Tuesday, September 22, 2009

There May be a New Bond in Town...

Hans Palmstierna emails:

....the FDIC bond.

He points to an NYT column which reports:
Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.
Hans concludes:
Since this, in extension, is a liability on the balance sheets of banks (because they have to pay a larger FDIC fee for the FDIC to be able to pay them back the money that has been lent to it), wouldn't that mean that the FDIC is now competing with the Federal Reserve (sort of)? Also, if you have something on both the asset and liability side of your balance sheet, doesn't that simply make it null and void? This would mean that the money borrowed to the FDIC does not exist, nor has it ever existed. I wonder how much money the US banking sector is going to "imagine" into existence...

This is completely bonkers.
Which to me looks like it is another circular flow series that needs to be added to Janet Tavakoli's Ponzi Network chart.


  1. A colleague mentioned to me that this also raises issues of regulatory capture: How can the FDIC properly oversee a bank that has just bailed it out?!

  2. Bob Murphy,

    How could it have avoided regulatory capture when it was dependent on fees from the bank in the first place? But yes, certainly this exacerbates it.