Nothing's being resolved. The most recent flareup in the European sovereign debt crisis ended with Greece getting enough pocket change to tide it over for a couple of months, while the EU squabbles over the terms of a second Greek bailout. In other words, the can was kicked a short distance down the road, after Greece got a few hamburgers that it promised to pay for on Tuesday. But the prospects of a real solution are as bleak as ever.
The debt ceiling fight in Washington is getting louder and more strident. That could mean both sides are posturing for their supporters and preaching to their respective choirs for a while, before working out a last minute deal. Or else they might be heading for a showdown. The latter would be dumb, seeing as how it would flummox the financial markets. But then again we're talking about politicians, so dumb is s.o.p. The moody intransigence of today's politics makes it harder for politicians to compromise. The one hope we may have is the world's largest collection of hypocrites is in political Washington, and if driven by expediency, they'll readily go back on their words in order to save their glutei maximi.
Meanwhile, back at the ranch, the poor consumer has to figure out how to avoid having his or her own glutei maximi deep fried. The European sovereign debt crisis could trigger a financial crunch like 2008, except maybe worse. If the U.S. defaults on its debt, 2008 will seem like Party Central. When the going gets tough, the prudent make sure their bank accounts are FDIC insured. Here are the basics on coverage.
Each account "owner" gets $250,000 per bank. In other words, all of the owner's accounts are totaled, and up to $250,000 of deposits is protected. So if you have a checking account and a couple of CDs, their balances are aggregated and as much as $250,000 is covered.
Here's the fun part: you can be more than one type of owner, and each owner you become gets $250,000 of coverage. This isn't like the Internet where you might have multiple user names, and you don't need to have dissociative identity disorder. Just take on various different legal persona, and, presto, you get another $250K of coverage.
Start with you as an individual: $250,000 of coverage is provided for accounts in your name.
You as a joint account owner (such as with a spouse, parent or child): $250,000 of coverage for each joint account owner. So a joint account for a married couple gets $500,000 of total coverage.
You as the owner of an IRA: $250,000 of additional coverage for your IRA accounts.
You as the owner of a revocable trust account: another $250K of coverage per beneficiary.
You as the beneficiary of an irrevocable trust account: yet another $250K of coverage for all beneficial interests granted by the same person creating trusts (known to lawyers as the "settlor") at any one bank.
A corporation that you own: another $250K coverage, as long as you operate the corporation for an independent purpose (i.e., a purpose other than increasing your FDIC coverage).
Then, here's your ace in the hole: if the foregoing account types aren't enough to protect the enormity of your wealth, you can, until Dec. 31, 2012, get unlimited FDIC coverage for non-interest bearing transaction accounts. In other words, you can open a non-interest bearing checking account, and protect as many of your hard-earned shekels as you like until the end of 2012. If you hear some ringing that sounds like Hell's Bells, keep this in mind.
What are the chances that FDIC coverage will actually matter to you? So far, in 2011, 55 banks have been closed by the FDIC. In 2010, there were 157 bank closings. The number in 2009 was 140. Banks close when the financial system goes bonkers and the economy nosedives. If today's governmental debt crises keep metastasizing, more banks will fail, and holders of uninsured deposits will take losses. If your money is too concentrated for full coverage, spread it around.
In addition, if your money is an uninsured place, like a money market fund, you may want to move some or all of it into FDIC insured accounts. The European debt crisis has cast a cloud over money market funds holding commercial paper of European banks (which would be many of them; check to see if your fund holds it). The U.S. debt ceiling showdown could cause losses--probably minor, but you never know--for money market funds holding U.S. Treasury bills (many funds hold T-bills in varying amounts). FDIC protection for at least some of your cash may improve the quality of your sleep.
For more information on FDIC deposit insurance, go to http://www.fdic.gov/deposit/deposits/insured/index.html.
Showing posts with label FDIC. Show all posts
Showing posts with label FDIC. Show all posts
Monday, July 11, 2011
Tuesday, July 14, 2009
Financial Regulatory Reform: We Should Taketh From, As Well As Giveth To, the Fed?
