While I never had much hope that this Congress would actually fix the real causes of the financial crisis — loose monetary policy, Fannie/​Freddie — I had hoped that they wouldn’t do a lot to make an already bad situation worse. Boy, was that hope naive.


Take the area of federally provided deposit insurance. There is a massive amount of scholarly work, much of it empirical, that demonstrates that expanding the level and scope of deposit insurance results in more frequent and severe financial crises. So what is Congress considering? Yes, you guessed it: expanded deposit insurance.


Recall during the financial crisis Congress raised the coverage limit to $250,000 — forget that there were never any premiums charged ahead of time for this coverage. The FDIC also, without any basis in law, offered unlimited coverage to non‐​interest bearing accounts, targeted mostly at business customers. While these expansions may have brought the system some short term stability, they come at the cost of considerable long term instability.


Congress is also making the misguided change of basing insurance premiums on total assets rather than total deposits. This will punish banks for relying on sources of funding other than deposits, giving banks an incentive to shift their funding toward deposits, putting the taxpayer ultimately at even greater risk.


So why all these expanded bank guarantees? Smaller banks view these as changes that would give them a competitive advantage relative to larger banks. After all community and regional banks are far more dependent on deposits as a source of funds. And while big banks are damaged politically, the smaller banks, despite their higher failure rates, have managed to maintain their political ability to shift the costs of their risk‐​taking onto the backs of the taxpayer.