During the eye of the Great Recession, it appeared that everything was headed for disaster. Banks were failing, credit was frozen, markets were falling off a cliff, etc. Congress took the opportunity to extend deposit insurance to over $250,000 limit in an effort to prevent bank runs and protect citizens. Fast forward to today, many are calling for the limit to be reconsidered. Several conservative groups argue that the increased deposit insurance limit “discourages the wealthy from investing in the economy”.
Back in October of 2008, one of the worst months of the recession, the Federal Deposit Insurance Corporation announced that they were creating a new program called TAG. Essentially TAG provided “non-interest-bearing” accounts with unlimited insurance coverage. Additionally, this program was tweaked and extended in the Dodd-Frank Wall Street law. The problem now is that this TAG program expires at the end of this year.
The Senate is gearing up for a test vote on Tuesday and representatives will be voting on a two year extension for the program. The bill is sponsored by Senate Majority Leader, Harry Reid, which could make it difficult to get Republican support. The bill needs 60 votes in the Senate to stay alive and be sent to the House of Representatives, which is Republican controlled. Ultimately, it will be interesting to see if this program will be used during the negotiations of the Fiscal Cliff.
According to the Independent Community Bankers of America, if Congress does now pass this extension, the government will no longer cover almost $1.5 trillion in TAG accounts. Additionally, smaller banks are worried that the failure to get an extension will lead customers to switch in favor of larger banks. The thought here is that if the government is insuring less in TAG accounts, smaller banks could be at bigger risk as customers look for more security in a bigger bank. As we saw in 2008, bigger banks are not always safer, however.
In this time of budget cuts and the federal spending slowdown, it is hard not to make the case for letting this program expire. For one thing, this TAG program was created for the purpose of claiming the anxieties of the public during the recession. While the recovery is taking its time and we are certainly not out of woods yet, I do not see a repeat of 2008. Additionally, I believe it will help increase investment spending as people look for other places to store their assets; an increase of money into the system is great for the economy also.
The bottom line here is that the US government should be focusing on the fiscal cliff disaster that carries much larger consequences than if the TAG program expired. The FDIC’s TAG program was a great confidence booster in 2008 but now it is time for things to slowly get back to normal. Opponents of the program have stated that it costs the FDIC $2.5 billion to run the new program. In the end, whether you agree or disagree with the extension of the TAG program, the government needs to continue promoting financial stability and security.
