“A Monstrous System of Guaranteeing Deposits”
Time for a good chuckle: Have a read of this excerpt from TIME magazine, circa 1933, about the evils of FDIC deposit insurance:
“Through the great banking houses of Manhattan last week ran wild-eyed alarm. Big bankers stared at one another in anger and astonishment. A bill just passed by both houses of Congress would rivet upon their institutions what they considered a monstrous system of guaranteeing bank deposits. Such a system, they felt, would not only rob them of their pride of profession but would reduce all U. S. banking to its lowest level. They saw their deposits which they had spent a lifetime to build up and protect with their good names confiscated by the Government to pay for the mistakes and dishonesty of every small town bankster . . .
Bank deposit guarantee schemes have been tried in Nebraska, Oklahoma, Kansas, Mississippi, Texas, North Dakota, South Dakota and Washington. They have invariably ended in failure and loss, if not in outright scandal and default. They have weakened the moral fibre of bankers and served chiefly as a temptation to bad banking. Honest banking has been penalized for dishonest banking.”
Thanks, Paul!
>
Source:
BANKS: Deposits Guaranteed
Time, Jun. 05, 1933
http://www.time.com/time/magazine/article/0,9171,745617-1,00.html
Tweet
Facebook
Reddit
Digg this!
April 24th, 2010 at 6:47 pm
BR,
Here’s an easy one: What are We supposed to be ‘chuckling’ over?
is this: “…Bank deposit guarantee schemes have been tried in Nebraska, Oklahoma, Kansas, Mississippi, Texas, North Dakota, South Dakota and Washington. They have invariably ended in failure and loss, if not in outright scandal and default. They have weakened the moral fibre of bankers and served chiefly as a temptation to bad banking. Honest banking has been penalized for dishonest banking.”
somehow, incorrect?
and, isn’t this: “They have invariably ended in failure and loss, if not in outright scandal and default. …served chiefly as a temptation to bad banking. Honest banking has been penalized for dishonest banking.” –exactly, what occured?
http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=FDIC+Fund+negative
“…Scott, chairman of the board and CEO of Coleman County State Bank, said 90 percent of the banks in the U.S. have the best rating from the FDIC. “Ninety percent of the banks in the U.S. are strong,” he said, “and the ratio in Texas is even better.
“From the news media, you would think all banks are in trouble,” he continued, “but only a small percentage of banks caused this problem.”…”
http://www.reporternews.com/news/2009/apr/12/banks-await-fdic-rate-increase/
April 24th, 2010 at 6:54 pm
the origins of modern “moral hazard” making……
April 24th, 2010 at 7:08 pm
What we’re supposed to be chuckling over is that, 80 years later, the predictions implied by this article have proven catastrophically wrong. The FDIC coincided with the bottom of the Great Depression and 50 years of stability in banking in which the American middle class, the largest in the world, was created.
The current problems we have are because of a one sided dismantling of this system. When the FDIC was passed, it was passed along with tough new regulations such as Glass Steagall that sought to transform banking into more of a utility. This balanced out the moral hazards of the deposit guarantee for 50 years. But in the 1970′s, 80′s, 90′s and 2000′s one leg of this balance was pulled out, and that’s why it toppled over. The reason being that one leg was politically easier to pull out than the other one.
April 24th, 2010 at 7:13 pm
God MEH, Patrick… do you guys understand nothing?
The “costs” of what you call “moral hazard” due to the FDIC system of guarantees is probably 1% of the information costs and frictional costs of trying to have EACH f-ing depositor figure out which bank is strong and hold 5 different accounts.
Follow dumb austrian and classical economists much? (So much money has been lost in that intellectual dump.)
The main quote in this post was cited by Obama in his speech on financial regulation Friday. To good and humorous effect. While I am not much for more regulation and wish the congress and regulators would reflect more on what they did wrong… the essential point is correct… stability will only mean MORE money for financial services companies. Its wierd that JPM, GS, C etc dont get this and arent out front on getting better regs, getting standardized derivatives into cleared exchanges, etc.
