I was watching CNN, and they were comparing the bail out plan that was proposed on Monday (Plan A), to the one that was looked at on Wednesday (Plan B), and they were noting the differences.
One different component to Plan B that I did not understand was the insurance part. In Plan A, it had insured a $100 k to loans, and in Plan B, it upped to $250 k.
Can someone explain to me from the ground up, just what exactly is this whole insurance thing about and how does it work? Who does this effect?
I think you are referring to the FDIC insurance. This is not a loan insurance, it is insurance for deposits made in FDIC insured banks. Basically it currently says that if your bank loses all its money the FDIC insurance will give you back your deposits up to $100,000. The new piece in the bailout plan is to increases this insurance to $250,000. If you have more money than that in one bank then you are A) stupid and B) out of luck if the bank goes bankrupt.
Above guy is a bit off, the money doesn't come out of nowhere, banks pay money for this insurance like any other insurance. If most of our banks failed and FDIC ran out of money then the government would step in and cover any money the FDIC needed.
OK so I read his post again and still don't completely agree. First, the FDIC never stopped taking premiums. They did take very small premiums while banks were doing very well. This month they will propose raising the premiums for banks and I'm sure it will pass. Second, the Treasury doesn't just run out of money and then convince congress to print more money. They can raise money buy issuing debt like Treasury Bills. These securities are considered to be risk free so there is a huge demand for them now with the turmultuos markets. I would guess they could raise all the money they wanted from these right now. I'm not saying that this is a good idea, but it is what they will do. The real worry is what we will do in 10 years or so when the government owes so much money it can no longer make the interest payments. Then it is possible they could start to print unbacked money and we will see terrible inflation. However, we don't know what will happen in the future and anyone who claims to know is lying. Tim H is right. Imagine if you put your money in the bank, and the bank goes out of business. Do you lose all your money? Not if that bank is FDIC insured, and I haven't seen a bank that isn't, because if it was, you'd know about it because everyone would say don't put your money in that bank.
FDIC currently guarantees that you can keep up to $100K in each bank account, and in the event that bank goes out of business, FDIC will reimburse you that $100K. If you have $200K and you want to put it in the bank, open 2 bank accounts and split the money! The Plan B version of the bill increases that $100K figure to $250K, that's all. It's been $100K for a long time, the value of money has changed, it's due for an increase.
As an aside, that part of the plan means nothing in terms of the bailout, it was a separate measure attached to try and get representatives on board to vote for it. And if you're wondering, it won't cost us anything. Banks usually fail because of "bank runs" Or when people panic and close their accounts on news a bank has over extended their credit also called "insolvent." To prevent the panic all FDIC insured banks insure each account for 100k, the new bill would make it up to 250k. The Federal Reserve would print money out of thin air to to cause inflation, or the money could come from the US Treasury at the cost of the American tax payer.
To address the following posters: I was trying to keep this simple but here goes. The FDIC had stopped charging the banks premiums and didn't resume until recently, and in order to cover the expenses of the loss they must now either raise the premiums on the existing banks to pay for the failed ones; this would push the existing banks toward insolvency. Or the FDIC, a government agency unlike the Federal Reserve, could ask Congress for money from the Treasury. The problem with that is that the Treasury is broke so what happens is that the Congress would need to ask the Federal Reserve, a quasi goverment and private bank with unknown shareholders that can print money without any backing, to increase the number of dollars in the economy to give to the Treasury, the Treasury would then give it to the FDIC. That scenario would cause inflation, basically the dollar you have in your pocket or account is now worth less. If the money was in the treasury, then the taxpayer would foot the bill directly through taxes. Even if the FDIC increased the rates they charged banks that cost would be past onto consumers through bank fees and a lower return on savings accounts and CDs. Therefore if the FDIC goes broke and asks Congress for more money they will now need to ask Congress for 250k one account that a person has at that bank, rather then 100k one account that a person has at that bank.
So now with massive bank failures we have few options, and all of them will cost taxpayers a lot of cash.
1.) We let Congress create a $700B slush fund banks could withdraw from to avoid becoming insolvent by subsidizing their loses for foreclosures. This comes directly from the taxpayers.
2.) We allow the banks to shutter when they become insolvent. The FDIC will reimburse up to 100k for one account a person has at a bank. When the FDIC becomes insolvent, they can ask the US Treasury for money. That will come directly from the taxpayers. When the Treasury is out of money we then ask the Federal Reserve to print money out of thin air an loan it to the Treasury. To repay this loan plus interest will cost the taxpayer money and cause inflation.
3.) We can let the FDIC go under. Everyone who didn't pull their money out will lose EVERYTHING when their bank goes under. People will panic and pull all their money out and push the majority of banks to fail. This option is free if you pull your money out now, if not you pay every dollar you have in your account. I suggest buying silver. I am not to sure how this would play out though. Since the FDIC is a government agency, I think someone could make the case for sueing the government for their loss.
4.) We can bailout homeowners who are making these banks insolvent by defaulting on their predatory loans. This will directly cost the taxpayer money.
Check the following link from the Houston Chronicle for more information.
That will probably be my last edit, I don't think anyone else besides the reader will take another look at this cause its so buried. |
