 So our next speaker is Mr. Doug French, as a former banker and then a man who got his master's in economics under Murray Rothbard, he knows where if he speaks about deposit insurance and related issues. Doug is a senior editor of the of Agora's laissez-faire book club, former president of the Mises Institute, great donor to the Mises Institute and it's great to have him here Doug, tell us all about deposit insurance. Thank you Lou, it's wonderful to be back in New York, we were here two or three years ago and it's great to be in this wonderful city, especially wonderful to be down the street from you know Barney's and Anne Taylor and the NKY and Todd's, some members of my family are going to be very happy about that and possibly do what Ben Bernanke wants us all to do with this smell of QE3 in the morning. I did want to make a mention about this book, you may have seen it propped up here re-assessing the presidency, if you do sign up as a member of the Mises Institute and support our great cause, you get a copy of that for free, there's a few authors here today, Joe Salerno has a piece in there, Tom Woods, so you may want to think about joining the Mises Institute today and get a great book and possibly a great keepsake to have them autograph it, so please think about that, this other book over here is a little something I wrote and you may not think I'm much of an author but I had great help, Murray Rothbard helped me with that book, it was my master's thesis and Hans Hoppe was on my thesis committee, so you can't get any better help than that, so whatever you think about me, think about, I tried to get, it had been wonderful to get Murray to co-author but it just didn't work out, so what I want to talk today about was TAG, which is maybe something you've heard about or haven't heard about, but the story of TAG actually starts in 1934 with I'm sure a president that you are all very much a revere, FDR, and after taking office and declaring a bank holiday, FDR told the nation in his first fireside chat he said after all there is an element in the readjustment of our financial system more important than currency, more important than gold and that is the confidence of the people. Well, what FDR was telling Americans was to be confident in government force, to be confident in what Murray Rothbard called an inherent hoax, the smoke and mirrors term for unbacked name of the federal government. Eight states had actually tried bank deposit insurance prior to the Great Depression and actually all eight funds failed, but that didn't stop the government from continually agitating for nationwide deposit insurance. There was actually 150 proposals for nationwide deposit insurance made into Congress, but the idea actually wasn't popular. 1932, Herbert Hoover called guaranteeing bank deposits a lot of rot, adding that it would make the government responsible for the management of all the banks in the country. Big banks hated deposit insurance. It believed that it would only keep smaller weaker competitors in business and actually FDR agreed with them. He told a press conference, the general underlying thought behind the use of the word guarantee with respect to bank deposits is that you guarantee bad banks as well as good banks and the minute the government starts to do that, the government runs into probable loss. FDR went on to say that the government's objective would have to be not putting a premium in the future of unsound banking. Now the banking panic that peaked in the first few weeks of March 1933, Roosevelt in his first official act, he closed the banks on March 6th, said that the banks would be closed for four days, and then what did his administration have to do? Well, they had to quickly draft legislation to actually legalize the holiday and resolve the crisis. In other words, FDR actually closed the banks without having the legal authority to do that. He didn't have the power to do it. The emergency banking act wasn't completed until a few days later. At that time, presidential advisor Raymond Morley said, we know how much of banking depended upon make believe. Believe or stated more conservatively the vital part of that public confidence had in assuring solvency. Now Murray Rothbard said it a little bit differently. He said the very idea of deposit insurance is a swindle. How does one ensure an institution, fractional reserve banking, that is inherently insolvent and which will fall apart whenever the public finally realizes and understands that it is in fact a swindle? Well, we didn't have nationwide deposit insurance until January 1st, 1934. And it started at what seems to be today a fairly nominal amount, it was $2,500. But when you adjust that in inflation, it was about $41,000 in today's money. And now in 1935, that amount was doubled to $5,050. It was doubled again to $10,000. It went up in 1966 to $15,000, $20,000, $69,000, $40,000 and $74,000. And then in the middle of the SNL crisis in 1980, it was raised to $100,000. And that's the way it's been until of course the recent