I agree, James. I was too brief..

The problem has to do with the way most of us have been trained to 
conceive of money balances. In the fractional reserve banking system, 
the deposits that would always function as transactions deposits in a 
100% system, support several times their value in loans. As a result, 
although it is not regarded as a savings deposit to the depositor, a 
deposit of currency functions, in the fractional system, as mostly a 
savings deposit. When the FDIC insures these deposits, it is, from a 
functional point of view, removing most of the uncertainty from 
households that is associated with transferring purchasing power from 
households to businesses. So, although the FDIC does not profess or 
probably even know it, it is, from a functional standpoint, insuring 
savings against the "vagaries of the market." It is, in a functional 
sense, trying to achieve a goal that it cannot possibly achieve in a 
free market economy. So it is not surprising that it has failed. 
About 20 years ago, the FSLIC (and probably the FDIC also, although I 
haven't studied the issue sufficiently to be sure) also failed.

The growth of M2 is not relevant to the state of the economy. This is 
because to understand the macroeconomy, one must deal with functions 
and not statistical categories. What is relevant to the avoidance of 
a rise in aggregate long run unemployment (as opposed to a short run 
fluctuation due to a restructuring in light of the massive recent 
reduction in perceived wealth and massive redistribution of wealth) 
is the M1 in circulation.

If the FED had allowed the FDIC to fail -- as the accounts show it 
would have if the major financial institutions failed -- the FED's 
only alternative would have been to create new money to replace that 
which would have been destroyed and which could not have been covered 
by the FDIC's reserves. As I see it, this would have been far more 
desirable and would have avoided the silly political games that have 
been played in recent hours, days, weeks and months. However, absent 
these games, what else could the politicians do to get attention?

There is more to the economics. Absent a fractional reserve system, 
the FED (or for that matter a third-grader) could control the 
quantity of money.

Some of US are deeper in the forest than others. I am happy to know 
that you are on the outside looking in.

J. Patrick Gunning