One of the best ideas to come out of the New Deal was the FDIC. You guarantee that the government will ensure that bank depositors get their money back even if a bank fails. Consequently, there are no “runs” on banks. Consequently, banks rarely fail. But still they sometimes fail, and to be credible the FDIC needs to have some money it can give to depositors. Since the deposit insurance is good for the banks, you do this by levying insurance premiums on banks. Works great. One of the least controversial government programs there is. And yet:
The federal agency that insures bank deposits, which is asking for emergency powers to borrow up to $500 billion to take over failed banks, is facing a potential major shortfall in part because it collected no insurance premiums from most banks from 1996 to 2006. The Federal Deposit Insurance Corporation, which insures deposits up to $250,000, tried for years to get congressional authority to collect the premiums in case of a looming crisis. But Congress believed that the fund was so well-capitalized – and that bank failures were so infrequent – that there was no need to collect the premiums for a decade, according to banking officials and analysts.
I don’t think we should beat around the bush here. “Congress” didn’t “believe” anything—Congress believed that they could legislate a giveaway to the banks and nobody would notice or care.
Robert Shiller makes the case in Animal Spirits that this kind of thing, the revelation of corruption and untrustworthiness in key institutions, does a lot to depress our spirits.