Debt Free

If you live in the U.S. you're fortunate to have bank deposit insurance. Depositors in U.S. banks are protected through the auspices of the Federal Deposit Insurance Corp (FDIC), who's been with us since 1933. A product of Roosevelt's New Deal policies, the FDIC was enacted to quell the public's fear of using public banks after thousands of banks failed during the Great Depression.

The way to ensure that you're completely protected by the FDIC's insurance policy is to keep less than $100,000 on deposit at any one institution. The other way to ensure that your deposits are covered is to use both an IRA and a traditional savings account to store your money. An IRA is ensured by the FDIC for up to $250,000.

The importance of this strategy was highlighted this past week when IndyMac Bank, a quasi financial giant with about $19 billion in deposits, was taken over by Federal Regulators as it became apparent they could no longer meet depositor's demands. NY Senator Chucky Schumer (D) took considerable flack for writing a letter that eroded public confidence in the troubled lender. When the contents of the letter reached the public causing depositors to pull their money out or transfer it to other institutions. The day after the letter became public, .5% of IndyMac's deposits were withdrawn by frightened customers.

Although Schumer was fundamentally correct in his accusations, many have questioned the wisdom of calling so much attention to the problems, which in effect created a self-fulfilling prophecy, when depositors came running for their money. The Office of Thrift Supervision opined that "the immediate cause of the closing was a deposit run that began and continued" when the senior Senator from NY sent his letter.