. “The theory had never been tested,” said Sprague. “I was not sure I wanted it to be just then.”2 So, in due course, a bailout package was put together which featured a $325 million loan from FDIC, interest free for the first year and at a subsidized rate thereafter; about half the market rate. Several other banks which were financially tied to First Penn, and which would have suffered great losses if it had folded, loaned an additional $175 million and offered a $1 billion line of credit. FDIC insisted on this move to demonstrate that the banking industry itself was helping and that it had faith in the venture. To bolster that faith, the Federal Reserve opened its Discount Window offering low-interest funds for that purpose. The outcome of this particular bailout was somewhat happier than with the others, at least as far as the bank is concerned. At the end of the five-year taxpayer subsidy, the FDIC loan was fully repaid. The bank has remained on shaky ground, however, and the final page of this episode has not yet been written. CONTINENTAL ILLINOIS Everything up to this point was but mere practice for the big event which was yet to come. In the early 1980s, Chicago’s Continental Illinois was the nation’s seventh largest bank. With assets of $42 billion and with 12,000 employees working in offices 1. Sprague, pp. 88-89. 2. Ibid., p. 89.

Source: Creature From Jekyll Island

https://www.scribd.com/doc/54912935/The-Creature-from-Jekyll-Island-G-Edward-Griffin

Why Did and Does the FDIC Care What the Fed Wants?

This brings up an interesting question. Why is a government agency being remotely controlled by the Fed, which is a cabal of private banking interests? This brings up an extra problem with the central bank being entirely private. It means due to their centrality in the financial system, that they have great influence over any financial regulation that the government seeks to impose. This same issue came up with the Commodities Futures Trading Commission, which was pressured not to regulate derivatives by then Chairman Allan Greenspan. By not regulating these derivatives, eventually led to the subprime mortgage crisis of 2007 2008.