Almost every Friday since January, the Federal Deposit Insurance Corporation (FDIC) has added more names to its “failed bank list”—84 so far this year, already more than the 26 for all of 2008. America should be proud of this document, which seems an example of the prudent regulation integral to free markets. But the FDIC’s elegant system, which both ratifies the markets’ discipline of bad banks and protects broader markets from depositor panic, has become a tool of the government distortion that imperils our competitive economy.

Since 1933, people who deposit money in American banks have relied on a guarantee: if their accounts are below a certain amount (today, $250,000) and their bank fails, they won’t lose a dime. The FDIC provides this...