market meltdown in 2008. And the deposit insurance limit was raised to $250,000. But that's not all. Also in 2008, the FDIC instituted a program called TAG, Transaction Account Guarantee Program. And what TAG does is provide unlimited coverage for non-interest bearing transaction accounts. These are typically checking and payroll accounts for corporations and municipalities and possibly large personal accounts. Now according to Wall Street Journal last month, taxpayers are standing behind $1.3 trillion in TAG deposits. And interestingly enough, the vast majority of these TAG deposits are held by the top five banks. While the Fed has been stomping down interest rates to zero. And as of yesterday, it appears they are going to do that until the end of time. Banks are paying but a few basis points to interest bearing accounts. So you're not giving up much to actually just take zero interest and get unlimited FDIC insurance. And Jim Grant wrote in his latest Grants Interest Rate Observer, he wrote, 0% interest rates in blanket FDIC insurance of bank deposits reconfigured what used to be a market in short-dated IOUs of the private sector. Today's money market is increasingly a market of short-dated IOUs of the public sector. He went on to write, when a given claim yields nothing, the prudent investor will roll Treasury bills or functionally the equivalent same thing, lay up deposits at too big to fail banks. Now it's clearly where corporate cash is going. The American Banker reports that the percentage of corporate cash held in bank accounts stood at 51% in May. That's marking the highest level since they started doing the survey seven years ago. This year's percentage compares to 43% a year earlier and 23% in 2006. 77% of the company's surveyed said they didn't care about yield. They cared only about safety and only 2% were interested in yield. FDIC reports that actually non-interest-bearing deposits for the top five banks have swelled over 100% since TAG was put into place in 2008. And by the way, if you're wondering about the FDIC Deposit Insurance Fund, it currently stands at $22.7 billion. That sounds like a lot of money, but it is backstopping $7.1 trillion in deposit. That is 30 basis points. Basis points being 100% of a percent. The Problem Bank List website actually put this rather colorfully. They wrote, this is the equivalent of trying to protect yourself with an umbrella in the middle of a CAT3 hurricane. The collapse of one of the two big to fail banks would immediately require the FDIC to seek financial assistance from the United States Treasury. And of course, during the last financial crisis, the FDIC was nobody else was able to secure a loan, but the FDIC was able to secure a line of credit from the Treasury for $500 billion just in case the need should arise. One might guess that the need will arise. The TAG is scheduled actually to expire at the end of this year. Like so many other government intrusions, it was put in place actually in 2008 with the idea it was temporary. You remember it, but it was worried. They weren't going to be able to get their cash out of their ATMs. I mean, what would we do? So they put this in place. Let's do this until the financial storm passes. And then it would sunset at the end of two years, actually in 2010. But actually in 2010, the Dodd-Frank Bill extended TAG for another two years until the end of this year. So this is again an issue. Back then, FDIC Chair Sheila Baer said it is necessary to extend the TAG program because the lingering effects of the financial crisis that emerged in 2008 in large, systemically important banks have now spread to institutions of all sizes, particularly in regions suffering from ongoing economic weakness. Allowing the TAG program to expire in this environment could cause a number of community banks under stress to experience deposit withdrawals from their large transaction accounts and would risk needless liquidity failures. This reflects the continuing legacy of too big to fail and the different liquidity pressures our community banks experience as a result. Keep that in your mind. Community banks. Now, here we are two years later. The bankers still do not want to give this up. Frank Keating, he just wrote a letter to the editor to the Wall Street Journal, and he claimed that taking away TAG would increase uncertainty in an economy whose path is anything but certain. He says the goal of the program was to maintain liquidity for financial institutions. He said depositors remain nervous for a number of reasons. The fiscal cliff, problems in Europe, the economy is slowed, and who knows what all. And this program should stay in place. But of course, he doesn't want to make it permanent. He just wants a temporary extension of another two years. He writes a TAG in a bailout because the banks have paid deposit premiums on these deposits. Of course, we might remind Mr. Keating that there are only 30 basis points worth of these premiums that stand behind their coverage. Besides, he says, hey, it's been successful. It has supported lending at no cost to the taxpayer, but in fact, really, there's been no lending at all during this post-crisis era. Scott Shea, he's the chairman of Signature Bank here in New York City, and he says the deposits of too big to fail banks are already essentially covered, so it would be unfair to take TAG away from other lenders. Jeff Gerrard, chairman of the Independent Bankers, says TAG deposits anchor broader banking relationships and support local lending. Local lending, really. 