How does the Fed ‘mop up’ extra cash?

(In accounting for the government’s financial bailout) shouldn’t the FDIC’s cost to date for the 50+ bank failures from Jan. 1, 2008, to date be included?  I don’t know the cost but guess in the 10s of billions.  Although stated that this cost is borne by the banks’ contribution to the FDIC fund, the banks are now going to be specially assessed to cover the recent excess.  In truth, this excess will be passed on to the consumer either in lower interest on their deposits or higher loan interest and/or fees.
— R. F. T., address withheld

In our recent “accounting” of the money lent, spent or committed to prop up the ailing financial system, we noted that coming up with a true “cost” is like counting squirrels in Central Park. For one thing, there are dozens of moving parts to the response by the Treasury, the Federal Reserve, the FDIC and Fannie Mae and Freddie Mac. For another, the amounts cited are often the maximum that could be spent, or lent, but hasn’t yet been dispersed. That maximum may never be reached.

Most of the money — in the form of loans made by the Fed — will be repaid. Most of those loans are backed by high-quality assets and borrowers paying interest. (Many of the bailout tallies you may see or read don’t take that income into account.)

As you point out, the FDIC has been a big player as the agency charged with taking over failed banks, selling off their assets and making sure depositors (with insured accounts of $250,000 or less) don’t lose money.

According to the FDIC Web site, the agency took over 25 failed institutions (banks and thrifts) last year and three in 2007. Another five were “assisted” by the FDIC. As of April 16, another 23 names were added to the “failed bank” list.

Some of those assets are still being sold off; the FDIC estimates that the losses for 2008 will come to about $18 billion.

In a speech to a bankers conference earlier this month, FDIC Chairwoman Sheila Bair estimated that bank failures will cost another $65 billion to clean up over the next five years — most of that this year and next. But with only $19 billion left in the insurance fund at the end of 2008, Bair said the fund will need to raise more money. To do that, the FDIC is going to increase the premiums banks pay to make sure their depositors are covered.

Banks that take bigger risks will be charged more than banks with more conservative investing and lending policies. The FDIC also has $100 billion in borrowing authority if losses turn out to be bigger than expected.

It’s true that, all other things equal, this special assessment will mean either less profits for banks or higher costs for depositors — or a little of both. But — unlike direct government spending — this is an indirect cost to consumers, which is why it really doesn’t belong in an accounting of the “cost” of the meltdown of the financial system.

If you wanted to, there are plenty of other indirect costs you could point to, starting with the puny rates you’re getting on a CD these days — thanks to the Fed’s aggressive moves to keep short-term interest rates near zero.

Or you could add in the higher interest we’re all being charged on consumer loans because bankers suddenly realized (after the meltdown began) that they’d been making too many risky loans to people who couldn’t pay them back. For that matter, why not add in all the lost wages from all the lost jobs since the recession began?

You get the idea. In fact, it’s probably easier to count up all those squirrels.

Also in msnbc.com business Companies scale back, cancel holiday parties Answer Desk: Overpaid and bailed-out at banks? Your Career: ADA expands to cover more workers Venza sorta-crossover is Toyota’s latest mistake   Video: Green motorcycles are born to be mild

MORE FROM ANSWER DESK

Answer Desk Section Front

Who needs overpaid bankers? Who gets extended jobless benefits Easing job losses point to wobbly recovery Long-term jobless face frayed safety net GDP growth overstates case Recession over? Readers don't believe it Breaking down the cost of health care Commercial real estate bust looms 'Official' job numbers don't tell the whole story Getting mortgage help Answer Desk Section Front   Add Answer Desk headlines to your news reader: