Today, it appears that the U.S. Senate is doubling down on the bill that the U.S. House of Representatives rejected on Monday. I am sure not how effective or meaningful higher FDIC insurance limits are likely to be; the bill calls for, among other things, raising the upper limit from $100,000 to $250,000 on insured deposits. Clearly, such a policy change weakens incentives for consumers to monitor their banks and also makes it incumbent upon banking regulators to monitor more solvency even more closely. By increasing the upper limit on coverage, this is an indirect way to recapitalize banks in the short run (by effectively enabling them to substitute (contingent) government capital for private capital). However, this also carries with it a serious moral hazard by creating incentives for banks to rely less upon private capital in the longer run.
I couldn’t help but notice from the news reports today that one senator apparently managed to slip in a provision in the “bailout” bill for “mental health parity”, whatever that means. I think it has something to do with mandating more “generous” mental health coverage in the private health insurance markets. What this measure has to do with resolving the credit crisis is beyond me. I can’t help but wonder what other completely unrelated earmarks are being inserted as a way to buy votes.