The high rate of bank failure in recent years and the $150 billion plus taxpayer bailout of the Federal Savings and Loan Insurance Corp. clearly indicate that federal deposit insurance is not working.

This should not be a surprise, for it always has been inherently and hopelessly flawed.Franklin D. Roosevelt, in his very first news conference as president, warned that federal deposit insurance would "make the United States liable for the mistakes and errors of individual banks and put a premium on unsound banking in the future."

How right he was.

Worse, electronic and financial technology are rapidly undermining the efficacy of all forms of financial services regulation. Thus, the regulatory process is less and less able to contain deposit insurance losses, except possibly by impairing banking productivity and increasing the risks facing the federal safety net administered by the Federal Reserve System.

The current problems in federal deposit insurance also are blocking a long overdue restructuring of an increasingly obsolete financial services industry. Restructuring must permit new powers for banks and S&Ls, powers that are feasible with today's technology.

Federal deposit insurance cannot be fixed for many reasons.

The basic reason is common to all government insurance and guarantee programs: Sound insurance mechanisms are incompatible with democratic government.

To be successful, insurers must discriminate among insureds on an objective basis; government, however, is premised on nondiscrimination and equal treatment for all.

Therefore, insurance programs of any type can operate successfully only in the private sector and without government subsidy.

There is only one way to reform deposit insurance and that is to replace federal deposit insurance with 100 percent cross-guarantees. Very simply, the 100 percent cross-guarantee concept is a self-insurance mechanism for the banking system.

Ad hoc syndicates of banks and other guarantors would form to protect all the deposit liabilities of an individual bank, not just the first $100,000 of a depositor's bank balance.

The 100 percent cross-guarantees would use the earning power and equity capital of the entire banking system, if necessary, to protect bank liabilities.

At the same time, guarantors of banks would charge risk-sensitive premiums to compensate them for the cross-guarantee risks they assumed and to curb unwarranted risk-taking by guaranteed banks.

The 100 percent gross guarantees would protect depositors and taxpayers much better than federal deposit insurance because cross-guarantees would be much more responsive to marketplace forces that would seek to minimize bank insolvency losses.

Premium rate formulas may charge the riskiest banks as much as 20 times the rate charged the safest banks. Intoxicated bankers truly would pay for the carnage they can cause while prudent bankers may pay as little as 0.04 percent annually - one fifth of the premium rate they are scheduled to pay next year.

The 100 percent cross-guarantees would dramatically reverse the declining creditworthiness of American banks. This reversal in turn would raise public and marketplace confidence in American banks, thus allowing them to raise funds more cheaply. Cheaper funds in time would bring lower interest rates to borrowers.

(Bert Ely is president of Ely & Co., a financial institutions consulting firm in Alexandria, Va.)