April 24th, 2010 at 7:54 pm
did they really use the word “bankster” in 1933??
April 24th, 2010 at 7:59 pm
nobetanofun Says: did they really use the word “bankster” in 1933??
Beat me to it. There really is nothing new, after all….
April 24th, 2010 at 8:00 pm
@noetanofun: I believe that’s when the term was coined, no?
April 24th, 2010 at 8:12 pm
cognos,
one could allow some hyperbole, but there’s no way you could even begin to support this: “The “costs” of what you call “moral hazard” due to the FDIC system of guarantees is probably 1% of the information costs and frictional costs of trying to have EACH f-ing depositor figure out which bank is strong and hold 5 different accounts.” -statement.
it is, simply, a total Red Herring that, at the very base, ignores well-known/-able potential substitutes like: http://www.ul.com/global/eng/pages/corporate/aboutul/
if it would help, see:
Standards of Business Conduct
For more than a century, UL has provided industry-leading technical expertise and quality service, building a reputation for integrity and independence along the way. UL built this reputation by maintaining the highest legal and ethical standards. Our commitment to quality and service has earned us the confidence of consumers, industries and safety professionals worldwide. The UL Standards of Business Conduct reflect our company’s values, our commitment to high legal and ethical standards and inform UL employees of their obligation to ensure that UL maintains its hard earned reputation…
http://www.ul.com/global/eng/pages/corporate/aboutul/standardsofbusinessconduct/
and/or http://www.consumerreports.org , to begin with.
We’d be, tremendously, better served by a Population that knew, like their Ancestors, that the World is ‘fraught with Risks’ and its best antidote is Vigilance, not unwarranted Belief..
April 24th, 2010 at 8:34 pm
Of course! Rely on a rating agency to tell you which banks are OK … Cos a bankster would never lie to a ratings agency, right?
April 24th, 2010 at 9:01 pm
Violins for cognos, because, wait for it, he cares!
April 24th, 2010 at 9:56 pm
“trying to have EACH f-ing depositor figure out which bank is strong and hold 5 different accounts.”
That someone thinks this is preposterous is pretty amusing.
April 24th, 2010 at 10:22 pm
@ Cognos
While I find that informational costs, and a more stable financial system in the quasi medium term ( lack of runs on banks and lower total financing costs because of FDIC insuarance etc.. ) have had a unmistakeable positive effect the long term effects (Im thinking 100 years) is still very muddied.
With now effective 0% Reserves in the system, the system is only as good as the Admistrators that run the asylum and a relatively consitant exploding debt: income ratio since FDIC insuarance conception is anything but a ringing endorsement.
In the long run “Banksters” and the Bankster like corporations ( Investment Banks) are feeding at the trough of ZIRP and the consequences of every Government Insurance or Bailout, be it FDIC S&L /LTCM/ Asian Financial Crisis / Mexican Peso Crisis/Dot Com and now Housing has made every savings and checking account a defacto backing for mutliples layers of risk over the span of many decades.
All of this has conditioned the Banksters that Goverment /FED will come riding to the rescue. Look at the large number of banks that were ofering above market rates for CD’s last year just as this blew up trying to attact capital before the FDIC shut them down or they were forced to merge (Washington Mutual)
In the end Im not sure that this quote is all that far of base:
“They have invariably ended in failure and loss, if not in outright scandal and default. They have weakened the moral fibre of bankers and served chiefly as a temptation to bad banking. Honest banking has been penalized for dishonest banking.”
April 24th, 2010 at 10:58 pm
“What are We supposed to be ‘chuckling’ over?”
This was my own laugh out loud moment: “They have weakened the moral fibre of bankers…”
What!?… Bankers have moral fibre!?
April 24th, 2010 at 11:18 pm
@cognos: Was that really you? Or did someone steal your identity.
I’m not yet ready to say we agree on something.
All anyone has to understand to make it work is truth and honesty and integrity.
I am reminded of a questionnaire/ or coin either the Lions or Kiwanis gave my son.