The wide scope of the Obama administration's regulatory reform proposals has triggered an economic recovery for lobbyists, and their frenzied paid, professional bewailing and whining has obscured some basic issues. We already knew, without being told, that banks wouldn't like the idea of a financial consumer protection agency. It also comes as no surprise that Wall Street would like to limit as much as possible the intrusion of regulators into their high margin derivatives business, even though that business brought the economy down last year with its reckless pursuit of profits without regard to risk.
But one issue that deserves more attention is whether the Federal Reserve should have responsibility for safeguarding the economy against systemic risk. This is the biggest regulatory reform issue. The reason why the current economic downturn has proven so intractable is the failure of a major part of the banking system due to uncontrolled systemic risk. We're talking about the unregulated multi-trillion dollar asset securitization market underlying the real estate and credit bubbles that popped so painfully. Banking collapses presage painful economic contractions (see, e.g., the history of the Great Depression and the Panic of 1907 for further details). The securitization market operated with virtually no meaningful risk management, either from Wall Street or the government. That's why things spun out of control and its risks became hideously large.
The Fed seems to be the principal nominee to serve as the systemic risk czar. It, after all, has played the biggest role in combating the current downturn and has regulatory authority over all the major Wall Street banks anyway. But is the Fed the best choice?
The Fed's current regulatory responsibilities already fill its plate. It is required to serve as the central bank--the lender of last resort to the banking system. It also is supposed to manage the economy. Section 225a of Title 12 of the United States Code provides that "[t]he Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." In other words, the Fed is supposed aim for "maximum employment, stable prices, and moderate long term-interest rates."
This is mandate makes the Fed a regulatory pushmi-pullyu. When the Fed is confronted by a slowing economy, it is supposed to lower interest rates to promote growth and employment. But doing so can run the risk of price inflation and asset bubbles. In the 1970s, the Fed chose to favor growth and employment, instead of raising interest rates to control inflation. The result was price inflation and little growth (the now infamous stagflation). In the late 1990s, the Fed lowered interest rates to promote growth, facilitating the expansion of the money supply that fueled the tech stock bubble. Then, in the aftermath of that bubble bursting, and the threat of recession from the 9-11-2001 terrorist bombings in New York and Washington, the Fed again lowered interest rates. This time, it fueled the real estate and credit bubbles that produced the train wreck we're now on. In other words, the Fed's legal mandate, as it has been interpreted for much of the past 40 years, appears to be inherently destabilizing.
If the Fed became the czar of systemic risk, things would only get murkier. In the world of commerce and economic enterprise, risk is a predicate to growth. Systemic risk is a predicate to systemic growth. Given its competing legal responsibilities, would the Fed be tempted to favor growth while allowing "some" systemic risk? Could the Fed, given its seemingly unlimited ability to print money, subsidize (at taxpayer risk and expense) Wall Street firms and others taking systemic risk in the hope of fostering more growth? The Fed's performance in the last 15 years reveals a tendency to underestimate systemic risk. People with a history of driving too fast usually have their licenses suspended or revoked. Why should we give a regulator that has a history of incautiousness the job of safeguarding the economy against systemic incautiousness?
The literary pushmi-pullyu exists only in fiction, and perhaps the regulatory pushmi-pullyu should no longer be a reality. Wouldn't it be better to relieve the Fed of the responsibility for promoting growth and employment? Shouldn't that responsibility rest in the hands of the elected government--the President and Congress? After all, fiscal policy, not monetary policy, fostered America's recovery from the Great Depression. The massive wartime spending that was required to fight World War II made America prosperous again. The federal government financed the war by sharply raising income taxes and borrowing record amounts of money. There were no Hail Mary pass-type policy measures by the Fed to print money in new and ever more creative ways.
