Faith in Banks

The Federal Deposit Insurance Corporation (FDIC) was created in 1933 as a depression-era effort to restore the public’s faith in banks and banking. The early years of the depression were marked by numerous bank failures and runs on even healthy banks. After taking office President Roosevelt declared a bank holiday to give regulators a chance to identify, close/merge/sell troubled banks and to stop a spiraling panic of depositors hearing about bank failures and running to their own bank to withdraw funds.

In my Principles of Macroeconomics class we have just been talking about money (in particular fiat money) and the importance of trust. As long as economic players trust that money will be valued by others we use it. The same kind of trust is important in banking. Our economy needs banks in order to attract deposits, which then allow borrowers to secure loans and invest or consume.

The FDIC is a type of insurance program for banks. Each bank is required to pay premiums to the FDIC. If that bank fails, then the bank’s depositors are protected and will get up to $250,000 from the FDIC. This protection made wary depositors in 1933 start returning their money to the banks, which in turn helped fuel the recovery.

nprlogo_138x46On NPR’s Morning Edition this morning, there was an interesting piece about workers hired by the FDIC in 2009 to help with the process of closing failed banks, securing the deposits and paying the depositors, and then selling the remaining assets of the bank. As of now there isn’t a transcript of the piece, but you can listen to it here.

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Are Americans Pessimistic About the Prospects for the Next Generation?

Gary Becker has recently written an interesting article on the Becker-Posner blog about polls suggesting that the majority of parents in the United States are not confident that their children will be better off economically than they are. He suggests that the best way to counter such pessimism is to promote faster economic growth.

The article made me feel slightly uneasy because I wrote something a few months ago suggesting that the poll results actually conflict with the view that Americans are pessimistic about the future for their children. Have I mis-read the poll results? How much have the poll results changed over the last year or so?

Scott Winship has recently considered the evidence of a variety of polls on his blog: here and here. In brief, the polls indicate that the proportion of Americans who think that their children will have better standards of living than themselves consistently exceeds the proportion who think their children will have worse standards of living. The margin tends to narrow during recessions but, even this year, the polls suggest that optimism is no lower than in the mid-1990s (see Pew Research Center poll results here).

Rather than trying to explain why Americans have become more pessimistic perhaps researchers should be trying to explain why Americans are still so optimistic.