FDIC Walks a Tightrope

08-30-2009 • Lew Rockwell

This past quarter American banks have set aside billions of dollars against non-performing home loans (foreclosures). One of the objectives is to have reserves that equal 100% of problem loans, but American banks fall far short of that goal. Bair’s agency has $13.3 trillion of assets to protect. But her reserve treasure chest has shrunk to around $10.4 billion, certainly not enough to bear the brunt of a thousand failed banks. Any day the FDIC could deplete its insurance fund and have to tap into a line of credit at the US Treasury (which is also insolvent and needs $1.8 trillion to meet this year’s US budgetary obligations). The FDIC has up to $500 billion at its disposal, but this is not likely to be money loaned from other sources but rather newly printed money that would fan the flames of inflation. So for now, the FDIC is holding off the inevitable. If Americans discover the true dire state of American banks, this might trigger a massive bank run, so the agency plods slow