At the end of their latest radio piece on the financial crisis, Alex Blumberg and Adam Davidson make a great point about uncertainty in the nationalization debate:
Of course, if [Tim Geithner and the Obama administration] were planning to take over the banking system, they wouldn’t announce it beforehand. They’d probably say exactly what they’re saying right now, wait ’til everything’s set up, ’til they hired enough people and got all their plans in order … and then one Friday evening, they’d make an announcement, and nationalize the banks over the weekend.
It’s a good point because that’s what already happens, every Friday night, when the F.D.I.C. seizes a small bank — by surprise — somewhere in America, cleans it up, and sells it back to a private owner.
60 Minutes reporter Scott Pelley recently rode shotgun with a band of F.D.I.C. agents as they snuck into town under assumed names and then, after business ended for the week, simultaneously seized all five branches of Chicago’s Heritage Community Bank.
The F.D.I.C. takes pains to keep its takeovers secret until the last minute. In this case, they gave the Heritage takeover a code name: Operation Happy.
You can watch the report below. It’s fascinating viewing, and should make you feel better about the safety of your bank deposits.
(HT: Ben Chandler)
and 
. You can also watch it on 
I was involved in auditing a failed bank before. This immediate takeover is needed to preserve a lot of documents and a reliable paper trail. You can not imagine the desperation of some bank employees in destroying evidence – shredding, document substitution, wiping out hard drives, and even burning documents in a fireplace. Like any other criminal, they will attempt to hide, destroy or erase anything that can be linked to them. Other hard assets like cars, computers, furniture, boats and even planes can all be moved to out-of-reach locations if there is a warning. It will be a long and painful process locating or retrieving them but sometimes you end up looking for phantom assets which never existed but included in loan papers. Good luck to those who are charged with recovering assets from Maddoff, Stanford and other scammers.
F wrote:
> and should make you feel better about the safety of your
> bank deposits.
Translation into political-economy terms;
1. Party A decides to store money with Party B.
2. Party B turn out to be incompetent.
3. Party C takes a whole bunch of money from Partys X, Y and Z and uses it to repay Party A.
Party A should have made sure Party B was sound before putting his money there. Why are X, Y and Z paying out because A was incompetent to manage his own money? what happens when A goes and does it again?
What happens when everyone stops bothering to make sure their bank is sound because they know Party C will take money from X, Y and Z? it means Party C has to do that all the time, because people happily bank with bad banks because they have no idea if they’re good or bad.
Overall assessment : broken situation. We appear to need FDIC taking tax money to pay for bad banks *because* we have FDIC taking tax money to pay for bad banks.
One other point –
I can imagine a counter-argument along the lines of “what about the poor guy who just lost his entire savings?”
The answer is for him to buy some insurance.
The answer is not for Party B to take money from Parties X, Y and Z, who have nothing to do with Party A and his bad decisions.
And I’d also say that insurance company will have a fundamental interest in keeping track of bank reliability – and charging premiums accordingly – which provides a clear signal about which banks are reliable and which not.
Sounds a whole lot better than a mechanism whereby random strangers are forced against their will to bail out people who have no incentive to care whether or not their bank is reliable.
Blank Xavier: you need to look up the word “insurance”. See, it means that we all (us X, Y, and Zs) pay a little so that there is money to pay party A when needed (things go wrong). Risk is used to determine how much we pay in advance.
How many of us are able to determine how strong a Bank is? I would say almost none, which is why the FDIC exists.
Further the alternative is bank runs where panicky people pull out their money and ensure that a bank in fact does fail, even if otherwise OK.
PaulK wrote:
> Blank Xavier: you need to look up the word “insurance”.
> See, it means that we all (us X, Y, and Zs) pay a little so
> that
> there is money to pay party A when needed (things go
> wrong).
Yes. But you are missing the crucial issue.
If Party A puts his money in a bad bank and then Party B takes money from X, Y and Z, it’s unjust. X, Y and Z have nothing to do with A. Why are they carrying the can for A being incompetent?
But if Party A – along with Q, R and S – puts money into an insurance scheme, then A, Q, R and S *have chosen of their own free will* to pool some money to cover their risk. If one of them invests in a bad bank and loses his money, *then they had all agreed to cover each others losses*.
You should pay for what you use. A, Q, R and S are paying for what they use. X, Y and Z are not – they have not chosen to use insurance, but they are being forced to pay for someone else. This is unethical and unfree.
econobiker wrote:
[snip]
> until his wife cleaned out his accounts and their house
> one
> spring Thursday afternoon and turned herself into his
> ex-wife.
> Only then did I learn his naivete about money
Then you had previously learned of his naivete about relationships?
If he chose a partner who’d do that to him, I’m less surprised than I would be that he was so unthoughtful about his money.
@Blank Xavier, FDIC is the Federal Deposit *Insurance* Corporation. All banks, good and bad, pay some into the FDIC (off deposit gains) so that it insures all banks, good and bad.
That is why it was created.
PaulK wrote:
> @Blank Xavier, FDIC is the Federal Deposit *Insurance*
> Corporation. All banks, good and bad, pay some into the
> FDIC (off deposit gains) so that it insures all banks,
> good and bad.
Yes. But this still misses the crucial point about freedom and paying for what you use.
First question : why am I forced by my bank to buy my insurance from FDIC?
Second question : why are FDIC forced to insure *all* banks, thus raising the price of insurance to everyone? any sane insurance company would refuse insurance to at least some banks.
Third question : imagine Party Z does due diligence and thinks that a particular bank is secure and puts his money there. He now may or may not want to buy insurance. If he does not, why are FDIC forcing him to do so?
Fourth question : imagine Party Z does no diligence and puts his money in a bad bank and doesn’t want insurance. Why is he being forced to buy insurance? why are X, Y and Z being forced to contribute towards his insurance with their premiums?
Fifth question : Party A does no diligence and puts his money in a bad bank. He is by his actions helping a bad bank continue to exist. He doesn’t care about this, because he’s insured by everyone else – by the people who did diligence and put their money is good banks. If people were doing diligence, bad banks would I suspect be much less common.
Sixth question : by having the bank pay insurance by reducing its interest rates and increasing its charges, people don’t pay directly and don’t realise how much they’re paying – because of this, they are insensitive to how much insurance is costing them, which means again they don’t care if they put money in a bad bank.
Basically, what I do with my money is my own business and no one else has any business, at any time, under any circumstances WHATSOEVER, to decide for me to spend some of my money. And that is exactly what FDIC is.