As the markets continue to lurch around like a sick pachyderm, lots of ideas and rumors have started to flow about what is in the works should the (most recent) actions prove ineffective. One of the ideas that has gained a lot of ground with me is about the FDIC and individual insurance limits.

People are so nervous about banks failing and their money being unavailable that the Fed has already raised the limits on FDIC insurance for account holders to $250,000 per person. And if you’ve already read my other article on the subject, you remember that what is actually covered, is a lot more than it appears at first.

This hasn’t completely stemmed the tide of people pulling money out of banks and ‘hiding it under the mattress’ (in some cases the literal truth!). This is taking money out of circulation that the banks vitally need right now to help them feel safe enough to start lending money again. It’s a vicious cycle; Banks don’t lend because they’re afraid that they won’t be paid back, so people not getting loans fear the bank is about to go under and pull money out of the bank. Which in turn, causes the bank to hoard it’s money, and,.. not make loans. Around and around we go, where it stops? Nobody knows.

Rumors, Innuendos, and Heresay

Now, in order to regain the trust of the people, and to allay the banks’ fears of losses (at least some of them) the White House is considering removing FDIC insurance limits for individual account holders altogether. This is a bold move that follows a similar measure by some of the EU countries. This move would hopefully inject some confidence into a very scared and panicking market, kind of like a tranquilizer for a raging animal.

The nice thing, is that it would be virtually cost-free for the government to do this! Since we’re so used to the multi-billion dollar bailouts, a relatively inexpensive fix is a welcome change. The existing FDIC insurance is paid for by the banks through insurance premiums, just like any other insurance. Eliminating the limits will raise the premiums a bit, but not nearly enough to counter all the good this move will do.

Carry this Through

If you think about it, the FDIC has quite a bit of funds already, and since they’re backed by the Fed, they already have a virtually limitless supply of money if it truly comes to that. It would take a large percentage of the banks across the United States to fail all at once, something we’ve never seen yet, even during the Great Depression, in order to seriously dent the reserves already available. Moving from $250k to no limit basically includes a few of the richer people in the world, and a LOT more small/medium businesses. These are exactly the kind of accounts that need to be covered, to stabilize the economy.

I hope that this becomes more than just a rumor in days to come. It would be one of the few GOOD things to come out of this debacle in the market. If the White House and the president can get in gear and enact this, it might be the ’stimulus’ we’ve been looking for.