While I’m glad FDIC coverage has been increased to 250k and while I’m disappointed it’s only temporary there are various problems with the increased coverage amounts.   Kudos to Ashmuck for getting partial credit on the answer posted to my original question, asking what the one HUGE problem is with this new coverage limit.

The first problem is that taxpayers will now be on the hook for even larger amounts of possible defaults.   Since the vast majority of the middle class doesn’t have 250k who exactly is this coverage benefitting?    The taxpayers will now be on the hook for protecting the wealthy, yet again.

The second problem is that capital WILL flow into banks from other investment arenas.  If I can get a guaranteed 6% return from a 5 year CD at a bank, why would I send that money to the wild stock market?   Warren Buffet is on record saying stocks may, at best, return just 6% over the long haul from this point out so why invest in the stock market?   In the past, the risk of losing anything above 100k meant you *had* to take that money and invest it in the stock market, not true any more.   Now, with multiple accounts, you could easily stash millions in FDIC protected accounts and keep that money out of the market.

The BIGGEST problem with the new FDIC coverage limits are the amplified leverage problem of the one we have now.   Unless we change fractional reserve banking, then the problem we had with the mortgage/lending mess will be multiplied 250% over the next time it happens.  Example,  bank receives 100k from customer.   Bank is now able to lend out 900k through the miracle of fractional reserve banking.   Imagine now that bank receives 250k from customer; Bank is now able to lend 2.25 million out with that same money.    The 2.5 increase scales any future problems even more and I’m not counting all the schemes, leveraged lending and swaps that magnified this problem even more.   If you factor those thing in then you may be looking at anything from 20x to 400x the problem we have now.

The banking system needs massive reform and part of that includes keeping the new 250k coverage limits but limiting or eliminating the fractional reserve lending system.