Austrian theory don't support any bailout plans to the banks allowing the market to do the job (I support this)! But when the bank go bankrupt, a lot of people lose their savings (deposits). So what Austrian theory tell us about these people and this situation, what goverment should do? Maybe its much better to bailout these people (pay back deposists) instead of banks to increase consumption?
Regards,
http://www.eurokonsultantai.lt/
Bank deposits are insured up to a certain amount by the FDIC.
Austrian economics would say that if there was not the moral hazard provided by the FDIC and bailouts, people would be more careful about where they deposit their money. In a free market, banks would likely be independantly audited and potential customers could see the amount of leveradge that a bank has and make judgements about the risk/reward of depositing that bank by weighing the risk of the bank failing and losing their money vs the increased rate that such a bank would offer to them. It is generally believed that banks would not lend out demand deposits in this case (called full reserve banking), rather they would make their profits off timed deposits like CDs.
Bank deposit insurance creates a moral hazard as bankers practice Fractional Reserve Banking on deposits that could at any time be claimed by their rightful owners. Therefore the FDIC and Federal Reserve should be closed. I am conflicted as to the legality of this practice. I think it is perfectly legal to loan out non-demand deposits such as bonds, CDs or equity.
As for the current mess, the FDIC is definitely on the hook for deposits that were made under the previous 100K limit. The FDIC should not insure new deposits and should increase the insurance charges on current deposits. The FDIC should not be on the hook although our leaders in Congress have determined so for deposits over 100K.
The amazing part is that the government could easily get out of the deposit insurance business. But with deposit insurance the government needs a printing press to make funny money to pay back depositors. So it has a build in justification for the Federal Reserve. Of course banks love the FDIC as it charges below market rates to insure deposits. Otherwise they would not be able to practice fractional reserve banking on larger amounts of their deposits.
Those people should lose their savings then. A major problem today is that, because of government insurance, people put their money into dangerously leveraged banks that run the risk of going bankrupt. Would you put your money into a bank that might go bankrupt if you run the risk of losing all of your money? Probably not. So by incentivizing people to put money in dangerous banks, the government is promoting economic crises like the one we're in right now.
Political Atheists Blog
Thank you