Truth. Reagan said the truth is hard to come by. True.
Being honest? Equally difficult. Lying. Yeah. I think the Hebrew term is ganalf.
But the bottom line that sorts out statements is : “Who benefits?”
April 24th, 2010 at 11:32 pm
@BR: Almost forgot . Great post.
Reminds me of a statement I used to love to make. Humans, on the intellectual scale are someplace between bacteria and dogs. Dogs have no sense of time, and bacteria will multiply until they destroy their host.
And that worked for quite some until a fellow worker said he knew of some pretty smart bacteria.
April 24th, 2010 at 11:37 pm
for quite some time
Where’s my wordsmith?
April 25th, 2010 at 12:29 am
I think you guys are insane. Just look at total wealth today compared to total wealth in 1933, or even, for that matter, 1929. “S&L /LTCM/ Asian Financial Crisis / Mexican Peso Crisis/Dot Com and now Housing ” are all except for one (S&L) post Washington Consensus crises, and all of them are most deregulation crises. Show me the banking collapses caused by the FDIC in the 1930′s,40′s,50′s,60′s and 70′s. Will these decades just disappear from collective memory in the rush to revisionism?
April 25th, 2010 at 1:08 am
I was using bankster 12 years ago and I thought I was coining a phrase. It appears I was only resurrecting one. Some truths do have a way of getting around. Especially the self evident ones :)
April 25th, 2010 at 2:21 am
Barry, I don’t go around saying that the CRA and FDIC are the closest proximate causes of our most recent bubble/bust. I.e., I’m not a wing nut. But, yes, the existence of the FDIC encourages people to put money into institutions without investing any due diligence, concern for where the institution invests that money. It is a backdrop to “OPM”.
On the one hand, I’m reluctant to say FDIC insurance is a net negative. On the other, I’m not sure the case (in favor of FDIC insurance) is sufficiently “clear cut” to make the market fundamentalists’ arguments so laughable.
April 25th, 2010 at 7:04 am
Cognos,
The point has been made before, and apparently needs to be made again.
The period in history following WWII was extraordinary in nature in favoring the US. Let’s not draw historic parrellels to a time which may never be repeated.
What we see happening now is the norm, as far as the competitive nature of national economies is concerned. And we need to measure the success or failure of our institutions based on normal economic times, not the fairy tale period following WWII.
April 25th, 2010 at 7:21 am
If you, BR, actually see humor in that quote, well, I’m sorry I bought your book. Are you really just another wall street bankster? Would you agree that Austrian economic thinking is an “intellectual dump?” Do you really see no path to ruin in government guarantees?
Hummm… Something about “end of days” keeps popping up.
April 25th, 2010 at 7:50 am
If you took a few weeks to sit down and read Amity Shales insightful, though-provoking, accurate book like I did (on FDR and how he bent his nation over and bailouts have never, ever worked) You wouldn’t be so quick to requote the Main Street Media and reprostitize their lies for the wider audience. Because if you ask me, the FDIC stands for F****ing Incompetent Dumb Sh*ts.
And I suppose you don’t care that your precious tax on working people’s bank accounts is really saving illegal immigrant’s money, not our money. Because what kind of idiot puts their money in a bank that’s going out of business? Not me, but they must, someone must, and it’s got to be the ones that ask you a whole bunch of questions in some language before they ask you to Press 9 for English. Am I right?
And don’t tell me that a few people of color getting asked a few questions in the State of Arizona is worse than a terrorist attack, you remember how Clinton left us exposed last time?
We know who we’re talking about here, c’mon. I mean Ricardo Montalban ain’t gonna get his hair mussed. We’re talking about letting our brave law enforcement officials question people who obviously look like they don’t belong where they’re at. What’s wrong with our police asking a few people a few questions? So you hate the police now too?
SNIP
April 25th, 2010 at 7:57 am
Amity Shlaes?
The women who thinks a recession is 2 consecutive quarters of negative GDP ?
