Arianna Huffington, Rob Johnson and colleagues recently created the "Move Your Money" campaign (moveyourmoney.info), the idea of which is to encourage people to move their money from the big banks into smaller, healthier banks, in an effort to stabilize the financial system.   It's a really clever idea, and certainly the right thing to do, given that it takes power away from the 'Too Big to Fail' zombies.  The campaign is coupled with a video montage from "It's a Wonderful Life," the Jimmy Stewart movie about how he saves his local building-and-loan from a big bank that comes in to the community and nearly destroys it.  Unfortunately, however, the campaign is only a short term fix to a deeper underlying problem: the moral hazard of FDIC insurance.

The biggest banks these days (Citigroup, Bank of America, JP Morgan Chase, and Wells Fargo) are zombies: they are supported by government bailout money in the form of the Fed discount window and the multi-trillion-dollar Fed & Treasury support for their deeply devalued mortgage backed assets (MBOs).  They are probably insolvent, and have received a grade of 'F' from Institutional Risk Analytics, the company hired by the FDIC to analyze their required quarterly bank filings and evaluate the health of each of the 8000 insured banks nationwide.  Don't be fooled by their repayment of the TARP money last year: they simply borrowed the money from the Fed discount window to repay it - perhaps the best 'carry-trade' of all time, financed by taxpayers and savers in low interest accounts.

Normally the FDIC is happy to shut down failed banks, but these big guys are considered 'Too Big to Fail'.  Their friends in the Federal Reserve and Treasury (under the leadership of Bernanke, Paulson, and Geithner), perhaps think that the failure of these banks would result in the utter collapse of the American financial system, and cause Great Depression II.  Or perhaps they just have friends there.  However, they certainly would not admit that the banks are insolvent.  If they did, the FDIC would have to take over, and either find a healthy bank to buy them (which is unlikely considering the unknown value of their MBOs), or they'd have to close them and wind them down, which would require liquidating the MBOs, counteracting the Fed and Treasury core strategy for combating the recession.  However, keeping them alive is just throwing good money after bad, increasing the national debt, and worst of all, allows them to continue their risky behavior, something which every indication shows they are doing.

So it's a great idea to get people to move their money out of these banks.  First of all it supports local, healthier banks.  With the help of Institutional Risk Analytics, you can type in your zip code and get a list of banks with grade 'B' or above in your area.  Secondly it takes the power out of the 'Too Big to Fail' argument: if no one has a deposit in these banks, then how can they be considered too big?  Also, reducing deposits forces the bank to try to sell their assets, which could force a more timely foreclosure -- unless of course they are permitted to just borrow more from the Fed.

But there are some fundamental problems with the campaign.  First of all, the video is based on the premise of rooting for the little guy (like Jimmy Stewart).  Although this has broad appeal, when it comes to economics, often bigger is better.  After all, most of us shop at Walmart and other superstores, even when they crush the smaller, local competition.  So we are justifiably suspicious when an ad campaign appeals solely to our emotions.  Secondly, even if we understand the threat of the zombie banking system, we don't have a real, economic incentive to move our money.  After all, our money is insured and protected by the FDIC.  In fact, the web site assures us that the listed local banks are also FDIC insured, so we still don't have to worry if we switch.

But even if the campaign is successful, it only punts the problem down the field.  The reason is that there will always be more banks that are on the verge of going bad, including the recipients of our fresh dollars.  And so there will always be a need to keep the public informed of who they are, and continue the campaign to warn them.  Either the do-gooders behind the campaign will run out of steam, or people will get tired of the message and do nothing, having discovered that it doesn't really make a difference.

The core problem here is simply FDIC insurance.  As long as we know our money is insured, we don't have a powerful incentive to monitor our banks carefully for financial misconduct and move our money to healthier banks if necessary.  However, if our deposits are no longer insured, we must take responsibility for the health of our banks -- market discipline -- which will force them to behave responsibly.  Under the current system, the taxpayer will have to pay the price for our laziness.  Given the current bailouts, the price may be a couple trillion dollars.