FDIC
Much is being reported about the FDIC $250,000 coverage of accounts. Paul Volker, upon his retirement, “blew the whistle” on the FDIC. He said that the FDIC has only one thousandth of a penny in reserve for every dollar insured. Thus, there is no money in reserve. It is insured by the “full faith and credit of the American people.” We are the FDIC!! Encouraging, huh?
Permalink Submitted by Alan Spross on Wed, 2008-10-22 20:22
Not encouraging. Like Treasuries themselves the ultimate backstop is the taxing authority of the govt to make good on all sorts of implied guarantees. At any hint that the FDIC is not high up on the heirarchy of protected agencies, there would be a massive run on banks viewed as either under capitalized or illiquid.
Then there is the reserves of the various state insurance guarantee funds………….for failed insurers that the feds feel is not large enough to be bailed out like AIG.
One real problem with the 250,000 FDIC temporary limit for taxable bank savings is that it does not apply for the life of CDs, it only applies until it is lifted. Therefore, the effective protection is only for terms less than the represented review schedule for continuing the protection.
Permalink Submitted by charles lore on Thu, 2008-10-23 01:10
To the extent that a bank deposit or cd meets the covered definition that money in the bank ranks equal with t-bills. Both are % full faith and credit of US GVT.
Always be careful to make a distinction between credit worthiness and liquidity.