Panic! at the Teller Window

I’m a little distracted this morning, because of the news that Trump is looking to dismantle the FDIC. The FDIC! The agency that protects deposits and makes sure we don’t have bank runs in which ordinary people watch their savings get wiped out.

Having looked into why the hell anyone would want to do this, even Trump, it appears related to the failure of Silicon Valley Bank last year. Tech mogul types freaked out and demanded that the FDIC guarantee the full amount of deposits at the bank, which the agency did. Musk and other oligarchs are advising Trump to take more control of the agency—undoing it as a separate entity and adding its main function to the Treasury Department—so that the full deposits of rich people will be guaranteed in any future bank run. That is not what the agency is designed to do. Currently it protects deposits up to $250,000 across the board. That is, its raison d'être is to protect the average depositor, not fully compensate the rich for any potential losses. If the goal of deposit insurance changes toward the latter, it will cease to function effectively. The government’s emphasis will be on protecting anyone who can speed dial the President, and letting everyone else drown.

Needless to say, this is very scary. It is the most telling signal yet on the changes in store for the American economy under the new administration. Every time the GOP undoes some major feature of the New Deal, they put the country at risk. The repeal of the Glass-Steagall Act of 1933 was a direct factor in the financial crisis of 2008, by allowing massive increases in the size of banks. Under the act, ordinary commercial banking and investment banking were kept separate, so financial institutions could only grow so big. It was repealed in 1999. There are arguments back and forth about how much of a factor this was—and, wow, a lot of disinformation from free market ideologues—but do recall that the major catchphrase of the time was “too big to fail.”

Any changes to the FDIC—which was created to prevent bank runs of the type rampant during the Great Depression—would both undermine stability in the market in itself and make it much harder to deal with the impact of any crisis. The incoming administration is about to start tinkering with the most important financial safeguards we have.

If you would like a handy introduction to the Great Depression and the New Deal, a friend of mine wrote one:

As Eric mentions, bank runs decreased by an order of magnitude after the FDIC was created. It was easily able to manage the SVB issue last year. After a stock market crash or failure of multiple large banks, however, we would want the agency to have the flexibility to manage the situation, while sticking to its original mandate.

I suspect knowledge of the Great Depression and its repercussions will unfortunately be very relevant for the next four years and beyond, as we attempt to undo the wreckage caused by these people.