The Fed's primary monetary policy tool--the level of interest rates--operates as a government price control. The government sets the price of short term credit. Doesn't the evidence now allow us to stipulate that such price controls have had the perverse impact that government price controls usually have? The government's underpricing of credit has produced repeated booms and busts in the asset markets during the last 15 years. We're now slogging through the worst recession since the 1930s as a consequence. Isn't it clear that government pricing of credit has produced distorted allocations of capital that may hamper long term economic growth? Cheap money goes into investments that produce the greatest short term returns. Higher interest rates induce more disciplined and thoughtful investing aimed at longer term gains. Don't we want more capital invested in ways that would produce the greatest long term returns--which tend to benefit workers and communities, as well as investors, instead of the privileged few that have profited from the short-mindedness of recent years? Have we just seen the latest manifestation of this perversity with the 60% jump in oil prices this year, in the face of a terrible recession? One wonders who, besides oil producers and perhaps Goldman Sachs, a noted commodities trader that just reported exceptional earnings, would have benefited from this latest asset bubble? Wouldn't systemic risk be fueled by lower interest rates? From a borrower's standpoint, as money becomes cheaper, higher risks become logical. If the Fed lowers short term interest rates marketwide, it may be increasing the levels of systemic risk. This, indeed, is likely an important reason for the astronomical size of the recent credit bubble.
Relieving the Fed of the responsibility to manage the economy would allow it to serve as the czar of systemic risk in a way consistent with its other legal responsibilities. After all, a central bank primarily focused on maintaining the health of the banking system would want to prevent high levels of systemic risk. It would no longer be tempted to compromise the safety and soundness of banks, and the moderation of systemic risk, in order to maximize employment and economic growth.
In Washington, it is axiomatic that government agencies do not readily give up power. After all, the more powerful you are, the more important you become. Minor bureaucrats are not invited to soirees in Georgetown. It would be unlikely that the Fed would give up its responsibility for the management of the economy without the mother of all bureaucratic battles. And Congress and the White House might not want to take it away because then they'd have the hot tamale in their laps.
So how do we avoid making the regulatory pushmi-pullyu even larger? Give the systemic risk job to the FDIC. Such a responsibility would be consistent with the FDIC's mandate to safeguard the banking system--no pushmi-pullyu problem there. And the FDIC is perhaps the only federal agency that has distinguished itself in the recent financial markets debacle, spotting problems earlier and proposing better solutions than more powerful players. Good performance and sensible ideas are rarely rewarded in Washington, a city where the well-connected and undeserving manipulate power to triumph over the meritorious. But perhaps once, just this once, we could make an exception.
But one issue that deserves more attention is whether the Federal Reserve should have responsibility for safeguarding the economy against systemic risk. This is the biggest regulatory reform issue. The reason why the current economic downturn has proven so intractable is the failure of a major part of the banking system due to uncontrolled systemic risk. We're talking about the unregulated multi-trillion dollar asset securitization market underlying the real estate and credit bubbles that popped so painfully. Banking collapses presage painful economic contractions (see, e.g., the history of the Great Depression and the Panic of 1907 for further details). The securitization market operated with virtually no meaningful risk management, either from Wall Street or the government. That's why things spun out of control and its risks became hideously large.
The Fed seems to be the principal nominee to serve as the systemic risk czar. It, after all, has played the biggest role in combating the current downturn and has regulatory authority over all the major Wall Street banks anyway. But is the Fed the best choice?
The Fed's current regulatory responsibilities already fill its plate. It is required to serve as the central bank--the lender of last resort to the banking system. It also is supposed to manage the economy. Section 225a of Title 12 of the United States Code provides that "[t]he Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." In other words, the Fed is supposed aim for "maximum employment, stable prices, and moderate long term-interest rates."
This is mandate makes the Fed a regulatory pushmi-pullyu. When the Fed is confronted by a slowing economy, it is supposed to lower interest rates to promote growth and employment. But doing so can run the risk of price inflation and asset bubbles. In the 1970s, the Fed chose to favor growth and employment, instead of raising interest rates to control inflation. The result was price inflation and little growth (the now infamous stagflation). In the late 1990s, the Fed lowered interest rates to promote growth, facilitating the expansion of the money supply that fueled the tech stock bubble. Then, in the aftermath of that bubble bursting, and the threat of recession from the 9-11-2001 terrorist bombings in New York and Washington, the Fed again lowered interest rates. This time, it fueled the real estate and credit bubbles that produced the train wreck we're now on. In other words, the Fed's legal mandate, as it has been interpreted for much of the past 40 years, appears to be inherently destabilizing.
