RSS
Should Congress Recapitalize the FDIC?
With the failure of yet another major investment bank and the take-over of another, the public is justifiably worried about the state of American banks. But should this fear result in a government bailout? The FDIC fund has about $50 billion to its name and yet there is roughly $1 trillion in assets in our nation’s banks, according to Nouriel Roubini, a professor of economics at NYU.
The failure of Lehman Brothers, Bear-sterns, IndyMac, etc… can be traced to poor investments in debt instruments. Three years ago these investments were too good to be true. The banks could purchase bundles of debt instruments from mortgage lenders repackage them and sell them overseas, largely to the Russians and Chinese. It must have been hard to say “no” to large amounts of cash being thrown at investment banks from foreign governments and unsuspecting (if not naive) speculators. So hard, in fact, that they all said “yes.” The question then becomes, does the U.S. government have a responsibility to bailout un-savvy investors through a recapitalization of the FDIC? What is the alternative, short of allowing these banks and their investors to suck it up; a whole-sale bailout al a Fannie, Freddie, etc…?
To be sure, the failure of these large investment houses is dire for many citizens that depend on such investments for retirement. And it may be cheaper in the long run for the Government to adequately fund the FDIC than to take over troubled banks simply to keep them afloat. But much more expensive that allowing the capital markets to do what they do best: correct themselves. Besides, to takeover every troubled lender, bank, mortgage would require the Fed to borrow more from the Chinese, Russians, Gulf States and other foreign entities. The government has followed this path to a point. Socialism here, socialism there, but no socialism for Lehman? Why stop at Lehman?
So give me your two-cents (seriously, I could use the money!), should Washington bail out industries, commit to a recapitalization of the FDIC or should they just let ‘em ride?
