Yet again, the government's policies are proving procyclical and seem to be making problems worse. This time it turns out the FDIC is making banks pay through the nose to insure their deposits, according to William Dunkelberg, the chief economist for small business group NFIB and the executive of a small bank. Today on Bloomberg Radio, he was asked whether the rising fees are hurting banks:
"It truly is. When we saw the proposals for this year we were astounded at the huge cost . It basically puts a real hole in the profitability of the bank ... If you don't have earnings, you can't raise new capital effectively, and that means you can't grow, you can't make the loans and you can't capitalize yourself the way the people in Washington are tyring to tell us we should do..."
Dunkelberg then notes that many healthy banks are being forced to pay for the messes created by defunct lenders such as Washington Mutual. Again, where are the priorities on the bailout bill? Why don't we budget extra money for the FDIC instead of punishing innocent banks? I would like to know what happened during the S&L crisis, which caused a huge fiscal deficit. Was the taxpayer ultimately on the hook in that case?
Dunkelberg says his bank's rate rose from 7 cents per $100 in deposits to 14 cents to 16 cents. And now there is also a new 20 cent "assessment" in the autumn. All of that will consume 80% of his company's expected profits for the year. He also notes that the Fed's recent rate cutting has punished his bank by forcing down the "prime rate," which is essentially 3 percentage points more than Fed Funds. (Another unintended, credit-ruining implication of the Fed's reckless and irresponsible policy of monetary easing.)
"The government keeps taking all my money." -- William Dunkelberg.
PONDERING THE VIX
I have a second, vaguely related point about insurance. At Monday's meeting of the Market Technicians' Association in New York, some questions were asked about why the VIX volatility index has remained relatively low even though the stock market has continued to make new lows.
One possible explanation offered was that the VIX is consolidating above the 44 range, which was more or less the top for the index in the 2000-3 bear market. That would make it a simple case of resistence becoming support and be consistent with a bullish uptrend for volatility.
I want to throw out a second possibility purely as a theory and am yet not sure whether it has any merit: The reduced market cap of the S&P500 has resulted in a situation where there are fewer assets to insure against downside. That means the system has extra capacity to insure against loss. More people are selling protection than people need to buy it. Imagine what would happen, for instance, to auto insurance rates if suddenly a third of the drivers in a state decided to get rid of their cars. Insurance would get cheaper.
Anyway, just an idea.