Federal Deposit Insurance Corp. Chairman Sheila Bair said the fund it uses to protect customer deposits at U.S. banks could dry up amid a surge in bank failures. “Without these assessments, the deposit insurance fund could become insolvent this year,” Bair wrote in a March 2 letter to the industry. U.S. community banks plan to flood the FDIC with about 5,000 letters in protest of the fees, according to a trade group.
Moral hazard is the prospect that a party insulated from risk may behave differently from the way it would behave if it were fully exposed to the risk.
When banks and their executives and insulated from the risks they are taking, yet they receive the rewards, they take on more risk than they would have in a free market environment. The government's "insurance" through the FDIC enabled banks to risk our deposits in by lending to high-risk businesses and home-owners or, even worse, by buying high yielding mortgage backed securities. Instead of acting prudently, banks gambled with our money.
Banks became like an option. Risk was limited (to the option holder) but reward was still huge. In reality, that risk was not limited, it was just shifted onto the government and the taxpayers.
Another successful government program...
UPDATE: Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.
Now we have the government bailing out other parts of the government.