40% of the bank deposits in the entire country are held by four banks, and they're not local. 78% of the deposits are held by the largest 1% of banks. Let's say the largest 70 banks that are out there. And by the way, if banks aren't lending, what are they doing? Well, derivatives, that's the latest growth industry in the banking business, and when it comes to derivatives exposure, the top 1% of banks have 99.999% of the derivatives exposure. That total derivatives exposure according to the last FDIC quarterly report was $225 trillion. So what are these big banks doing? If they're not lending money, there's no one to lend to. Well, during testimony before Congress, JP Morgan, CEO, Jamie Diamond specifically stated that the bank's deposits had swelled by more than $400 billion in recent years, putting pressure on the bank to seek higher returns. Bank analyst Chris Whalen, who by the way spoke for the Mises Institute here two or three years ago, he makes the point in a recent investment letter of his that the growth of JP Morgan's non-interest-bearing deposits supported by TAG almost perfectly tracks the period when the Treasury of the bank increased its rogue speculative activities, something you may have read about, specifically the size and risk profile of the London trading operation of Bruno Xkill and the JP Morgan CIO office seems to have increased at the same time that the supply of excess funds due to TAG, JP Morgan was peaking essentially from 2010 till today. Whalen figures that TAG accounts for $200 billion of JP Morgan's deposit base or about 10% of total assets. So that additional cash provided a big incentive for Morgan to Morgan management to add increased risk because remember after all JP Morgan Chase needs to make a can keep assets and equity returns at the at a growing rate and if you have increased assets through increased deposits then you need to take more risk to keep keep up that return. Diamond told Congress that his bank was unable to deploy these increased deposits via lending. There just wasn't enough loan demand. So the liquidity instead was invested in corporate bonds via the Chief Investment Office. Whalen says insiders actually at JP Morgan have told him that his suspicions that there was a connection between the increase in TAG deposits and the speculative trading activities of the office in London is actually true. They've actually confirmed that conversation with him. Now according to the New York Times this spring JP Morgan had 30% of its portfolio invested in securities that are backed by the federal government either agencies or or or treasuries. Now this was a shift from the end of 2010 when actually that their portfolio was 42% of governments and agencies. Now by comparison Bank of America had 87% of its bond portfolio in government securities. So clearly JP Morgan was taking more risk in the government or in the corporate bond area. The time speculates that JP Morgan may have wanted to be a little more ambitious and earn more returns with its hedging program and of course the hedging program is made through the heavy use of derivatives price of these derivatives being linked to the value of corporate bonds and this is a quote from the New York Times. While the bank made both bullish and bearish bets with these instruments it appears that the trading strategy started losing a lot of money when the market turned against corporate bonds toward the end of March. Now JP Morgan's troubles or JP Morgan's problem with what to do with the excess TAG funds was actually mentioned by Thomas Lemke. He's a general counsel and executive vice president for leg mason and he was speaking on in on behalf of the investment company institute who is by the way against the extension of TAG. He wrote we understand that some are calling for congress to extend this unlimited insurance program beyond its statutory expiration date. ICI strongly opposes any such extension. We view the program as having the potential to dislocate markets and increase systemic risk in times of market stress by creating an unlimited taxpayer support backstop for these transaction accounts. Historically the risks posed by deposit insurance programs have been mitigated by capping that amount of the depositors account that is insured. Now in banking everything starts with funding. Funding creates the need for earning assets. After all this is fractionalized banking. You don't collect deposits and then let them sit there and guard them so that you know people when they come back for their money it'll be