Economic analysis of deposit insurance Essay

national unsex Insurance Corporation was an institution set by governing back in 1930s to protect steriliseors fund held by bank. In the great depression of 1930 most depositors lost their fund following the break dance of m whatever banks. After the stock grocery crash in 1929, fiscal market was adversely affected and by March 1933 more than 9,000 banks had already failed and this facilitated cheek of FDIC. Henceforth it has been evolving and finding alternative ways of insuring depositors fund against potency bank insolvency.FDIC guarantees a specific amount of deposit and checking for member banks. Since it establishment FDIC paid depositors in 1988 following the banking crisis fueled by high busy rate, inflation, recession and deregulation in the banking sector. More than 200 banks were in a liquidity problem and FDIC had to intervene to settle claims by depositors.Role of deposit damages in the economyThe main purpose of deposit constitution is to create financial sta bility in the economy. Majority of pot did non bother to check whether their deposit was insured under deposit insurance but following the present-day(prenominal) financial crisis which started in mid 2007 which dictum many banks and other company becoming insolvent most people areincreasingly becoming aware of the role and importance of deposit insurance in the economy. The Emergency Economic Stabilization Act of 2008 temporarily increased the basic limit of deposit insurance from $100,000 to $250,000 (Robert, 2009).Advocates of free market view deposit insurance as part of government encumbrance in the market and criticize it on the basis that a agonistical market is self ordinance and will act to correct any deviation that occurs in the market. however the great depression of 1930s and the current financial crisis has proved that the market is not always self regulating and therefore there is a need for government intervention as proposed by Keynes in order to correct devi ation in the market. although the stain little economist argued that in a competitive market system price, remuneration and interest rate would freeally adjust to restore the economy to plenteous employment levels there existed certain factors such as investment demand, specie demand, union and monopoly power that inhibited the automatic mechanism assumed by classical writers.Keynes advocate for discretion fiscal policies given the failure of automatic forces as a counter cyclical device to oppose say trends in business cycles. In period of massive unemployment and depression, expansionary fiscal policy was required by government to solve the problem in less time than automatic forces ever could (Stephen, 2008).Deposit insurance creates confidence among the common and avoid panic traceals as those occasioned in UK when information reached the public that Union bank was experiencing liquidity problem and many account holder were queuing to withdraw there money from the bank. During the current financial crisis where many bank were state insolvent FDIC compensated many deposit holders whowould otherwise lost their deposit. This not only helps to maintain financial stability but also make better scotch growth (Robert & George, 2006).Where people receive compensation they will be able to increase the level of spending on goods and services. This increase in aggregate demand forces supplies to increase output in order to encounter the growing demand. Supplies will in turn require additional stimulant in term of labor, material and capital which reduces unemployment and increase economic growth. The graph below indicates the role that deposit insurance can play during economic crisis for instance the current financial crisis.