Why a ‘Financial Crisis Fund’ was rejected over a century ago.

July 13, 2010

By EUGENE N. WHITE

The emerging Dodd-Frank Wall Street Reform Act boldly promises to end financial crises and taxpayer bailouts. One feature of the bill, the “Financial Crisis Fund,” aims to provide regulators with the funds necessary to liquidate any failing financial institution. With assessments on the financial industry, the fund will assemble a war chest of $19 billion that, it is claimed, will eliminate the need for taxpayer assistance.

Will it work? Some insight may be gained from efforts over a hundred years ago when a similar proposal was placed before Congress after the financial crisis of 1893.

During that crisis, 491 banks suspended operations and the country entered a serious recession. Many proposals were brought before the House of Representatives’ Banking and Currency Committee. One that received particular attention was authored by future Democratic presidential candidate William Jennings Bryan, then a Nebraska congressman. Concerned with the problems that ensued when depositors had to wait for the liquidation of a bank, he proposed the creation of a special $10 million reserve to be funded by a tax of 0.25% on bank deposits. His aim was little different than that of Congress today: to protect taxpayers from bearing the burden of bank failures and prevent contagion.

Bryan believed that this sum was more than adequate because in the previous 30 years total losses to depositors from the demise of banks had been approximately $6 million. He sought to allay fears that the government would have to stand behind the fund, stating: “the Government will administer this trust fund . . . it does not guarantee the deposits, so there is no debt or liability upon the taxpayers of the country to make good anything to depositors of a national bank.”

When Bryan presented his bill to the House committee, he was met with skepticism from both Democrats and Republicans. One critic, Nils P. Haugen (R., Wis.) quickly pointed out that many recent bank failures were quite large, “and that would be a great draft upon the fund in the case of a failure of two or three large banks,” easily exhausting it.

One of Bryan’s most telling exchanges was with Nicholas N. Cox (D., Tenn.):

Cox: “Now, the fund becomes exhausted and you have to assess another tax to make it good, and then after that is exhausted you have to assess another?”

Bryan: “Yes.”

Cox: “Then how can you arrive at any certainly about [the $10,000,000 figure]? Take this panic on hand now, and six, eight or 10 banks have broken in a technical sense and the depositors closed out, and they want their money, now it does not strike you that you would have to be continually assessing the solvent banks to supply those which have broken?”

Bryan: “A greater [one] than I has said that you can only judge the future by the past, and judging by the past, I do not think the danger of which you speak is a proximate one at all.”

Cox: “If it does not go to that extent, does it not result in the end that the good banks, that the well-managed banks, stand as a guard for the badly managed banks?”

Read more at: http://online.wsj.com/article/SB10001424052748704075604575356931846676058.html?mod=WSJ_Opinion_LEFTTopOpinion

No Comments »

No comments yet.

RSS feed for comments on this post. TrackBack URL

Leave a comment