Tuesday, August 10, 2010

Brokered Deposits - FDIC is wrong

I recently learned that the FDIC is working on implementing rules to limit (or prevent) brokered deposits at banks, ostensibly to prevent banks from being victimized by nefarious deals. Once again the government is doing its level best to show they are doing something even if it is wrong.

For those of you that do not know what a brokered deposit is, here is a link that explains it nicely:http://www.epfc.com/issuing_cd/faqs.html

In this case, our legislature has put too much power in the hands of the FDIC and they are going in the wrong direction. Rather than making the banks act responsibly and put rules into place that would hold individuals responsible for not doing their fiduciary due diligence, they are just about to regulate an entire sector of business (brokers) out of existence. Does this make sense?

If this rule is implemented, it will still be OK for you to buy a CD from a bank in bad financial condition, as long as you buy it directly. Think of it like buying a used car; are you in any better position if you buy it from an individual instead of using a dealer?

I would rather see the FDIC do their job and monitor banks that are in bad condition and make that information available to anyone. When a bank is in bad condition, cut them off so that they do not create a Ponsi-scheme-like situation. And if they do continue to transact bad deals, hold someone accountable and kick him out of the business or throw him in jail.

The more government regulation you create, the more people will rely on the goverment to keep them safe. People will have expectations that all investments are safe because the government said so. If the goverment keeps its nose out, then it would be up to the buyers and sellers to do their due diligence and act responsibly.

Take this story about traffic lights for example from John Stossel . The summary is that when you remove traffic lights, the drivers of cars expect that each intersection is a dangerous place and they will proceed through it more cautiously. As it turns out, accidents decrease to nearly zero and there are fewer traffic jams because cars rarely need to stop. Additionally, pollution in those areas have dropped significantly.

If you have a bank that has too many accidents, then take away their license and get them off the financial road.

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