National Commentary

Nicholas F. Benton: Bernanke’s Good Advice




For those who blame Sen. Chuck Schumer for the failure of the IndyMac Bank in California last weekend, alleging his identification of the bank’s troubles triggered a run, what are they saying now about the prominent front page headline and story in yesterday’s Washington Post baring Wachovia Bank’s dirty laundry? What are they saying about the fact the FBI has now launched an investigation into IndyMac?

Those who urge us to “shoot the messenger” divert attention from the realities of the unraveling U.S. economy, including the role of predator lending in it, and are appealing to those incapable or unwilling to accept things as they actually are.

So it was with President Bush’s lame attempt on national TV Tuesday to blame the nation’s economic woes on “psychology.” This, of course, comes from the man who sold us “weapons of mass destruction in Iraq,” “we don’t use torture,” and other bald-faced lies.

The problem is that the really operative “psychology” is that most Americans simply don’t cope well with bad news, and are eager to grasp for any straw that could enable them to carry on with business as usual.

“Don’t worry, everyone’s insured deposits are safe in our banking system,” come the calming words of assurance from government and banking officials. The sleight of hand, of course, involves the word “insured.”

For people not used to paying attention to much beyond their video games, neighborhood gossip or favorite celebrities and sports teams, they blithely hear such words of comfort, breathe a sigh of relief, and go back to what they were doing.

They don’t pick up on that caveat word, “insured.” Only those who are paying attention may know that a lot of their money and investments may not be “insured” by the FDIC or SIPC, which cover only up to $100,000, which is not a terribly lot in today’s economy, and would go up in smoke in the event of a bank failure, as was the case for over 10,000 depositors at IndyMac.

Uninsured deposits at IndyMac totaled in the billions of dollars, and were wiped out when the bank closed its doors Saturday. Folks reported going on line to look at their savings accounts, only to see their deposits altered instantaneously from whatever number they had above $100,000, cut down to $100,000. If a grandmother had accumulated $750,000 in her savings account, she instantly lost $650,000.

FDIC officials generously offered to cover half of such losses, but for that grandmother, the amount she lost was still $325,000.

It’s not the same as the value of a stock plunging, because in that case, the investor still owns the stock, and it can rebound in the future. In the case of savings above $100,000, they’re simply evaporated.

Brokerage accounts are not fully insured, either. The amount of cash held in such an account by, for example, pulling out of the stock market and temporarily “parking” investment funds, is also insured only to $100,000.

When the FDIC was created, in the depths of the Great Depression in 1933, $100,000 was a lot of money, such that the insurance was designed to cover almost everyone. Not so today by a long shot.

The insured limit for Individual Retirement Accounts (IRAs) was boosted to $250,000 in 2005, but even that is a relatively small sum for fully covering retirement by the standards of today’s economy.

On the one hand, U.S. Treasury Secretary Hank Paulson has said repeatedly in recent weeks that “banks are going to have to be allowed to fail,” as indeed IndyMac did in the largest U.S. bank failure since 1984. Surely, others will follow, although naming the ones at greatest risk on national TV or in Washington Post headlines doesn’t seem to be the determinant. The FDIC has a list of 90 troubled banks it’s now watching.

Federal Reserve Chief Ben Bernanke offered simple but wise advice in his appearance before the House Banking Committee yesterday. People should deposit only up to the insured limit in any individual bank, he said, suggesting they open accounts in as many different banks as they need to, in order to make sure all their money is insured. It is the least risky thing to do to maintain liquidity in highly risky times.

No bank is eager for that word to get out, as they stand to lose a lot of money from their biggest depositors if the advice is followed. But in these nervous times, with assurances that more banks will fail, it is sound and refreshing advice coming from the biggest banker in the land.

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