Federal Deposit Insurance Corporation

America finally “solved” its pesky problem of bank failures when it adopted Federal Deposit Insurance in 1933. The Federal Deposit Insurance Corporation has only a negligible proportion of “backing” for the bank deposits it “insures.” But the public has been given the impression (and one that may well be accurate) that the federal government would stand ready to print enough new money to redeem all of the insured deposits. As a result, the government has managed to transfer its own command of vast public confidence to the entire banking system, as well as to the Central Bank.

— Murray Rothbard; What Has Government Done to Our Money?

The FDIC protects bankers more than it protects savers. Because deposits are insured, the FDIC rewards bankers who take greater risks, punishes bankers who are prudent, and covers up banking fraud. Deposit insurance gives savers a false sense of security while their savings are put at greater risk. The FDIC helped cause the banking crisis and credit meltdown.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

Deposit insurance protects the bankers—not savers. In America we have the Federal Deposit Insurance Corporation (FDIC) to protect our savings, but its primary purpose is to protect big banks like Citigroup, Bank of America, and JP Morgan Chase—the very banks that helped cause this crisis.

When savers line up en masse to withdraw their savings, it is known as a bank run. The FDIC exists to make sure that runs don't happen on banks. During the Savings and Loan Crisis of the 1980s, savings were insured up to $50,000. When the savings and loans got into trouble, deposit insurance was increased to $100,000. When the financial crisis of 2007 began, the insurance was increased to $250,000. These increases were put in place to create confidence that even if a bank fails, depositors won't lose their money. From 2007 to 2009 there have been very few runs on the banks even though the numbers of failed banks is increasing. One reason is because savers feel secure that the FDIC will protect them.

Although the FDIC does a lot of good, it also protects incompetent, greedy, and dishonest bankers. By giving a sense of security—a financial backstop—the FDIC rewards bankers for taking greater and greater risks with depositors' money. And while the FDIC claims the banks pay for their insurance, the truth is that the FDIC docs not have enough money to cover today's losses—so the taxpayer will have to cover them, in the form of bailouts. The bankers get away with billions of dollars. We get stuck with the bill.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

Today, we hear the word bailout over and over. In reality, not all banks are bailed out. Bailouts are only for the biggest banks.

If a smaller bank goes bust, the FDIC generally uses a payout to fix the situation. For example, if you and I owned a small bank, and we made too many bad loans, the FDIC would simply close the bank, pay off the depositors, and we and our investors would lose the equity we put in to start the bank. A payout is often the remedy for small bankers with no political clout.

A second option is a sell-off. A sell-off occurs when a large banks steps in to take over a struggling bank. This has happened a number of times during the recent financial crisis, most notably with JP Morgan's purchase of Washington Mutual. It is an easy way for a larger bank to gain market share. The FDIC takes over the troubled bank on Friday and reopens it on Monday as a branch of the bigger bank. Again, this is a sell-off not a bailout.

Bailouts are generally reserved only for big banks and bankers with political clout—and for banks that took the greatest risk and thus have the greatest chance of severely damaging the economy, banks that are too big to fail. As Irvine Sprague, a former director of the FDIC, writes in his book bailout, "In a bailout, the bank does not close, and everyone—insured or not—is fully protected, except management which is fired and stockholders who retain only greatly diluted value in their holdings. Such privileged treatment is accorded by the FDIC only rarely to an elect few."

This means bailouts are only for the rich. If a big bank such as JP Morgan Chase or Citibank gets in trouble, the taxpayers pay for all losses. This means the $250,000 limit does not apply. If a bank in Europe has millions on deposit, or a rich man from Mexico has millions in savings, their money is 100 percent covered. Taxpayers pick up the tab.

If you and I took the risks that the biggest banks did, we would lose everything. We would not be bailed out. In overly simply terms, the FDIC is a smoke screen protecting the biggest banks. If a big bank gets caught, the government bails it out.

— Robert Kiyosaki; Rich Dad's Conspiracy of The Rich

For example, the Federal Deposit Insurance Corporation, which guarantees bank accounts, has only a fraction of the money that it is supposed to have on hand to see that people's life savings don't get wiped out when a bank fails.

— Thomas Sowell; Dismantling America