There is a lot of dialog about the FDIC funding proposal. Here’s Denninger:

Who would have thought that a government agency would actually contemplate paying the insured party for the coverage on their own risk?

In a world where we had a rule of law this would be identified instantly as what it is: rank, outrageous fraud.

But we don’t live in such a world.

Here’s Taunter:

The plan, to put it in plain language, makes no sense.

Why would the FDIC borrow at all? The FDIC – the Federal Deposit Insurance Corporation – is funded by a levy charged to all banks. When the insurance fund runs low, the banks have a supplemental levy. It is the banks’ obligation to keep the FDIC fund topped up.

If the fear were that the FDIC needed money suddenly, before a levy on the banking industry could be processed, not only can the FDIC borrow directly from the Treasury, home of the lowest dollar-denominated cost of capital going, the banks from whom the FDIC would be borrowing are already themselves wards of the Treasury. Why would anyone possibly want to create a middleman?

One of Taunter’s Tips is that when you see a government action that makes no damn sense for the government, don’t assume it is being done for the government’s benefit.

Insurance is a form of redistribution, it doesn’t conjure funds out of the air, only banks can do this.

Since banks can make instant money by lending it, why not put this tool to good use for once, and let the banks invent some free money to bail out depositors in failed banks? What’s so wrong with that?

http://economic-undertow.blogspot.com/2009/09/more-fdic-follies.html

There is no such thing as “the banks.” There are individual banks. The banks that were the problem can no longer be taxed. The banks that were not the problem will bear the burden.

Today an individual bank that accepts a deposit cannot use the deposit to buy fed funds or treasury bills, the safest of investments, and earn enough interest to pay the FDIC insurance premium. It can only cover the FDIC assessment by making riskier loans or investments.

The FDIC assessment is not very closely tied to risk, not nearly as closely tied as my auto insurance. In the last deposit insurance crisis, around 1990, I was in a meeting with FDIC economists who told me that I didn’t understand their system because I was trying to think of it like insurance. I said, “Hmmm. Federal Deposit Insurance Corporation.” They said, forget the part about it being insurance.

I have a better idea: Rather than increasing assessments on *all* banks (including the few prudent ones) like the FDIC did earlier this year, or paying the same bad actors who bankrupted the FDIC to “self-insure” (while still knowing that the government has their back if – or better, when – they screw the pooch again), the FDIC actually MAKES ASSESSMENTS ON INDIVIDUAL BANKS AT RATES REFLECTIVE OF THEIR RISK-TAKING? What a radical idea, eh? Why, that would be the moral equivalent of charging 20-30-something males who ride motorcycles more for insurance than Volvo-driving soccer moms. Crazy, I know…

“The modern banking system manufactures money out of nothing. The process is perhaps the most astounding piece of sleight of hand that was ever invented. Banking was conceived in inequity and born in sin . . . . Bankers own the earth. Take it away from them but leave them the power to create money, and, with a flick of a pen, they will create enough money to buy it back again. . . . Take this great power away from them and all great fortunes like mine will disappear, for then this would be a better and happier world to live in. . . . But, if you want to continue to be the slaves of bankers and pay the cost of your own slavery, then let bankers continue to create money and control credit.”
- Sir Josiah Stamp, president of the Bank of England and the second richest man in Britain in the 1920s.

“appears to have taken off in 1980 . . .hmmm . . .I . . .wonder . . .”
_____

You wonder correctly.