I presume the government requires banks to keep on deposit with the Federal Reserve enough funds in RESERVE to meet their obligations to fulfill the FDIC insurance program.
Interesting article below. What happens is the government or Federal Reserve prints, or add a bunch of zeros to the bank accounts, to supply the funds it needs for the FDIC. Problem is, there is now additional trilllion dollars just printed. And once in the bank again, they pull fractional reserve on the newly printed money. Hence major inflation. On and on it goes.
From
http://mises.org/library/bank-crisis
The FDIC had to perform this bailout, everyone said, because "otherwise the financial system would collapse." That is, everyone would find out that the entire fractional-reserve system is held together by lies and smoke and mirrors, that is, by an Establishment con.
Once the public found out that their money is not in the banks, and that the FDIC has no money either, the banking system would quickly collapse. Indeed, even financial writers are worried since the
FDIC has less than 0.7% of deposits they "insure," estimated soon be down to only 0.2% of deposits. Amusingly enough, the "safe" level is held to be 1.5%! The banking system, in short, is a house of cards, the FDIC as well as the banks themselves.
Many free-market advocates wonder: why is it that I am a champion of free markets, privatization, and deregulation everywhere else, but not in the banking system? The answer should now be clear: Banking is not a legitimate industry, providing legitimate service, so long as it continues to be a
system of fractional-reserve banking: that is, the fraudulent making of contracts that it is impossible to honor.
The only reason the FDIC is still standing while the FSLIC and private insurance companies have collapsed, is because the people believe that, even though it technically doesn't have the money, if push came to shove, the
Federal Reserve would simply print the cash and give it to the FDIC. The FDIC in turn would give it to the banks, not even burdening the taxpayer as the government has done in the recent bailouts. After all, isn't the FDIC backed by "full faith and credit" of the federal government, whatever that may mean?
Yes, the FDIC could, in the last analysis, print all the cash and give it to the banks, under cover of some emergency decree or statute. But . . . there's a hitch. If it does so, this means that all the trillion or so dollars of bank deposits would be turned into cash. The problem, however, is that if the cash is redeposited in the banks, their reserves would increase by that hypothetical trillion, and the banks could then multiply new money immediately by ten-to-twenty trillion, depending upon their reserve requirements. And that, of course, would be unbelievably inflationary, and would hurl us immediately into 1923 German-style hyper-inflation. And that is why no one in the Establishment wants to discuss this ultimate fail-safe solution. It is also why it would be far better to suffer a one-shot deflationary contraction of the fraudulent fractional-reserve banking system, and go back to a sound system of 100% reserves.
