In a development of a type that I had begun to think was no longer possible, the Senate earlier today appears actually to have accomplished a modest reduction in the Federal government's provision of infinite insurance for everything. The fight is not necessarily over, but there is real reason to hope that this has worked.
The program in question is called TAG -- the "Transaction Account Guarantee" Program. You haven't heard of it? This is the program by which the Federal government, through the FDIC, lifted all limits and agreed to go to infinity on guarantees of bank deposits. Up until the financial crisis in 2008, the FDIC only insured bank accounts up to $250,000, itself a way excessive amount. During the panic in 2008 the government got buffaloed into thinking that infinite bank account guarantees would calm everything down and make the world perfect again. So TAG was enacted, supposedly as a two year program. In 2010, in the way of all Federal programs, it then got extended, for a second two years. That extension runs out at the end of 2012, and hence we have the Senate taking up the question of extension.
This is Federal insurance that by definition backs up people (and companies and governmental entities) with over $250,000 in the bank -- they're all rich! It covers some $1.5 trillion of deposits. Is there any hope that this wouldn't be continued like all other Federal handouts?
Turns out there is hope. Senator Pat Toomey (R, PA) raised a "point of order," arguing that the extension had budget impact and should only be heard as part of budget-related matters. Senator Johnson (D, SD) moved to waive the point of order. That motion required 60 votes to pass. The vote was 50 - 42 in favor, not enough to pass. Note that if majority vote would do it, this would have passed. By the way, if that motion had passed, the next motion would have been "cloture," otherwise known as a motion to cut off a filibuster. That also requires 60 votes under current rules, and presumably the result would have been the same 50 - 42. So at least for the moment this Federal giveaway to the rich appears to be dead.
The big backers of this were the American Bankers Association, and needless to say their head, Frank Keating, immediately came out with a statement seeking to keep the thing alive:
“We’re disappointed that the Senate failed to vote on a temporary extension,” American Bankers Association President and Chief Executive Officer Frank Keating said in a statement. “The TAG program has been fully funded by the banking industry at no taxpayer expense and millions of small businesses and municipal depositors would have valued its continuation during this period of economic recovery.”
(Keating was a conservative Republican governor of Oklahoma from 1994 - 2003, but unfortunately has now gone over to the dark side as a lobbyist.) Keating's argument is eerily similar to the arguments made for years by the proponents of Federal flood insurance -- Hey, the premiums fully fund this program! That is, until they don't. In the case of flood insurance, the premiums covered it until Hurricane Katrina in 2005, when suddenly the program needed a $20 billion bailout; and now, how about another $20 billion after Sandy for the flood insurance program alone, and by the way another $60 billion of "supplemental" appropriations on top of that. Same for deposit insurance. So far the premiums have covered it. Oh, except for the S&Ls, whose Federal insurer (FSLIC) got a bailout of around $160 billion to cover losses from the 80s through 2004. Just wait until a systemic crisis of the same sort hits the banks insured by the FDIC. Current insured amounts exceed $10 trillion, with TAG representing an additional $1.5 trillion. Believe me, when the real crisis hits, the premiums will look like a drop in the bucket. And, the crisis will hit. It's just a question of when.
To be fair to those pushing for extension of TAG, there is another argument put forward, namely that without TAG the big banks have a huge advantage over small banks in attracting big deposits, since the big banks will be deemed "too big to fail" under the Dodd-Frank law. It's not a ridiculous argument by the little banks, but there are many better solutions, including, in my order of preference, (1) remove "too big to fail," (2) make Federal deposit insurance applicable only to bank funds invested in designated non-risky instruments, and (3) break up the big banks.