The Federal Deposit Insurance Corporation: A Plunge to Irrelevance

Abstract

What was the role for the FDIC as the financial industry began to collapse in 2008? One must remember that when it was created as part of the Banking Act of 1933, the prime directive of the FDIC was policing banking activities to prevent reckless and speculative activities with the money entrusted to banks by depositors. With the passage of the Graham-Leach-Bliley Act in 1999, the FDIC became an insurer of gambling losses. It was still responsible to depositors when gambling losses occurred; but it had very little control over the gambling activities themselves. Considering the magnitude of the 2008-2009 collapse, common sense should have dictated that if financial institutions had become too big to fail, then they had also become too big to regulate. As part of the bailout process, one would think that the federal government should have taken a page out of Teddy Roosevelt’s playbook and set out on a mission to bust these trusts rather than further contributing to their unbridled growth. If the collapse and taxpayer bailout was precipitated by reckless behavior among institutions that were too big to fail, the sensible response by the U.S. government would seem to have been a passage of legislation disallowing future corporate mergers that create such institutions. However in its feckless state during the recent banking crises, the FDIC not only facilitated more growth, it worked at cross-purposes to its original mandate. In the 21st century, it has instead become the quintessential facilitator of the moral hazards that continue to permeate the U.S. banking industry today. With the FDIC insuring these hazards, the American taxpayer will most certainly be called upon once again to foot the bill for reckless behavior by the big banks. It’s just a matter of time.