The Seen and the Unseen (Part 1)

   [W]hat advantage is there in institutions of credit? It is, that they facilitate, between borrowers and lenders, the means of finding and treating with each other; but it is not in their power to cause an instantaneous increase of the things to be borrowed and lent. And yet they ought to be able to do so, if the aim of the reformers is to be attained, since they aspire to nothing less than to place ploughs, houses, tools, and provisions in the hands of all those who desire them.
   And how do they intend to effect this?
   By making the State security for the loan.

   [I]f you submit the most complicated Government institutions of credit to the same test, you will be convinced that they can have but on result; viz., to displace credit, not to augment it. In one country, and in a given time, there is only a certain amount of capital available, and all are employed. In guaranteeing the non-payers, the State may, indeed, increase the number of borrowers, and thus raise the rate of interest (always to the prejudice of the tax-payer), but it has no power to increase the number of lenders, and the importance of the total of the loans.

 - Frederic Bastiat, What Is Seen and What Is Not Seen, 1850.

Bastiat had a few issues with Socialism.  FDIC Exposer aims to be impartial, and we use his words not to take a political stand against the FDIC, but to highlight the logical absurdity of its policies.

What lay behind the housing boom and bust, and the free-for-all lending followed by sweeping bank closures are the dysfunctional actions of government agencies.

While the FDIC blames the banks for taking too many risks and mismanaging their capital, they were the ones who approved every new charter and gave the banks their blessing.  Many of the loans which led to the bust (bad loans as a whole and not held by any one bank) were backed by Fannie, Freddie, and the FHA, whose goal was to enable consumers to achieve the American dream of homeownership through credit - by any means possible.  Some banks could see that it was a bad idea - but as one source says, the FDIC said they had to make so many bad loans to get their new charter.  Then the FDIC turns around and blames the banks for not predicting the mess that followed.

Remember where Bastiat wrote about the government creating capital out of nothing, just by guaranteeing loans?  We'll get to that next.