Who defended Phil Gramm’s “Mental Recession” comments?
No thank you.
April 25th, 2010 at 9:04 am
Meanwhile money continues to be made in fantasy:
http://cryptogon.com/
April 25th, 2010 at 9:37 am
Some of the looneytarians seem to have their sequencing reversed.
It’s not as if some time in the distant past we had this perfect free market banking system and then for no good reason central banks, deposit insurance, and regulation were forced into the picture, wrecked all that was good and pure, and brought about the boom/bust cycle and financial crises.
Central banks, deposit insurance, and regulation came into the picture BECAUSE private market banking is an inherently unstable activitiy, prone to recurring crises, and tending to bring the entire economy down with it when it implodes.
We had free banking in the US from 1837-1864 and it was an unmitigated disaster.
April 25th, 2010 at 10:52 am
Am I crazy? Isn’t an important rationale for FDIC deposit insurance to protect the banks and the banking system by preventing runs on banks? That seems important, and I think still effective.
April 25th, 2010 at 12:38 pm
@Beet
My post was not an outright denounciation of FDIC Insuarance just trying to point out what FDIC accounts (mostly demand accounts ) now back.
Your point that a majority of those crises are post deregulation are well taken and I will not argue the fact, but instead ask a question for you to think about.
How different a financial world would we live in, if intead of bailing out those institutions during deregulation (de-facto making them larger and bigger) simply starting with the S&L crises allowed those crises to work themselves out naturally?
Institutions would fail that managed themselves poorly and used Other People’s Money to speculate and especially LTCM loses would have been an enourmous lesson to the Banks about counter-party risk and Unregulated Derivitives.
It was my intention to show that mild Government sponsered Insuarance ( FDIC) might have a stabilizing effect (Call it regulation if you wish) but when coupled with massive systemic Insuarance (FED and Congress Bailouts) FDIC puts everyones money at risk in a Ponzi-financial relationship therfore massively increasing risk layering though leverage.
April 25th, 2010 at 1:26 pm
We just have gone [most of the way] through the biggest financial crisis in 80 years after Wall Street got all anarchistic [no rules, no regulation does not make the market "free"] thanks to dumping most of Glass Steagall, EXCEPT for the FDIC. In the early 1930s hundreds of banks went under and many more would have if FDR had not arrived and – in his first week – called a bank holiday and worked with the new Democratic Congrees to pass the Emergency Banking Act.
I don’t seem to remember thousands of bank runs this time, so I guess the FDIC worked; is that what you guys are calling “moral hazard”? Where somebody besides the rich and the bankers gets a fair shake?
April 25th, 2010 at 1:35 pm
As for individuals doing the “due dilligence” before en-trusting their money to a bank, that is a cruel joke when the experts at Moody’s et al [and also apparently some Wall Street CEOs] were completely suckered by the designed to be opaque new investment vehicles behind the economic collapse.
The average working person can not even figure out the needlessly complex applications for a credit card, or a home mortgage, or the prospectus for the mutual funds offered in their 401[k].
April 25th, 2010 at 1:49 pm
Come on, no one snickered when reading “the moral fibre of bankers”? I almost chocked on my own spit.
Here at Goldman Sachs
We make money the old fashioned way…
WE STEAL IT !
April 25th, 2010 at 1:57 pm
some how i don’t see a way to be in favor of what was done prior to the FDIC. as it was, the banks were always failing, and bank runs happened frequently. and the opportunity costs that incurred were enormous as the population had to no way to judge the banks reliability to do what it was hired to do. so they pulled money out at the first hint or even rumor of a problem at a bank, killing good and bad banks equally. and probably some the rumors were spread by competitors. hm, maybe that why the bankers did really like the FDIC much. it took a quiver out of the way of competing. and you can’t just do that due diligence once, you were doing it every hour of every day, leading to lost time to do any thing else.
