Economic analysis of deposit insurance Essay

Federal de considerationine Insurance dope was an institution set by government pole in mid-thirties to protect fixateors fund held by swan. In the great depression of 1930 most repairors missed their fund hobby the collapse of many hopes. after(prenominal) the stock market crash in 1929, monetary market was adversely affected and by frame in 1933 more than 9,000 banks had already failed and this facilitated establishment of FDIC. Henceforth it has been evolving and decision alternative ways of insuring depositors fund against potential bank in work onncy.FDIC guarantees a specific amount of deposit and checking for member banks. Since it establishment FDIC paid depositors in 1988 following the banking crisis render by high amour rate, inflation, recession and de regularization in the banking sector. More than 200 banks were in a liquidity bother and FDIC had to intervene to settle claims by depositors.Role of deposit indemnity in the thriftThe main purpose of de posit insurance is to grow financial stability in the providence. Majority of population did not bother to check whether their deposit was control under deposit insurance but following the current financial crisis which started in mid 2007 which adage many banks and other company befitting belly-up(predicate) most people areincreasingly becoming aware of the role and importance of deposit insurance in the economy. The Emergency Economic Stabilization execution of 2008 temporarily increased the basic limit of deposit insurance from $100,000 to $250,000 (Robert, 2009).Advocates of free market view deposit insurance as part of government interposition in the market and criticize it on the tail that a competitive market is self regulating and will act to correct any leaving that occurs in the market. however the great depression of 1930s and the current financial crisis has proved that the market is not always self regulating and in that locationfore thither is a need for gove rnment intervention as proposed by Keynes in lay to correct remainder in the market. although the classical economist argued that in a competitive market system price, wages and interest rate would instinctiveally adjust to restore the economy to full employment directs there existed certain factors much(prenominal) as investment demand, money demand, union and monopoly index finger that inhibited the automatic mechanism assumed by classical writers.Keynes advocate for discretion fiscal policies condition the failure of automatic forces as a re travel key cyclical device to oppose advance trends in business cycles. In period of massive unemployment and depression, expansionary fiscal policy was required by government to solve the problem in less time than automatic forces ever could (Stephen, 2008).Deposit insurance creates confidence among the state-supported and avoid panic withdrawals as those occasioned in UK when information reached the public that northern bank was exp eriencing liquidity problem and many account holder were queuing to withdraw there money from the bank. During the current financial crisis where many bank were declared insolvent FDIC compensated many deposit holders whowould otherwise lost their deposit. This not only helps to honor financial stability but also mitigate economic growth (Robert & George, 2006).Where people receive payment they will be able to increase the level of spending on goods and services. This increase in totality demand forces supplies to increase output in order to satisfy the growing demand. Supplies will in turn require additional input in term of labor, material and capital which reduces unemployment and increase economic growth. The graph below indicates the role that deposit insurance basis play during economic crisis for instance the current financial crisis.