Top Economist: Americans Should Worry About Bank Deposits if Congress Doesn't Act

Posted Sep 15, 2008 12:58pm EDT by Aaron Task in Investing, Recession, Banking
Related: LEH, MER, BAC, AIG, WM, ^DJI, ^GSPC
Updated from 12:58 p.m. EDT

With the "financial storm of the century" hitting financial institutions, many Americans are worried about the safety of their bank deposits. While the FDIC insures individual accounts up to $100,000, the reaction to IndyMac's failure this summer -- lines outside retail branches -- shows Americans have limited faith in the Federal Deposit Insurance Corp., which guarantees individual accounts up to $100,000.

Update: "The banking system is safe and sound," Treasury Secretary Hank Paulson declared at a mid-afternoon press conference Monday, seeking to ameliorate such concerns.

"Nothing is more important than the stability and orderliness of our financial markets [and] regulators remain vigilant," Paulson continued. "We're working through a difficult period in our financial markets right now as we work of some of the past excesses, but the American people can remain confident in the soundness and resilience of our financial system."

But Americans are justified to be worried, says Nouriel Roubini, of NYU's Stern School and RGE Monitor, who notes there is already a "slow-motion run on retail banks" occurring nationwide.

That "run" could accelerate as people realize the FDIC fund has about $50 billion to "insure" about $1 trillion in assets at the nation's financial institutions, says Roubini. "They're going to run out of money" unless Congress acts soon to recapitalize the FDIC.

In addition, the recent spike in number of banks on the FDIC's "troubled list" is only through June, meaning even that inflated number understates the problem.

The intent here isn't to add to people's anxieties, but Roubini is one of the few market watchers to correctly predict the severity of this ongoing credit crisis. If nothing else, he says people with accounts exceeding $100,000 in value should spread their money - and the risk - among different firms.