Back at the beginning of this problem, the first thing Hank Paulson proposed (probably at the request of Tim Geithner) was to bump up the FDIC coverage limit to $250,000 per account. George Bush and John McCain quickly jumped on board. This was exactly the WRONG thing to do and was a horrible mistake.
The result was an immediate outflow of money from the stock market which led to its immediate freefall – and then to make things worse they started adding in FDIC insurance to non-bank accounts like mutual fund money market accounts. This is like writing insurance policies after the hurricane has already destroyed New Orleans, and with the same outcome.
They believed we are all cowards, and maybe the new Attorney General has a point.
My proposed solution:
“90 days from today, your FDIC coverage will drop to $20,000 per person (not per account) and that is a lifetime limit. Once your money has been “saved” by the FDIC, that amount is deducted from your remaining $20k. Amounts in CDs with a maturity of 1 year or more remain at $100,000 per PERSON coverage.”
Right now, huge piles of money are sitting in short term deposits. Because they could vanish at any minute, banks can’t do anything useful with the money.
This would force people to do one of the following:
- move the money into tangible assets – real estate, gold, cars, inventories
- put their money back into the stock market – which would likely go up 20% the first week, and group psychology would do the rest
- move the money into longer term CDs – which would give the banks a comfort zone that they could start buying commercial paper, fund construction loans, etc… and “unlock” the credit market
- Pay off debt
- People will question how their bank is investing money, not chase the highest yields from the weakest banks
- Reduce demand for short term Treasury notes, allowing interest rates to return to a more normal range
This entire mess happened because we encouraged most of the money in the economy to surge into the one place where it does no good – short term safe havens. We need people betting on the future, not fearing it.