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Tuesday, September 22, 2009

Creative self-destruction

Just in case you thought we'd reached the outer limits of economic madness already, the FDIC announces that it wants to insure bank deposits by borrowing money from banks:

Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks. The plan, strongly supported by bankers and their lobbyists, would be a major reversal of fortune.

They've already got permission to borrow $500 billion from the Treasury, but they'd rather borrow it from the banks that they're insuring even though the reason they need the money in the first place is because so many of those banks are failing. How does this make any sense at all?

There are two factors involved. First, a few of the big banks have the money thanks to the boatloads of cash they received from the Fed and the Treasury. A lot of that is parked in excess reserves at the Fed because the banks don't want to loan to anyone. This would let them loan money to the FDIC knowing that the $500 billion credit line can be used to guarantee repayment. So, the zombie banks propped up by the federal government will profit from failure of the banks that weren't deemed too big to fail. Best of all, should prevent the FDIC from demanding further assessments from them; instead of paying money to the FDIC for deposit insurance, the FDIC will be paying them with taxpayer-backed dollars.

No wonder banksters and their lobbyists "strongly support" this insane idea. It's just another governmment-abetted transfer of wealth to them.

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