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Only by plundering the productive parts of society. Of course the FDIC is in trouble. The problem is that banks who have sufficient capital and invested prudently and thereby have not put their depositors at risk are being asked to take care of the banks that were not so prudent.

Where does that leave incentives for prudence going forward? Do we really want a society where prudence is a bad thing? If I taught that to my children “they” would lock me up.

Now onto the wonky part.

  1. If the FDIC insurance fund is insolvent, does that not imply that “premiums” charged to banks have been too low? If that is the case, then we have a case of one of the most important financial system regulators mispricing risk, and not understanding the system it proposes to regulate. But isn’t that a criticism levelled at greedy market participants?
  2. It is insane to both have FDIC insured deposits AND reserve requirements at banks. They are two tools intended to do the same thing. In fact, it is not clear that doing away with BOTH would be worse than what we have now. The record of depositors during the 19th century “free-er” banking eras was much better than what we see today. Inquiring minds might thoughtfully ask why we have both.

One Response to “Can Government Bail Itself Out?”

  1. Harry says:

    What terrific questions!

    We both, along with anyone still living who was not born in 1905, have been raised and educated during a time when FDIC insurance for deposits was a fact of life, assurance just as certain as the sun setting in the west. I never gave it a second thought, except for numerous occurences when somebody asked me about a safe place to park your money, as long as you could weather the ravages of inflation and would settle with having your principal intact.

    It’s fair to assume that the FDIC is not nor will ever be, at least in the next five years insolvent, for the same reason that treasurys will be safe, in that both promise to pay dollars, which the government will invariably print.

    As long as the dollar fetches enough goods and services, all is well. That, of course, is predicated on the availability of goods, and services that deliver those goods. The more goods and services that are shoved down a rathole, the less there is to go around. Argentina comes to mind, as do pesos, Weimar marks, asssorted francs, and Smoot-Hawley and Walter Reuther talking about wanting a bigger slice of the pie.

    If we abolished FDIC insurance tomorrow, there would be a run on the banks and an unfair breach of a contract, just as the government screwed certain bondholders when it expediently reorganized GM and gave people who never earned it money. None of this stuff encourages anyone to take whatever they have left after the impressor has taken his share to risk starting a business.

    What it does encourage is stuffing your money under the mattress, or converting it to gold and stuffing it under the mattress, which are both defensive bets that it will all go to hell, and none of this leads to prosperity, unless one defines prosperity as surviving the deluge.

    Of course your children should lock you up, not for being imprudent, but for being an economics professor.

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