April 25th, 2010 at 4:46 pm
@crjdriver,
You’ll find no disagreement from me on that point, my comment was only defending FDIC insurance, not S&L and LTCM bailouts/insurance. Also, any kind of insurance is of course a privilege and must come with corresponding responsibilities. The latter is what I call that regulation. Insurance itself is not regulation.
Highly levered and financed economies need recessions from time to time because otherwise, the among of leverage just continues to grow to dangerous levels as a matter of human psychology. The 2001 “recession” was a strange recession in that is was mostly felt in a few sectors – technology, stocks, manufacturing, labor market – but it completely bypassed consumer spending, the finance, and the housing sectors. It was never a ‘check’ on those sectors at all.
April 25th, 2010 at 10:25 pm
Yeah, I don’t get this one BR. What’s to chuckle over here?
The FDIC and SEC have both given investors the feeling that their money is somehow “safe.” And, we know now, that is total bullshit.
What’s wrong with making investors conduct some due diligence on whom they bank with whom they make bets on?
Gee, in the absence of these fine institutions, what would we possibly do? Maybe there would be a growth industry in private firms who would conduct due diligence on behalf of investors and charge a fee? Maybe there would be a growth industry of professional investors who vetted the companies/banks and then charged an asset management fee of some kind based on their track record of good peformance?
Nahh…forget that nonsense. I’m sure Government created agencies will do the job much better…. heh heh heh.
April 26th, 2010 at 12:12 am
willid3, that’s indeed a selling point in favor of the FDIC. Now, “increasing transparency” — much easier with technology today — and “lowering lending ratios” would go some way to improve stability. But, for me, these are interesting questions. I don’t know nearly enough to be convinced either way.
>> jimc1004 Says:
>> April 25th, 2010 at 1:35 pm
>> As for individuals doing the “due dilligence” before en-trusting their money to a bank, that is a cruel joke when the experts at Moody’s et al [and also apparently some Wall Street CEOs] were completely suckered by the designed to be opaque new investment vehicles behind the economic collapse.
jimc1004, I firmly believe the “experts” at Moody’s et al chose to be “suckered”, because that’s how they made their money. Cue the Upton Sinclair quote…
April 26th, 2010 at 12:28 am
>> I don’t seem to remember thousands of bank runs this time, so I guess the FDIC worked
Jim, first, more of today’s assets are concentrated in larger banks. Don’t count “numbers of banks”. Count “writedowns as a % of national assets” or some similar metric. Second, “not recognizing losses” has been job#1 around here. Are we better off that way? Third, who are we helping? There’s a 32% unemployment rate among the poor. Empty, overpriced houses rot while we increase the number of homeless. Keeping asset prices inflated seems like a way to keep the little people hooked on debt. Looks to me like we’re helping the rich.
April 26th, 2010 at 6:26 am
interesting that back then it was the small banks who were blamed – “…pay for the mistakes and dishonesty of every small town bankster . . .”
April 26th, 2010 at 9:04 am
It’s far from ideal but bank regulation is needed for the same reason Utilites had to be regulated. Without regulation, the managements of utilities did unbelieveably stupid and risky things in the 1930s with the steady stream of cash flows.
How efficient is it to have your utility go bankrupt and cut off the power because some executive decided to bet on derivatives? I guess Doug Casey and the Austrian economists would argue that we should all have our own power generator and multiple utility companies competing for our business. But that’s a complete waste of capital too.
Regulators are needed because the average American can’t balance their own finances, let alone read a bank balance sheet and be expected to do due diligence on every bank they deal with. Having no regulators or deposit insurance is a recipe for constant panic-inducing bank runs. That’s not efficient either. As long as the regulators do their job (which they haven’t been), the FDIC runs a pretty efficient system. Again, it’s not ideal but it instills enough confidence for people to spend time on more productive activities.
April 26th, 2010 at 10:31 am
If the FDIC went out of business tomorrow 100 independent ratings agencies would crop up to fill the gap. Odds are they would do a better job since their long term viability is predicated on them doing a good job, unlike the FDIC. I would also not be surprised to see private deposit insurance creep up that banks would use as a differentiator. Underwriters would dig through the books, etc.
