◼ Senate bill 3637 was introduced late last month by Senator Harry Reid (D-NV), who wants to bring it to a vote this week. This bill extends the Transaction Account Guarantee (TAG) program, a system that supplements the Troubled Asset Relief Program (TARP).
◼ The Federal Deposit Insurance Corporation (FDIC) normally insures bank account deposits up to $250,000. During the financial crisis, the TAG program was created to eliminate the cap on insuring deposits from $250,000 to infinity.
◼ The TAG program ensures there will be insurance for deposits for any amount of money, on the condition that the sum of money in a TAG account does not accrue any interest. Normally, wealthy individuals and corporations would not let large sums of money sit in a bank account without accruing interest, preferring to invest that money in the market. TAG changes things because now corporations and wealthy individuals would rather not take a risk by investing in the market when they can have any sum of money insured by taxpayers in a TAG account.
◼ Proponents of TAG argue that by incentivizing people to hold static large sums of money in banks, those banks will be able to lend more. However, according to the FDIC, lending has decreased since TAG was first enacted, not increased.
◼ TAG encourages people to put large sums of money into banks that may be troubled, meaning that if those banks begin to fail, taxpayers will be responsible for paying for any depositor's losses in a TAG account.
◼ As Peter Wallison points out in the American Banker, $1.6 trillion, or 13% of all bank deposits are now a part of the TAG program. The average account size TAG is concerned with has $2 million in it; 19 of the largest banks take 2/3 of taxpayer-backed TAG insurance.
◼ The Congressional Budget Office (CBO) has scored Senate bill 3637 and determined that it increases the deficit. Click here to see the brief report.
◼ If the economy recovers and interest rates rise, people will take money out of TAG accounts and invest it to take advantage of the higher interest rates. This could create a problem where banks then stop lending because there is no longer the necessary liquidity to do so, causing any recovery to be cut short. Even still, banks have been lending less since TAG was enacted in January 2011, so the argument that the program enables banks to have sufficient capital at hand to lend fails because it is not incentivizing banks to lend.
◼ It is strange for Democrats to want to put the taxpayer on the line for bailing out corporations and wealthy individuals with liquid assets over $250,000 if their banks fail, but also want to raise taxes on the same wealthy Americans because they believe it will help the middle class.
◼ Finally, TAG was passed as a temporary program, set to expire on December 31, 2012, after which the FDIC would return to business as usual by insuring deposits for up to $250,000. Washington needs to stop renewing temporary programs, especially ones that increase the deficit and inhibit investment in the market. Peter Wallison said it best: "the one good thing about the TAG program is that it was scheduled to end on December 31, 2012."
Last Thursday, Senator Jim DeMint (R-SC) announced that he will leave the Senate to head the Heritage Foundation, a conservative think-tank in Washington DC, come January. This leaves South Carolina Governor Nikki Haley the task of appointing someone to take Sen. DeMint's place until a special election is held in 2014. Speculation from CNN and The Hill on who Gov. Haley will pick includes 5 Republicans:
Rep. Tim Scott, elected in 2010 to serve South Carolina's first congressional district.
Rep. Trey Gowdy, elected in 2010 to serve South Carolina's first congressional district. Before being elected, Gowdy served as the district attorney for South Carolina's seventh judicial circuit.
Henry McMaster, who from 2003 to 2011 served as South Carolina's attorney general. He ran for governor in 2010 but did not gain the Republican nomination.
Jenny Sanford, former first lady of South Carolina. She is an investment banker.
Catherine Templeton, the head of South Carolina's Department of Health and Environmental Control.