Don’t be too hasty in raising the FDIC limit
An increase in the FDIC’s insurance limit may be part of Washington’s log-rolling effort to craft a financial rescue package. Both Barack Obama and John McCain support raising the deposit cap to $250,000 from $100,000, and now FDIC Chairwoman Sheila Bair is asking Congress for authority to raise the limit. The goal seems to be putting something for the little guy — small businesses and ordinary depositors — into the bailout bill. Reports the Associated Press:
Republican House aides said the FDIC proposal might attract some conservatives who want to help small business owners and avert runs on banks by customers fearful of losing their savings.
Let’s not buy that rhetoric too quickly. Customers already can get far more than $100,000 in insurance by using the proper account structures. Businesses – who must carry large balances to cover payroll and other needs — do have a problem, but we NEED them to be vigilant about the health of their banks. Here’s how Mark D. Vaughan and David Wheelock of the St. Louis Federal Reserve Bank described this problem in a 2002 article:
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David Nicklaus has covered St. Louis business for more than 25 years. His column appears three days a week on the Post-Dispatch business page. 
Preventing runs on the banks and helping small business owners is a large part of rebuilding consumer confidence and shoring up the foundation of our economy. Banks are already up to their necks in moral hazard and it’s not from FDIC insurance but from the reckless speculation available in housing derivatives. Temporarily increasing the FDIC limit to protect depositors is unlikely to temp questionable banke to further risks as they’re already leveraged to the hilt.
Mr Nicklaus: Give me a break. This PROTECTS people. People who have now lost money in the State of Nevada because their bank went under, and the FDIC insurance will not cover monies over the $100000 mark. THE BANK advised customers, NO don’t worry we’ll divide the accounts and you will be safe. Another thief in the banking business, who “retired” three months before the bank went under and took his money.
So don’t write about and quote others in the business saying it’s a bad thing. People in Nevada would strongly disagree with you and others, because now they have less than the banking industry led them to believe they actually had covered - greed in the banking business - it’s a hell’va thing. Do some research before you write something like this, so you can at least understand both sides especially about the people who are now out thousands of dollars of their savings!!
It’s been no secret that an easy way to insure more than $100,000 is simply to put the excess in more than one bank — or in Treasury securities. People with over $100,000 in cash should presumably be smart enough to know about those options.
What strikes me as even worse in the sense of incurring greater moral hazard (a.k.a., greater risk for taxpayers) is the idea of government insurance of money market funds. If that happens, competition will drive down the return on these to the same minuscule level as savings accounts. Why not compromise and insure money market accounts for, say, 90% of their par value of $1 rather than 100%?