Guaranteed Hazard

Congress forgets the lessons of the S&L crisis.

Comments

[MP]

There was an interesting (long) article on bank regulation in the latest Regulation magazine. Interestingly, I found out that FDIC insurance is now backed directly by bank capital (i.e. Congress has legislated that in the event of a crisis, the government isn't the primary bail-out entity). It also pointed out that FDIC insurance is really for protecting the little guy, so the 100,000 limit was already excessive (remember, that limit is per person per institution, not simply per person).

[jp]

It is worth emphasizing this passage from the linked article: In 1990, 42% of IRA funds were invested in insured bank deposits, a percentage which has since fallen to 9% as funds are moved to mutual funds in whiuch investors assess their own risks. Many pension and Keogh accounts in mutual funds exceed $100,000; they will be special targets for banks eager for more deposits.

Treat people like adults. Let them evaluate the risks and decide where to park their savings (while they continue to have their common-law right to sue for fraud). As long as the government protects us from our mistakes, we'll think that only the government can protect us from our mistakes.

[Russ 2000]

$100,000 is a "little guy" amount these days. Make minimum wage for 8 years and you've been paid that much.

[John]

JP, you are exactly right, but try explaining that to someone who is convinced that the S&L crisis was solely the result of corporate greed and the government's failure to restrain the evil capitalist system and nothing to do with bad government overregulation. Good luck.

[theCoach]

Russ2000,
Without commenting on the suggestion that a person making minimum wage for 8 years will have anywhere near $100,000 in savings, I do not see how your comment addresses:

remember, that limit is per person per institution, not simply per person

It is almost as if you simply missed that point.

[Xmas]

Ron Paul for President!

Seriously, is there any congressman who is more committed to smaller government?

[smalls]

Xmas,
You nailed it. Ron Paul has been a hero of mine ever since I started paying attention to politics. It seems crazy that there aren't more representatives like him (honest in their politics), considering the large amount of support he maintains.

[Russ 2000]

coach,

Yes, I missed the point, mostly because I didn't RTFA; I was only pointing out that $100,000 is little guy money nowadays and not "excessive" as the first poster said it was.

The FDIC level and the minimum wage go hand-in-hand with the fractional reserve, central bank, fiat money system we have. If we had a hard money system where the banks controlled the amount of paper currency, then the FDIC would be a completely stupid concept. But with the government-controlled fiat money system, it acts as sort of a check-and-balance on the Fed.

So I did decide to RTFA, and I had to laugh at it. Although some of the points are valid, it is just plain fucking stupid to talk about "perverse incentives" created by this when IRA's are a perverse incentive to begin with.

And this comment is a bit misleading: In 1990, 42% of IRA funds were invested in insured bank deposits, a percentage which has since fallen to 9% as funds are moved to mutual funds in whiuch investors assess their own risks.

People moved their investments because the rate of return on bank deposits was so shitty, partly because low interest rates made bank interest low and the low interest rates encouraged capital investment. If interest rates remain low, money ain't gonna shift just because the FDIC limit goes up.

[Yogi]

Ron Paul for President!
I think I may consider moving to Galveston soon. How is it possible that the people that elected Tom Delay and the people that elected Ron Paul live right next to each other?

[MP]

I think I may consider moving to Galveston soon. How is it possible that the people that elected Tom Delay and the people that elected Ron Paul live right next to each other?

Redistricting...which eliminates inter-party competition.
McCain/Feingold...which gives incumbents a competative advantage.
Voter apathy.

[Jeff]

Are you people seriously arguing against any deposit insurance? You want to go back to the days of bank runs and crashes every few years?

[MP]

Are you people seriously arguing against any deposit insurance? You want to go back to the days of bank runs and crashes every few years?

Jeff,

The argument is in regards to the amount and the moral hazard that comes with making that amount excessive, thus artificially mitigating risks taken by banks.

[John (the IT guy)]

Jeff,

I would very much like the govt to get out of the banking business entirely. I see no reason whatsoever that a company, let's call it an 'insurance company' for example, couldn't offer deposit insurance to a banks customers.

Let the actuaries with a sense of fiduciary responsibility determine the correct amount of cash to insure and what rates to charge. That way, when some greedy sob goes looking for 'safe' double digit gains it ain't gonna come outta my arse when the bankers ponzi schemes blow up.

[jp]

Russ 2000 said: "People moved their investments because the rate of return on bank deposits was so shitty, partly because low interest rates made bank interest low and the low interest rates encouraged capital investment. If interest rates remain low, money ain't gonna shift just because the FDIC limit goes up."

