The Federal Deposit Insurance Corporation (FDIC) was established in 1933, during the Great Depression, and in response to the bank failures that had followed the stock market crash on Black Tuesday, October 1929. It was established to restore confidence in banks, insure…
The following brief discussion will focus on the FDIC and its second mission, to reduce the economic disruptions caused by bank failures. Specifically, the role of the FDIC in the recent spate of bank closures will be examined. In conclusion the FDICs intervention in the bank failures will be critically analyzed to determine its impacts, or lack thereof, on the American economy during the recent economic crisis popularly known as the Great Recession.
Written in the 1980s the FDIC official history described American banks as “more closely regulated than in any other nation.” (“The First Fifty Years”) In the quarter century since that volume was written the situation changed significantly. American banks underwent a comprehensive process of deregulation that climaxed during the former Republican administration.
In 2007 Philip E Strahan summarized the effects of more than a decade of deregulation: “Interest rate ceilings on deposits were phased out in the early 1980s; state usury laws have been weakened because banks may now lend anywhere; and limits to banks’ ability to engage in other financial activities have been almost completely eliminated, as have restrictions on the geographical scope of banking.” He also praised the positive impacts of deregulation. It “allowed banks to offer better services to their customers at lower prices. As a result, the real economy—Main Street as it were—seems to have benefited” and “Overall economic growth accelerated following deregulation.” (Strahan, 2007) Strahan was a firm proponent of the stimulative effect of banking deregulation. He also saw its benefits being distributed throughout society and including, notably, Main Street.
When Strahans remarks were published in the influential, Federal Reserve Bank of St. Louis Reviews July/August issue in 2007. ...
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