With the internet, e-banking, etc., DD would be a piece of cake. I can see the need for the FDIC back in the day due to geographic constraints. In 1933 I probably had three banking options, one of which is a coffee can in my back yard. I don’t think that is the case anymore. IMO
~~~
BR: The FDIC is more than a ratings agency — they are a supervisor of banks, forcing them to report actual balance sheets, including insolvencies. And, they oversee the FDIC insurance fund, which guarantees deposits when these institutions go belly up.
You seem enamored of the private sector — who would like to see running his — Goldman? Lehman Brothers? Maybe Arthur Anderson? Citi? Enron? WorldCom? These priate sector companies all did a bang up job!
April 27th, 2010 at 3:22 pm
BR:
Agreed, I did not mean to imply that the FDIC was simply a ratings agency, and folks such as AMBAC and Arthur Anderson have put a dent in my libertarian armor. Is there not, though, a market for ACTUAL watchdogs who could have high standards, morals to boot, and provide a valuable service to their “clients” by putting them through a true set of financial tests and, if passed, give a stamp of approval which actually holds some value? Maybe I’m naive.
April 27th, 2010 at 11:15 pm
If you took a few weeks to sit down and read Amity Shales insightful, though-provoking, accurate book like I did (on FDR and how he bent his nation over and bailouts have never, ever worked) you wouldn’t be so quick to requote the Main Street Media and reprostitize their lies for the wider audience. Because if you ask me, the FDIC stands for F****ing Incompetent Dumb Sh*ts.
And I suppose you don’t care that your precious tax on working people’s bank accounts is really saving illegal immigrant’s money, not our money. Because what kind of idiot puts their money in a bank that’s going out of business? Ones that ask you a whole bunch of questions in some language before they ask you to Press 9 for English, that’s who.
And don’t tell me that a few people of color getting asked a few questions is worse than a terrorist attack, you remember how Clinton left us exposed last time?
We know who we’re talking about here, C’mon. I mean Ricardo Montalban ain’t gonna get his hair mussed. We’re talking about letting our brave law enforcement officials question people who obviously look like they don’t belong where they’re at. What’s wrong with our police asking a few people a few questions? So you hate the police now too?
And you think you can go anywhere you want in Mexico. Like they don’t ask us questions? You ever cross the border there, General Custerd? You love Mexico so much why don’t you move there? Do you even remember the Alamo? They were real nice then, weren’t they?
Next you’re gonna try telling me China doesn’t ask people who shouldn’t be in their country why they’re there? And they’re kicking our butts with all of Golden Boy’s state-sponsored Socialism. If he’d take a second and stop looking in the mirror (and boy, does he) and do what needs to be done to fix the economy we wouldn’t even be having his conversation, and I hope you lose your blog job to oneo f them so YOU know how it feels like.
J*s*s Chr*st, it’s like we’re lining people up and shooting or something if you listen to the Far-Left MSNBC-lovers. That’s why nobody listens to you goof balls, you’re completely out of touch with regular Americans, you know, REAL Americans.
…and with Obama giving up our nukes, we might as well just… you know, just go ahead then. Now there’s something I’d pay higher taxes for (no not more windmills for you and Numb-nuts Nancy Peloski and Harry GREED to cut the cheese on) …on enough nuclear bombs to protect us. Maybe Russia can sell us some of theirs since we’ve lost well over a third of our ability to test and manufacture, working, nuclear bombs under Obama’s in competent stewardessship (it’s on snopes.)
So the next time you spout your mouth off about whatever you’re wrong about, realize the gun you see slung over the shoulder of someone who is somebody who’s getting real angry …and cares about the MIAs Carter and Clinton and now Obama has left behind.
April 28th, 2010 at 6:21 am
Amity Shlaes?
The women who does not know what a recession is? (She thinks it is 2 consecutive Qs of negative GDP)
Who came out in support of Phil Gramm‘s “mental recession” ?
Her? Why on earth should anyone care what that clueless ideologue thinks?