Economic analysis of deposit insurance Essay

Federal sediment indemnity Corporation was an institution set by organisation back in thirty-something to protect forceors fund held by slang. In the great depression of 1930 most depositors lost(p) their fund following the collapse of umpteen banking companys. After the stock grocery brush in 1929, financial market was adversely affected and by March 1933 more(prenominal) than 9,000 banks had already failed and this facilitated establishment of FDIC. Henceforth it has been evolving and conclusion alternative ways of insuring depositors fund against potential difference bank insolvency.FDIC guarantees a specific come up of deposit and curb biting for member banks. Since it establishment FDIC pay depositors in 1988 following the banking crisis fueled by high interest rate, inflation, recession and deregulation in the banking sector. More than 200 banks were in a liquidity problem and FDIC had to interpose to settle claims by depositors.Role of deposit insurance in th e economyThe of import purpose of deposit insurance is to prep atomic number 18 financial stability in the economy. volume of people did not bother to check whether their deposit was insured under deposit insurance but following the rate of flow financial crisis which started in mid 2007 which byword many an(prenominal) banks and other company worthy insolvent most people are  increasingly becoming aware of the character reference and importance of deposit insurance in the economy. The Emergency Economic Stabilization passage of 2008 temporarily increased the basic place of deposit insurance from $100,000 to $250,000 (Robert, 2009).Advocates of free market view deposit insurance as part of government intervention in the market and criticize it on the instauration that a competitive market is self regulating and will act to neutralize any deviation that occurs in the market. and the great depression of 1930s and the circulating(prenominal) financial crisis&nbs p has proved that the market is not always self regulating and because there is a need for government intervention as proposed by Keynes in entrap to correct deviation in the market. although the classical economist argued that  in a competitive market system price, fee and interest rate would reflexiveally arrange to restore the economy to full trade levels there existed certain factors such as investment contain, bullion demand, union and monopoly magnate that inhibited the automatic mechanism faux by classical writers.Keynes advocate for address fiscal policies given the failure of automatic forces as a counter cyclical device to oppose advance trends in business cycles. In period of immense unemployment and depression, expansionary fiscal policy was required by government to solve the problem in less time than automatic forces incessantly could (Stephen, 2008).Deposit insurance creates confidence among the humanity and avoid panic withdrawals as those occasione d in UK when information reached the public that northern bank was experiencing liquidity problem and many eyeshade holder were queuing to withdraw there money from the bank. During the catamenia financial crisis where many bank were declared insolvent FDIC compensated many deposit holders who would otherwise lost their deposit. This not only helps to maintain financial stability but also improve frugal growth (Robert & George, 2006).Where people take in compensation they will be adequate to increase the level of spending on goods and services. This increase in aggregate demand forces supplies to increase output in order to satisfy the growing demand. Supplies will in turn require additional stimulant in term of labor, material and groovy which reduces unemployment and increase economic growth.  The graph beneath indicates the role that deposit insurance kindle play during economic crisis for instance the current financial crisis.