Say ‘No’ To Upping Federal Bank Insurance Coverage

For over a century, progressives drawing their inspiration from Karl Marx have undermined the idea of “moral hazard” as they’ve pushed for brotherhood and universal equality. The latest manifestation of their effort, oddly enough, comes in what they claim is a move to protect savers and investors by raising the federal deposit insurance limit from $250,000 per account to $10 million.

This may seem prudent—especially for non-interest-bearing accounts used for payroll and daily business expenses. Ostensibly, it protects business owners and working Americans alike and will be funded by banks through fees paid to the FDIC meaning there should be no risk to taxpayers.

Some brilliant, capable people, including Treasury Secretary Scott Bessent, have expressed support for the move. They should rethink that. As we learned in 2008, taxpayers almost always end up holding the bag. The FDIC made individual account holders whole—up to the statutory limits—some depositors did face losses, leaving them bitter despite the federal bailouts.

Strangely enough, as The Wall Street Journal reported, big banks oppose raising the coverage level. As they sit, they will pay for most of it and get little benefit from it — they will not be eligible for the higher level of coverage. Which may be why supporters of the increased limits say the proposal is meant to help small banks and community-based institutions. Yet a recent study from the Cato Institute found that fewer than 1% of deposit accounts exceed $250,000, the level at which FDIC coverage currently ends.

When significant failures occur, the pressure on Washington to bail out affected parties to the full extent of their losses increases, and we all end up footing the bill. We all know that taking significant risks often leads to substantial rewards. This is how fortunes are built, and let’s be honest, few among us don’t want to be wealthy. If an endless class struggle shapes your worldview, however, these “rewards” come only at others’ expense. They are the product of injustice and must, therefore, be disposed of.

The process of doing that takes various forms, including eliminating or alleviating the consequences of risky behavior. A look around us shows that nearly all large government social welfare programs aim to shield people from the outcomes of poor decisions across all elements of life.

We have been conditioned, for example, to empathize deeply with those who choose not to purchase health insurance only to face financial ruin when illness strikes. The liberal response to this issue is not to educate individuals about the benefits of coverage so they can make informed choices. It was, through Obamacare, to mandate that everyone enroll in an insurance plan, regardless of cost, and offer generous subsidies to those who found premium payments burdensome.

Similarly, the government has introduced a host of stringent regulations in the banking and financial sectors that may inhibit growth without making deposits or investments appreciably secure. And none of these measures, from FDR’s 1933 Bank Holiday to Dodd-Frank and beyond, have stopped every bank and financial firm from failing. It still happens, but rather than focus on whether these actions have been practical or whether the benefits are worth the cost, we keep trying to eliminate risk.

Some will say that risk mitigation has been a net plus, but that’s not clear. Each time the government intervenes in that fashion, it creates what economists call “moral hazard.” By reducing or eliminating the consequences of mismanagement—such as bank failures that cause depositors to lose money—we inadvertently encourage people to become complacent about their savings. As a result, they may no longer feel the need to ask critical questions like, “Is the institution where I’ve deposited my savings sound?” They assume that if it isn’t, the government will step in through the FDIC to make them whole.

But what if these kinds of guarantees incentivize risky investments, as they did in the late 1980s, leading to the S&L bailout, triggered by the catastrophic collapse of multiple savings and loan institutions? It was catastrophic, just as it was in 2008 when the collapse of the subprime mortgage market brought Wall Street to its knees. Will increasing the size of insured deposits at regional and community banks send a flood of money their way in ways that threaten their stability?

We need to ask—though we often do not—whether federal protections have even subconsciously encouraged executives at failing or at-risk banks to engage in riskier investments and operations than they otherwise might have. Did these safeguards create moral hazards that first-year finance students are warned to avoid?

The existing system, with its current limits, may instill confidence in banks but might also lead depositors to become complacent. Proponents argue that public deposit insurance reassures average Americans that their money is safe. However, until we have more unmistakable evidence, it might be wiser to maintain things as they are. With federal debt surpassing $38 trillion—mainly due to prolonged COVID-related bailouts and subsidies—we cannot afford to take on additional risks. For that matter, neither can large banks. As Nobel Laureate Milton Friedman famously stated, “There is no free lunch.” 

 An experienced journalist and commentator who has contributed to various media outlets and is a highly regarded political analyst, Peter Roff is a former UPI and U.S. News columnist who is now affiliated with several public policy organizations, including Frontiers of Freedom and Center for a Free Economy. He is @TheRoffDraft on his social media and can be reached by email at RoffColumns AT GMAIL.com.

The views and opinions expressed in this commentary are those of the author and do not reflect the official position of the Daily Caller News Foundation.