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The FDIC Should Stick To Insuring Bank Depoists

Posted By Conn Carroll On April 11, 2008 @ 2:48 pm In Economics | Comments Disabled

Federal Deposit Insurance Corp. chair Sheila Bair gave a curious interview [1] to US News & World Report this week. While Democrats in the House are holding hearings on a housing bailout that will cost tax payers a minimum of $20 billion, Bair starts the bidding $50 billion:

One idea is to provide loans directly to troubled borrowers to pay down principal. For example, if you used $50 billion to pay down 20 percent of the principal on troubled mortgages, you could modify 1.1 million loans. So $50 billion, that’s a big number—but I’ve seen a lot bigger numbers. The stimulus package was $150 billion. So I think by leveraging existing resources, I think there may be ways to reach a fairly significant number of mortgages with a cost somewhat less than the stimulus package.

What exactly does she mean by “leveraging existing resources”? Are those the new code words for ramping up deficit spending? Perhaps instead of offering legislative fixes for Congress the FDIC could concentrate on doing its real job: “identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails. [2]

As the insurer of last resort the FDIC has the power to conduct an audit of any bank they insure whenever they want. How many of the banks now stuck with thousands of under performing loans did the FDIC audit in the boom days of the current housing bubble? It is not the job of the federal government to prop up inflated housing prices. The type of bailouts Bair is advocating creates the moral hazard [3] at the core of this banking crisis.


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URL to article: http://blog.heritage.org/2008/04/11/the-fdic-should-stick-to-insuring-bank-depoists/

URLs in this post:

[1] interview: http://www.usnews.com/articles/business/real-estate/2008/04/09/fdic-chief-calls-for-a-housing-rescue.html

[2] identifying, monitoring and addressing risks to the deposit insurance funds; and by limiting the effect on the economy and the financial system when a bank or thrift institution fails.: http://www.fdic.gov/about/learn/symbol/index.html

[3] moral hazard: http://en.wikipedia.org/wiki/Moral_hazard

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