Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.

Here is the problem with that proposal:  This request for a half-trillion dollars follows trillions of dollars already spent to bailout Fannie, Freddie, Citi, GM, Chrysler, and AIG.  More accurately, those earlier dollars were spent bailing out the shareholders and failed management of those failed companies–every single one of which, will by the end of President Obama’s first term, be as bankrupt and non-existent as Braniff Airlines and E.F. Hutton. 

What?  You’ve never heard of Braniff and Hutton?  That’s the point.  It happens all the time; big companies go bankrupt because poor decisions catch up with them during economic downturns.  High oil prices in 1982 were the final nail in Braniff’s coffin, while E.F. Hutton collapsed as a result of bank fraud and the Wall Street crash in October 1987.  Washington didn’t bail them out.  Their remaining assets were broken up and bought by others in the marketplace who could more profitably use them.  (Interestingly, E.F. Hutton’s assets were absorbed by Lehman Brothers and Citigroup, perhaps proving the long term toxicity of toxic assets.)

It’s a good thing that Washington didn’t bail them out, because by 1989 the American savings and loan industry was in full-scale collapse.  The government finally did subsidize those losses in the form of guaranteeing depositor assets, ultimately costing the taxpayers $125 billion.  (That, unfortunately, now seems such a paltry sum by comparison.)  Had Washington spent the 1980s propping up failed institution after failed institution, it might not have so readily had the capital–both financial and political–to subsidize lost deposits.

The problem with Dodd’s proposal is not the proposal itself.  A half-trillion dollar guarantee of depositor assets is probably the first taxpayer expenditure in this entire crisis that I actually support.  However, it comes after taxpayers have already spent trillions bailing out other failed institutions, and with the near certain knowledge that there are trillions of dollars in bailouts yet to come.  At some point the people run out of money to give–even when the expenditure is necessary.

Speaking of the FDIC . . .

Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures . . .

The FDIC was created in 1933 to guarantee most assets of bank depositors.  (I say “most” because the current limit is now $250,000 per depositor.)  It is like flood insurance.  All federally chartered banks have to pay into an account from which are drawn payments in the event of a bank failure.  In normal times when there are maybe ten or twenty bank bankruptcies a year, the system works well. 

The problem comes when the flood is severe.  If the number of claims exhausts the fund and the pool of insurance money runs out, the deposits are backed by the “full faith and credit of the United States Government.”  In other words, taxpayers. 

This flood is already over the levees and it hasn’t stopped raining.  If late-to-the-crisis Chris Dodd is warning of the need for a half-trillion dollar infusion of taxpayer dollars to shore up the FDIC, you can be virtually assured that the actual number will be larger.  Much larger.  We’ve frittered away trillions of dollars “recapitalizing” insolvent assets.  It’s good money chasing bad.  Meanwhile, real problems are looming.

If a FDIC bailout to the tune of several trillion dollars is necessary, where does the money come from?  We’ve already spent too much to expect to sell more treasuries to cover the loss.  It will have to simply be printed, the consequence of which will be runaway inflation.

Finally . . . I’ve wondered aloud why there aren’t any banks running advertisements telling people their balance sheets.  It seems to me that if I was the president of a solid solvent bank that I would want to tell people.  I would want to share my audited balance sheet with the public in the hope that they would bring their deposits to my bank.  That there aren’t any banks doing so has me greatly concerned that there really aren’t any solid solvent banks. 

That Fed Chairman Ben Bernanke went before a Senate committee and refused to even release the names of the banks receiving bailouts certainly does nothing to allay my fears.  If by releasing information about bank balance sheets he fears that he might precipitate a run on the banks, then there just might be a very good reason to fear a run on the banks.

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Bill Quick agrees:

If an appendage of the banking industry like Chris Dodd is being instructed by his owners to increase their credit line by 1700% (!!!), it’s a dead . . . giveaway as to what shape the bankers think their businesses are in.

(ht: GR)

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