I think the author's point was that the increased government insurance furnished to banks will enable them to offer higher rates of return because their costs will be lower than those of the uninsured competition (or, to put it a different way, they'll be able to take on riskier and thus more profitable investments while bearing the same costs as the uninsured competition).

[Russ 2000]

jp,

What you say is true, but it's a relative pittance; the existence of the FSLIC didn't cause the S&L crisis, it just made it cost slightly more - the S&L's that failed would have failed regardless. If the market is going to be gamed with such federal regulation, the depositor should get some kind of insurance because there's no way the average depositor could keep up with the ever-changing array of regulation/deregulation.

The real problem with the insurance isn't so much that it's government run as much as the government charges the banks the same premiums regardless of whether they are making riskier investments or safer investments. If the insurance premiums were based on actual risk being taken, there would basically be no effect because the insurance would come at an actual cost. Raising the limit to 250K only means that instead of having your IRA's in 5 banks you can have them in 2. That will tend to funnel the money toward the riskier institutions, but only because their risk is being subsidized by the less-risky institutions.

[jp]

"The real problem with the insurance isn't so much that it's government run as much as the government charges the banks the same premiums regardless of whether they are making riskier investments or safer investments."

I agree. (With the qualifiation that, this being a libertarian blog after all, I would prefer that most things not be government run.)

[mike in ftw]

Actually banks are charged different rates for deposit insurance based on their risk-based capital ratios. And deposit insurance is not 100,000 per person per institution, it is more complicated than that. An individual could have much more than 100,000 insured at a single institution.

The whole premise of this argument is that bank managers are going to invest in more risky investments if a higher percentage of their customers retirement accounts are insured. Do you think a bank manager looks at their accounts and thinks...well old Joe has 400,000 in retirement savings, back when he was only insured to 100,000 I invested conservatively, now that he only stands to lose 150,000 of his savings I'm going hog wild.

This change has very little impact on the banking system as a whole. Due to all of the mergers, the large banks are way too big to ever be allowed to fail. By default, all of their deposits are insured. This increase in deposit insurance is just a bone to the small community banks so that they can try and keep more of their deposits from leaving to the TBTF (too big to fail) banks.

[Jeff]

John,
If private deposit insurance were viable we would have seen it spring up before the FDIC existed. In fact, it didn't.

[Russ 2000]

Jeff,

What makes it viable for the FDIC to do it if it's not viable as a private enterprise?

[Isaac Bartram]

In fact their used to be state chartered institutions with private insurance. I'm pretty sure that in the end they were not able to compete with fed chartered institutions and their FDIC.

[kmw]

I'm totally a proponent of eliminating social security. I think school vouchers or complete privatized education is the way to go. I think government should be reduced to an absolute minimum.

And then there's this philosophical masturbation exercise.

Like people pointed out a couple days ago, there's this tendency in libertarian circles to eschew any hint of normal human social behavior. This does nothing to counter that.

When I'm not being forced to contribute to social security or prison ward "public schools" we can talk about public vs. private deposit insurance. Otherwise, people who have libertarian tendencies yawn, and those who don't are aghast at how heartless pure/true libertarians can be.

[Ron Hardin]

The S&L crisis came from banks lending long and borrowing short when the yield curve inverted on them.

The amount of insurance doesn't affect anything. The smaller the amount, the wider the money from a single investor gets spread, but the total amount stays the same per bank.

That is, I save at ten risky banks instead of one, and so does everybody else.

[Ruthless]

I'm a lapsed stockbroker who plied my trade in Sinincincinnati where the "dumb deutsch" were especially addicted to S&L's.
On the rare occasion when I tried to explain why investing directly in US government paper is more "secure" than a C. D., which is government-guaranteed paper, it went over like a loud fart in high mass.
Then, lo and behold, brokerage firms began offering C.D's. with far more "juice" for brokers than direct government paper.
The "dumb deutsch" got what they deserved, eh?

[Ruthless]

"The S&L crisis came from banks lending long and borrowing short when the yield curve inverted on them."

Ron Hardin,
I fear you know little about that upon which you are speculating.
The bank where I put in my hard time may be about to run off the track a la GM and F, but the guru who monitors interest rates near my department is a libertarian who passes along to me his read literature from the Cato Instutute, etc.
He is not so simplistic, and I don't think his counterparts back in the days of S&L's were either.

The set-up for this thread adequately explains the issue. An inverted yield curve as an explanation is bloviating on your part.