Can Government Bail Itself Out?
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.
- 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?
- 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.