FDIC, Up to a Point

Wednesday, July 23, 2008
Walk into any bank and you'll notice the posters boasting that all the deposits are FDIC-insured up to $100,000. Meaning: if the bank fails, the government will recoup the money in your account. This system was established during the Great Depression, and it gives the public confidence in the banks, even though at any given time the banks keep only a fraction of the deposits in the vaults.

The FDIC was tested last week when IndyMac, the California bank, dried up and failed. Government insurance took effect and customers with deposits under $100,000 got reimbursement. In total, IndyMac cost the FDIC $8 billion.

Here's the kicker: There are $6.84 trillion dollars deposited in American banks, and there are only $53 billion dollars in the FDIC fund. Make that $45 billion, now that Indymac is gone.

The FDIC is useful for saving a small bank or two per year; but if a series of banks fail, as is possible in the present turmoil, the FDIC will find itself bankrupt. And so will millions of people.