"The only thing we have to fear is fear itself."
Those words were, of course, spoken by Franklin D Roosevelt.
However, since Roosevelt was the president who saw America through
most of World War II, many people mistakenly assume his famously
reassuring words had something to do with that conflict. In fact,
Roosevelt's words were spoken as part of his first inaugural
address in 1933, and referred not to war but to the Great
Depression.
Given the economic strains of recent years, Americans could use
a similar dose of reassurance. A
recent Rasmussen Reports survey
found that 42 percent of respondents fear losing their money in a
bank failure. Less half of the survey's respondents expressed that
they were at least "somewhat confident" in the stability of
America's banks.
As Roosevelt would have recognized, this lack of confidence is
important, because fear can play a major role in making a bad
financial environment even worse.
Irrational fear?
On first blush, it would be easy to dismiss the fear of losing
money deposited in America's banks as being wholly irrational.
After all, since the Great Depression, FDIC insurance has been
available to protect American bank customers. In reaction to the
2008/2009 banking crisis, the
amount of FDIC insurance
was raised to $250,000 per depositor, per bank. That's more than
enough to cover the typical bank customer -- so why should 42
percent of them fear losing their money?
Statistically, it would be more rational to fear death by
lightning. According to the Journal of Environmental Health, this
happens at a rate of 0.23 occurrences per million persons in the
U.S. In a population of about 300 million, that comes to around 69
such deaths per year.
Rationalizing the irrational
Rationally, then, anybody who is under the umbrella of FDIC
insurance shouldn't fear for their deposits -- unless that fear
becomes a self-fulfilling prophecy.
Like any insurance, the FDIC program is funded on the assumption
that the insurance will only be called upon in a small minority of
cases. It is theoretically possible for a high level of fear to
stress that system. In short, the fear is only irrational until it
becomes widespread.
Savings accounts look underpaid
Rational or not, if so many people doubt the safety of their
bank deposits, there is a disconnect between that fear and the
ultra-low level of today's interest rates on
deposit accounts
. People normally receive some benefit when they put their money at
risk. This is referred to as a "risk premium." With interest rates
near zero, people who worry about the safety of their money in a
bank are taking a perceived risk for virtually no compensation. Now
that's truly irrational!
Rational or irrational, people's fears have to be taken
seriously, because fear is a dangerous force in economics. These
days, "fear itself" may not be the only thing we have to fear, but
it should certainly be on the list.