Washington’s Short Memory

It seems politicians in Washington often forget past mistakes, sometimes even the most critical ones. Isn’t it odd?

Not so long ago, less than two decades past, the U.S. faced a significant economic downturn due to the mortgage and banking crisis. Does anyone even remember that?

Experts were convinced that a housing market collapse was improbable. “Fannie Mae and Freddie Mac won’t ever need a bailout,” they said. And mortgage-backed securities? They were touted as extremely valuable—like gold. And then, without warning, everything fell apart. Banks began issuing risky mortgage loans to subprime borrowers, and the government essentially backed these loans with nearly full guarantees. Michael Lewis’s book, “The Big Short,” features the fascinating story of a Las Vegas stripper who dabbled in the housing market, taking out multiple mortgages and flipping properties.

Many depositors and investors ignored the risky strategies of big banks because there were guarantees involved.

And that’s where we all come in.

The outrage amongst Americans over the multi-trillion dollar taxpayer bailout is still palpable. The media depicted this as a case of rampant greed and fast-track capitalism. While those factors played a part, the government’s role in guaranteeing financial risks cannot be overlooked.

This leads us to the concept of deposit insurance, which contributes to moral hazard. With accounts insured up to $250,000, the average American doesn’t have to stress about the stability of the banks holding their savings. A run like in 1929 is something we certainly want to avoid. So, yes, having this safety net makes sense for individuals who save and invest, even if it means absorbing systemic risks.

Now, there’s talk of raising that insurance limit to…wait for it…$10 million.

Really? How many individuals actually have $10 million sitting in a bank? Well, a few come to mind—people like Bill Gates, Elon Musk, and even Taylor Swift. I’m not here to bash the wealthy when they earn their money, but still.

Supporters from both political parties argue this would help smaller community banks compete better against the big players. That’s a valid point.

But honestly, we might as well rename this the “Millionaires Insurance Act.”

A recent Cato Institute study indicated that less than 1% of deposit accounts go beyond the $250,000 current FDIC coverage cap. Raising this limit to $10 million would essentially provide taxpayer-backed insurance primarily for the wealthiest Americans, narrowing it down to the top 0.01%.

But then, who’s keeping an eye on the banks? It’s a bit like letting the fox guard the henhouse. With so many restrictions, the only oversight might come from federal regulators who were completely unprepared in the years leading up to the previous crisis. Imagine how much more taxpayers would have lost if this new policy had been in place two decades ago.

There’s another important factor to consider with elevating the deposit insurance cap—it could encourage investors to seek safer, risk-free options. Billionaires should be the ones taking bold risks with our wealth, exploring opportunities that could lead to the next Microsoft or Google.

After all, embracing risk is essential and has fueled this country’s progress.

However, it’s crucial that investors engage with their own finances—not with yours or mine.