there. Banks do something with this money and hope not everybody comes back at once for their dough. So the Fed's zero interest rate policy actually has banks in margin rate under margin rate pressure. A flood of funding encouraged by this FDIC's emergency TAG insurance causes bank management to make even more risk for more yield. As Mr. Whelan says quote we see too big to fail zombie banks doing even more stupid things than is normal and customary unquote. But TAG has plenty of adherents and supporters on Capitol Hill. Senate Banking Committee chairman is Tim Rogers and he actually is a Democrat from the great state of South Dakota. He wrote a letter supporting extension of TAG. That's hardly surprising since Citicorp's banking operations are actually operated in that state or at least chartered in that state. Johnson's easily one of the most friendly members in Senate when it comes to pandering to the big too big to fail banks and it should be noted that the two big to fail banks benefit disproportionately from TAG. For every one dollar of TAG funding that goes into small banks four dollars will go to large banks. Indeed when small banks may have had a funding advantage actually before the crisis today large banks have the upper hand in terms of funding in part because of the FDIC's TAG program. Indeed the proportion of TAG eligible deposits held by the largest bank as I said earlier is almost double. At the end of first quarter of this year more than 75 percent of the 1.3 trillion in TAG deposits were held with banks of over a hundred billion in deposits. Less than four percent of the amount was held by small community banks with assets of less than one billion. So far from supporting economic growth as supporters of TAG suggest and far from supporting these poor community banks that's mentioned by Sheila Bear and others the FDIC insurance for TAG eligible deposits actually spurs the growth in too big to fail banks and it actually spurs unsafe and unsound banking practices by these same banks. In the case of JP Morgan the result was of the nearly 10 percent increase in their total assets and this flight to quality if you will encourage by TAG was a significant increase in the risk-taking at that bank. The need to degenerate returns on the flood of funding pouring into JP Morgan actually resulted in a breakdown of their internal systems and controls leading to a significant financial which I believe was five billion dollars or such and reputational loss of one of the biggest banks in the country. Now a similar increase in this non-interest bearing deposits has occurred at Wells Fargo Bank and what Wells has done with this increase in funding is an increase to almost 40 percent market share in the new mortgage origination sector and that's an incredible market share that has been encouraged by the fact that they have a vast funding advantage with the FDIC TAG program over their smaller competitors. Now as Wayland writes the half-point rate differential between Wells Fargo and the other mortgage lenders implies that this giant bank is actually taking a loss on its new residential production over time but what Wells can do as they originate these mortgages is quickly sell them off and make a quick gain on sale and that's really what they're after. Now the American Bankers Association or the Independent Community Bankers Association may cry for an extension of TAG to stimulate economic growth or jobs but TAG is simply another active government intervention in the United States economy that under the guys of protecting small banks and the banking public but actually the winners are the large banks small banks and the publics are net net losers. Now in a wonderful book Money, Bank Credit, Economic Cycles Jesus Huerta de Soto's wonderful book he wrote the various systems and agencies designed to ensure created deposits in many western countries tend to produce an effect which is the exact opposite of that intended when they are established. These deposit guarantee funds encourage less prudent and responsible policies in private banking. Since they give citizens the false assurance that their deposits are guaranteed and thus that they need not take the effort to study and question the trust they place in each institution. These funds also convince bankers that ultimately their behavior cannot harm their direct customers very seriously. In not quite 80 years U.S. deposit insurance coverage has gone from an inflation-injusted 41,000 now to unlimited so it's no wonder that the financial system while magnitudes larger has grown many times more unstable. William Seidman he was the chairman of the FDIC during the SNL crisis. He wrote a deposit insurance system is like a nuclear power plant. If you build it without safety precautions you know it's going to blow you off the face of the earth and even if you do you can't be sure it won't. A return to sound banking would mean doing away with the swindle of deposit insurance entirely otherwise that financial nuclear explosion could happen anytime. Thank you.