ICBA - Publications - The Fed is Part of the Problem

The Fed is Part of the Problem

FEBRUARY 28, 2003


The Fed is Part of the Problem

Chairman Greenspan began his testimony on federal deposit insurance reform legislation before the Senate Banking Committee by citing why our nation opted for federal deposit insurance in 1933. The Chairman didn't mention that legislation was passed over the Federal Reserve's objections.

In response to a direct request from President Hoover on February 28, 1933, the Federal Reserve Board told the outgoing President that it was "not at this time prepared to recommend any form of federal guarantee of banking deposits." President Roosevelt assumed office on March 5 and immediately issued a proclamation closing all banks-at first from March 6-9, and then for two additional days. The monetary policy of the Federal Reserve had significantly contributed to this banking disaster (as it subsequently contributed to our nation's savings and loan debacle in the 1980s). In short order, the Congress passed the banking act of 1933 that contained the Glass-Steagall Act separating investment banking and commercial banking and a separate title establishing a federal deposit insurance fund.

Fast forward almost exactly 70 years. Today's Fed chairman, Alan Greenspan, tells the Senate Banking Committee that "raising the ceiling now would extend the safety net, increase the government subsidy to depository institutions, expand moral hazard, and reduce the incentive for market discipline without providing any clear public benefit."

The Chairman further opined that increasing individual coverage levels to $100,000 in March of 1980-a recommendation that the Fed board at that time endorsed-"significantly increased the taxpayer cost of the bailout of the bankrupt thrift institution deposit insurance fund." Mr. Chairman, wouldn't brokered funds have moved into the brain-dead thrifts anyway, in $40,000 increments? And again, the thrifts were brain dead because of Federal Reserve interest policies in the early 1980s. Deposit insurance didn't kill them, a prime rate of over 21 percent did.

Today's bottom line, sadly, is that the Federal Reserve and the Treasury have opted for allowing existing levels of federal deposit insurance to wither away, to the eventual detriment of consumer confidence in our financial system. And it also has been their ongoing policy option to establish ever bigger financial institutions, controlling more and more market share, that are too big to fail and too big to regulate.

We again urge the House of the people-the House of Representatives-to reject these policy recommendations. The House Financial Services Committee is scheduled to mark up last year's comprehensive and balanced legislation on March 13. Lobby your member, please.