Small businesses are being crushed as governors order them to shut their doors and customers stay home and lose their jobs.
There are a lot of people and businesses that are being directly harmed by the coronavirus and the shutdowns aimed at mitigating the pandemic’s damage. Legislation currently in Congress is supposed to help those people. There is one group that would get protected by both House and Senate bills: folks with more than $250,000 in their savings accounts.
Both the House and Senate coronavirus bills include little-noticed provisions that would provide a taxpayer guarantee on all deposits.
Under current law, the Federal Deposit Insurance Corp. guarantees bank deposits up to $250,000. During the financial crisis, the cap was lifted for noninterest-bearing accounts. That is, savings accounts were still covered only up to $250,000, but checking accounts, payroll accounts, or other accounts that paid no interest got taxpayer-backed insurance to infinity.
Why should there be a taxpayer-backed guarantee for some rich person’s $1 million checking account? In 2008 and 2009, the rationale was that we had a liquidity crisis and a financial crisis and that we didn’t want people pulling their money out of the banks.
The current (and coming) crisis doesn’t look like a financial crisis. The banks are doing fine. So are people who might have more than $250,000 in a checking account.
Yet still, both coronavirus bills restore this unlimited deposit insurance, and they both go further than we did during the crisis. Both bills also cover interest-bearing accounts. It’s a government backstop for the massive savings accounts of very rich people.
The two bills erect their limitless backstops in different ways. The House bill is pretty straightforward. It states that the FDIC can simply lift the limit on how much of each account it will insure. The Senate bill is more complex. It activates a provision of the 2010 Dodd-Frank Act that allows the FDIC to guarantee all bank obligations, including loans, while expanding that provision to include deposits (which are, technically, bank obligations to the depositors).
The mutual funds are not happy with this, because very large deposit accounts compete with money market funds, which are very low-risk, cashlike accounts that companies such as Fidelity and Charles Schwab operate. Removing all risk from savings accounts would draw money from money market funds, which do not enjoy FDIC insurance.