If the Fed became the czar of systemic risk, things would only get murkier. In the world of commerce and economic enterprise, risk is a predicate to growth. Systemic risk is a predicate to systemic growth. Given its competing legal responsibilities, would the Fed be tempted to favor growth while allowing "some" systemic risk? Could the Fed, given its seemingly unlimited ability to print money, subsidize (at taxpayer risk and expense) Wall Street firms and others taking systemic risk in the hope of fostering more growth? The Fed's performance in the last 15 years reveals a tendency to underestimate systemic risk. People with a history of driving too fast usually have their licenses suspended or revoked. Why should we give a regulator that has a history of incautiousness the job of safeguarding the economy against systemic incautiousness?
The literary pushmi-pullyu exists only in fiction, and perhaps the regulatory pushmi-pullyu should no longer be a reality. Wouldn't it be better to relieve the Fed of the responsibility for promoting growth and employment? Shouldn't that responsibility rest in the hands of the elected government--the President and Congress? After all, fiscal policy, not monetary policy, fostered America's recovery from the Great Depression. The massive wartime spending that was required to fight World War II made America prosperous again. The federal government financed the war by sharply raising income taxes and borrowing record amounts of money. There were no Hail Mary pass-type policy measures by the Fed to print money in new and ever more creative ways.
The Fed's primary monetary policy tool--the level of interest rates--operates as a government price control. The government sets the price of short term credit. Doesn't the evidence now allow us to stipulate that such price controls have had the perverse impact that government price controls usually have? The government's underpricing of credit has produced repeated booms and busts in the asset markets during the last 15 years. We're now slogging through the worst recession since the 1930s as a consequence. Isn't it clear that government pricing of credit has produced distorted allocations of capital that may hamper long term economic growth? Cheap money goes into investments that produce the greatest short term returns. Higher interest rates induce more disciplined and thoughtful investing aimed at longer term gains. Don't we want more capital invested in ways that would produce the greatest long term returns--which tend to benefit workers and communities, as well as investors, instead of the privileged few that have profited from the short-mindedness of recent years? Have we just seen the latest manifestation of this perversity with the 60% jump in oil prices this year, in the face of a terrible recession? One wonders who, besides oil producers and perhaps Goldman Sachs, a noted commodities trader that just reported exceptional earnings, would have benefited from this latest asset bubble? Wouldn't systemic risk be fueled by lower interest rates? From a borrower's standpoint, as money becomes cheaper, higher risks become logical. If the Fed lowers short term interest rates marketwide, it may be increasing the levels of systemic risk. This, indeed, is likely an important reason for the astronomical size of the recent credit bubble.
Relieving the Fed of the responsibility to manage the economy would allow it to serve as the czar of systemic risk in a way consistent with its other legal responsibilities. After all, a central bank primarily focused on maintaining the health of the banking system would want to prevent high levels of systemic risk. It would no longer be tempted to compromise the safety and soundness of banks, and the moderation of systemic risk, in order to maximize employment and economic growth.
In Washington, it is axiomatic that government agencies do not readily give up power. After all, the more powerful you are, the more important you become. Minor bureaucrats are not invited to soirees in Georgetown. It would be unlikely that the Fed would give up its responsibility for the management of the economy without the mother of all bureaucratic battles. And Congress and the White House might not want to take it away because then they'd have the hot tamale in their laps.
So how do we avoid making the regulatory pushmi-pullyu even larger? Give the systemic risk job to the FDIC. Such a responsibility would be consistent with the FDIC's mandate to safeguard the banking system--no pushmi-pullyu problem there. And the FDIC is perhaps the only federal agency that has distinguished itself in the recent financial markets debacle, spotting problems earlier and proposing better solutions than more powerful players. Good performance and sensible ideas are rarely rewarded in Washington, a city where the well-connected and undeserving manipulate power to triumph over the meritorious. But perhaps once, just this once, we could make an exception.
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