Once again Congress is threatening to give us a cure that is worse than the problem it wishes to solve. This time our legislators are threatening to "improve" federal deposit insurance at your local bank or S&L.

The problem they wish to solve is "hot money," deposits that followed the highest yields offered at some of the worst run financial institutions in the country. Hot money helped the likes of tiny Vernon Savings (of Vernon, Tex.) grow into failed multibillion-dollar institutions almost overnight.These deposits are called hot money because they are subject to immediate withdrawal upon the expiration of their term - or sooner if a higher yield offered somewhere else would offset any early withdrawal penalties.

Hot money had a very destabilizing effect on financial institutions. Further, they (the financial institutions) could only pay the high yields by making risky investments, the kind that brought on the S&L crisis, said Roland Barstow, chairman of Chicago-based Bell Federal Savings, one of the nation's healthiest and conservative S&Ls. Bell, with its multibillion-dollar deposits, did not make any commercial loans and stuck to home lending, just as its charter originally intended.

Here's what we think Congress should do to cure the problem, without penalizing small investors:

- Leave individual deposit insurance at its current limit of $100,000 per account. As recently as September, Congressman Henry Gonzalez, D-Texas, chairman of the House Banking Committee, put out for debate the possibility of a reduction in deposit insurance. The amounts considered by the committee went down to $25,000 per account. Since then, Gonzalez and his cohorts have decided to leave the limit alone - for now.

- Limit deposit insurance to people who were living within 150 miles of the financial institution at the time the accounts were opened. Exceptions might be retirees, or other people who move away but had a prior relationship with that financial institution.

Geographic limits of this type would have three results: First, high risk institutions would be cut off from a major source of funds.

Second, sound local institutions would not lose deposits to unsound institutions in another part of the country. Such deposit flows not only gave the bad guys more cash to squander, but it also penalized the local community by pulling cash out that could otherwise go toward local investment.

Third, while individual depositors could still avail themselves of high yield opportunities elsewhere, they would not be able to do so without a commensurate risk. They would not be able to play the federal deposit insurance system in a way in which it was not intended.

- Limit, or eliminate, federal deposit insurance for brokered deposits or certificates offered by, or through, stockbrokerage houses and similar firms. These firms must take some non-productive additional profit, or they could not perform the task. The higher yields offered for such bundled funds were yet another major hot money source that compounded the S&L crisis.

"Federal deposit insurance was supposed to protect the needy, not the greedy," said Duane Lillibridge, president of Farmers Saving Bank of Northwood, Ohio.

- Define federal deposit insurance more clearly. Currently, the $100,000 deposit limit (per depositor per bank) can be stretched to unintended lengths. Under today's regulations a family of four can each have an account, in any one institution, that is insured for $100,000 each, or a total of $400,000. That's OK. However, by setting up trust and joint accounts for each other, that family of four can stretch those limits up to $1.4 million per institution. That appears to be excessive.

- Make interest earned on savings accounts either tax-free or tax deferred. This would encourage savings, lower interest rates and the cost of funds to banks and S&Ls and enable our financial institutions to pay higher insurance premiums.

All of this could be done without penalizing consumers, and would reduce interest rates tremendously (especially for small businesses and the home-buyer) and without raising inflation. It also would leave more cash in the hands of the American people where it belongs and away from government.

What Congress is now considering is a raft of measures that would be intended to pull poorly run institutions back into line, once they are discovered. It is similar to closing the proverbial barn door after the horse is gone. Why not have a reform that addresses the problem up front, before it occurs?

Reader questions will be answered and may appear in this column, when mailed to Gary S. Meyers at 308 W. Erie, Suite 300, Chicago, IL 60610