STEVE MOORE: A Dose Of Moral Hazard

I am never a fan of expanding government. More government always either costs taxpayers money through programs or subsides, distorts market incentives or imposes some kind of regulatory burden on businesses. In the end, except for a favored few, consumers, businesses or taxpayers are almost always worse off. The Trump Administration has done a wonderful job with tax policy. And Trump’s attack on senseless regulations that cost our economy at least $2 trillion annually will go down in history as sound economic policy.

That’s why I am surprised that Treasury Secretary Scott Bessent appears to be supporting an increase in the Federal Deposit Insurance Corporation’s (FDIC) limit on deposit insurance from the current $250,000 per ownership account to $10 million.

The proposed increase in insurance coverage is not merely keeping up with inflation, but a fundamental change in FDIC insurance. The FDIC was created by the Banking Act of 1933, and in 1935 the insurance limit was $5,000. While $5,000 seems like a small amount, at the time it covered almost all depositors and gave the public confidence in the banking system. Over the years the limit has been adjusted, generally to keep pace with inflation. In fact, the limit was $100,000 as late as 2008 but was raised to the current $250,000 as part of the Emergency Economic Stabilization Act. According to a recent Wall Street Journal article, the $250,000 limit covers 99% of deposit accounts and most small businesses.

Small and mid-sized banks claim that they need a higher limit to maintain customer confidence that depositor’s money is safe. After the failure of Silicon Valley Bank, Signature Bank and First Republic in 2023 the argument is that, while the largest banks are perceived as being “too big to fail,” small and mid-sized banks believe they are no longer competitive because of systemic stability concerns.

There is no doubt that small and mid-sized banks face increased competition. But small grocery stores face competition from Walmart and Costco. Should we create a new government program or subsidy to help them? At less than $10 billion in annual revenue, JetBlue Airways faces competition from Delta, United and American Airlines, all having annual revenues over $50 billion. What favors should the Federal Aviation Administration do for poor JetBlue to help that airline compete with the larger carriers? If it is now U.S. policy to make smaller businesses competitive, where will it stop?