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I understand that the Federal Deposit Insurance Corporation (FDIC) failing is unlikely, but the probability of such a failure is still positive. In case the FDIC fails, who covers the customers' losses? Will the Federal Reserve surely step in to print money to cover FDIC's ass?

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FDIC is government institution, so it can only fail if government itself lacks the funds.

Fed (unlike other central banks) does not have power to print new money. If the government would like to print more money it will be done by the Bureau of Engraving & Printing that is officially part of the Treasury. Fed could help by creating more money digitally by buying government bonds, which also creates new money but it can't literally print them.

In case government runs out of funds, Fed could create more money by buying up US bonds or Treasury could order BEP to print more money. However, even though government does not need to ever default on nominal obligations, historically governments often choose to (at least partially) default to avoid negative consequences of excess money creation.

Hence, what would happen is that either government would raise more money through monetary financing to avoid default, or government would decide that it is not worth the consequences of monetary financing and will just default on its FDIC obligations.

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  • $\begingroup$ Does your answer implies that the FDIC insured deposits are more risky than t-bonds? This is because the government are legally obliged to honor the t-bond, but the government can decide to default on FDIC obligations. $\endgroup$
    – dodo
    Commented Sep 17, 2022 at 11:46
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    $\begingroup$ @dodo government is not obliged to honor any debt. US government could unilaterally decide it will never pay the money for their T-bills and no amount of suing would help. As a regular person government can always declare a bankruptcy. $\endgroup$
    – 1muflon1
    Commented Sep 17, 2022 at 12:00
  • $\begingroup$ Hi, is it true that the government cannot default on t-bill unless it declaims bankruptcy, but a government can default on FDIC without bankruptcy? $\endgroup$
    – dodo
    Commented Sep 17, 2022 at 12:02
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    $\begingroup$ @dodo I don’t know details of public bankruptcy law. That is a law question not econ one. However, I know government can also just default partially (eg Greece few years back) I am not sure how is it determined what debt is defaulted on in that case. You should ask these legal details on some law site $\endgroup$
    – 1muflon1
    Commented Sep 17, 2022 at 13:00
  • $\begingroup$ Money created digitally is colloquially referred to as "printed" because it takes the exact same function as cash. Really it is the same as cash, but saves paper and ink. Any bank with digital money can ask for cash money by paying a printing fee which pays for paper and ink. $\endgroup$ Commented Feb 13, 2023 at 13:25

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