Re: [A-List] Destructive destruction: Socializing banksters' losses

["Anne Williamson" <annewilliamson@xxxxxxx>]

Don't Expand Federal Deposit Insurance

by Rep. Ron Paul, MD

US House of Representatives, May 22, 2002

Mr. Speaker, HR 3717, the Federal Deposit Insurance Reform Act, expands the
federal government's unconstitutional control over the financial services
industry and raises taxes on all financial institutions. Furthermore, this
legislation could increase the possibility of future bank failures.
Therefore, I must oppose this bill.

I primarily object to the provisions in HR 3717 which may increase the
premiums assessed on participating financial institutions. These "premiums,"
which are actually taxes, are the premier sources of funds for the Deposit
Insurance Fund. This fund is used to bail out banks who experience
difficulties meeting their commitments to their depositors. Thus, the
deposit insurance system transfers liability for poor management decisions
from those who made the decisions to their competitors. This system punishes
those financial institutions which follow sound practices, as they are
forced to absorb the losses of their competitors. This also compounds the
moral hazard problem created whenever government socializes business losses.

In the event of a severe banking crisis, Congress likely will transfer funds
from general revenues into the Deposit Insurance Fund, which could make all
taxpayers liable for the mistakes of a few. Of course, such a bailout would
require separate authorization from Congress, but can anyone imagine
Congress saying "No" to banking lobbyists pleading for relief from the costs
of bailing out their weaker competitors?

Government subsidies lead to government control, as regulations are imposed
on the recipients of the subsidies in order to address the moral hazard
problem. This is certainly the case in banking, which is one of the most
heavily regulated industries in America. However, as George Kaufman, the
John Smith Professor of Banking and Finance at Loyola University in Chicago,
and co-chair of the Shadow Financial Regulatory Committee, pointed out in a
study for the CATO Institute, the FDIC's history of poor management
exacerbated the banking crisis of the eighties and nineties. Professor
Kaufman properly identifies a key reason for the FDIC's poor track record in
protecting individual depositors: regulators have incentives to downplay or
even cover-up problems in the financial system such as banking failures.
Banking failures are black marks on the regulators' records. In addition,
regulators may be subject to political pressure to delay imposing sanctions
on failing institutions, thus increasing the magnitude of the loss.

Immediately after a problem in the banking industry comes to light, the
media and Congress inevitably will blame it on regulators who were "asleep
at the switch." Yet, most politicians continue to believe the very
regulators whose incompetence (or worse) either caused or contributed to the
problem will somehow prevent future crises!

The presence of deposit insurance and government regulations removes
incentives for individuals to act on their own to protect their deposits or
even inquire as to the health of their financial institutions. After all,
why should individuals be concerned with the health of their financial
institutions when the federal government insures their deposits?

Finally, I would remind my colleagues that the federal deposit insurance
program lacks constitutional authority. Congress' only mandate in the area
of money and banking is to maintain the value of the money. Unfortunately,
Congress abdicated its responsibility over monetary policy with the passage
of the Federal Reserve Act of 1913, which allows the federal government to
erode the value of the currency at the will of the central bank. Congress'
embrace of fiat money is directly responsible for the instability in the
banking system that created the justification for deposit insurance.

In conclusion, Mr. Speaker, HR 3717 imposes new taxes on financial
institutions, forces sound institutions to pay for the mistakes of their
reckless competitors, increases the chances of taxpayers being forced to
bail out unsound financial institutions, reduces individual depositors'
incentives to take action to protect their deposits, and exceeds Congress's
constitutional authority. I therefore urge my colleagues to reject this
bill. Instead of extending this federal program, Congress should work to
prevent the crises which justify government programs like deposit insurance,
by fulfilling our constitutional responsibility to pursue sound monetary
policies.

Dr. Ron Paul is a Republican member of Congress from Texas.
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