I totally agree with the lead editorial in yesterday’s Wall Street Journal, which argues against extension of the government’s Transaction Account Guarantee program providing unlimited federal insurance on non-interest-bearing business checking deposits. TAG was put in place in the midst of the 2008 financial panic to help prevent a run on a banking system that, at the time, no one was sure was even solvent. It worked, and thank heavens it did. But the panic has long since passed. In the meantime, taxpayers are left with a contingent liability of $1.3 trillion while, at the margin, the banks—their business deposits having been covered no matter what—have a little less incentive to lend and invest prudently.
Prior to TAG, FDIC insurance covered deposits up to $250,000 and provided a core level of protection that prevented runs and helped keep the banking system stable. That’s a good thing. But in a non-stressed environment, the notion that FDIC insurance should provide unlimited coverage on certain accounts makes no sense. If a bank wants protection above $250,000, let it go buy it from a private insurer. (It goes without saying, of course, that the premiums banks are paying for the government’s open-ended liability don’t come close paying for the risk the government is taking on.)
At a moment of high crisis TAG was needed, and played an important role in saving the financial system. But it’s not needed anymore. The sooner Congress winds it down, the better.
What do you think? Let me know!