Wasting the Plenty

by cactus

Wasting the Plenty

Via Atrios, this piece of bad news from Michael Kranish at the Boston Globe:

The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006.

The Federal Deposit Insurance Corporation, which insures deposits up to $250,000, tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized – and that bank failures were so infrequent – that there was no need to collect the premiums for a decade, according to banking officials and analysts.

The folks who happened to be running Congress during those years believed (and still believe, even if they aren’t running Congress any more) that cutting taxes leads to more tax revenue coming in. Perhaps they also figured collecting less premiums would lead to more money in the FDIC’s pot?

The article goes on:

Last week, FDIC chairwoman Sheila Bair wrote to Senate Banking Committee chairman Christopher Dodd, a Connecticut Democrat, that her agency could need more money because the existing fund “provides a thin margin of error” given the government’s responsibility “to cover unforeseen losses.” The March 5 letter, provided to the Globe, said the additional borrowing authority is necessary to “leave no doubt” that the FDIC can “fulfill the government’s commitment to protect insured depositors against loss.”
Bair said yesterday that the agency’s failure to collect premiums from most banks “was surprising to me and of concern.” As a Treasury Department official in 2001, she said, she testified on Capitol Hill about the need to impose the fees, but nothing happened. Congress did not grant the authority for the fees until 2006, just weeks before Bair took over the FDIC. She then used that authority to impose the fees over the objections of some within the banking industry.

“That is five years of very healthy good times in banking that could have been used to build up the reserve,” Bair, a former professor at the University of Massachusetts at Amherst, said in an interview. “That is how we find ourselves where we are today. An important lesson going forward is we need to be building up these funds in good times so you can draw down upon them in bad times.”

Truly, the Republican Congress took the teachings of St. Ronald to heart.
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by cactus