Economics Questions

Re: deposit insurance

Bogart — Tue, 24 Feb 2009 21:03:43 GMT

Right away the FDIC and Federal Reserve fail the "Free Market Test". If the answer to the Free Market Test is Yes then the institution by definition affects the economy and society negatively. That is: Could a free market or somewhat free market function without the government created institution? The Federal Government created the Federal Reserve in 1913 and the FDIC after 1930. Clearly there is 5000 years of human history before that so the answer is that a free market and even a mostly free market could function with out these institutions. Ergo they are harmful to the economy and society.

As for deposit insurance, it is a fine concept but not very likely in the free market. Deposit insurance is a premium paid by fractional reserve lenders to an insurer who will pay their deposits if the lenders aren't paid by their borrowers. As the bank experiences increasing defaults on loans the risk of defaulting to depositors increases, the insurance premiums must then go up with increasing the chances of the bank defaulting on its deposits. So you can see that premiums in a free market would be quite high, so high that even a mild default on loans plus higher insurance premiums would force the bank into default.

Re: deposit insurance

bearing01 — Tue, 24 Feb 2009 20:09:32 GMT

FDIC gives people peice of mind that they can deposit their savings into any shabby bank on the street. It makes the customers be less prudent in choosing a bank. If there was no FDIC coverage then there would be market competition between banks to have the best reputation and lowest risk. The stability / sound operations of a bank would matter. Most people would only deposit their money in banks that are sound and prudent. If depositors felt risk in activities of their bank then people would resort to other banks and bad banks would loose profit or go out of business.

FDIC gives the bank piece of mind that it can take on risks while having gov't there to back them up. Sure, the bank could still bust, but the bankers won't get death threats from customers because the customers will be taken care of by the FDIC.

Re: deposit insurance

liberty student — Tue, 24 Feb 2009 20:08:51 GMT

You got it. Central banking doesn't work without the false and artificial security blanket of deposit insurance, which says, "fractional reserve banking may fail the bank, but it will never fail you"

Fractional Reserve banking is always insolvent. You can't insure against it's insolvency, any more than you can insure water against being wet.

deposit insurance

conservative — Tue, 24 Feb 2009 19:52:40 GMT

I wonder what you guys think of the necessity of FDIC insurance for bank deposits. I am of the opinion that they probably do more harm than good since the banks assure their depositors that the risks they take are OK no matter what since the depositors' will be made whole within a the $250k limit. What do you think?