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The FDIC is a confidence game. Mentioning it just gives a reminder of its existence and confidence in the system. I just like to imagine the enterprisers in 19

The FDIC is a confidence game. Mentioning it just gives a reminder of its existence and confidence in the system. I just like to imagine the enterprisers in 1930 that convinced Congress to insure their private company deposits with public money in order to more easily convince people to make deposits. Worried about the viability of a new market because there is no recourse if you lose your money? Make enough money to lobby Congress to insure it with non-participant's money! Now there is more confidence in your market

rahimnathwani 7y ago
FDIC insurance, and similar deposit guarantee schemes in other countries, aren't primarily a way to socialise private risks. A bank run is caused by the perception that a bank may have insufficient liquidity. But once a bank run starts, this is a self-fulfilling prophecy. The bank may have held enough of its assets as cash/near-cash for normal times, but of course many of its assets are illiquid things like mortgage loans. The main purpose of deposit guarantee/insurance schemes is to prevent this vicious cycle from starting in the first place. If the scheme succeeds in instilling confidence, then there will never be a run, and the scheme will never result in a costly bail-out.
- rossdavidh 7y ago
  Just to reinforce one point: the bank in question could even have MORE of a cushion than other banks, but if the rumor mill hits them instead of other banks, they are the one who goes under. So, it's not even a case of rough justice from the market, it's death by rumor mill. Of all the stupid laws and regulations regarding finance, this is not one of them.
cromwellian 7y ago
The FDIC isn’t public money and there is no congressional appropriation for it. FDIC is funded by bank premiums. Sure if the FDIC goes bust in a massive financial implosion the feds will backstop it, but in such a disaster almost no private orgs have the resources to backstop it. This sounds like an uninformed libertarian rant.
- deleted 7y ago
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rahimnathwani 7y ago

FDIC insurance, and similar deposit guarantee schemes in other countries, aren't primarily a way to socialise private risks. A bank run is caused by the perception that a bank may have insufficient liquidity. But once a bank run starts, this is a self-fulfilling prophecy. The bank may have held enough of its assets as cash/near-cash for normal times, but of course many of its assets are illiquid things like mortgage loans. The main purpose of deposit guarantee/insurance schemes is to prevent this vicious cycle from starting in the first place. If the scheme succeeds in instilling confidence, then there will never be a run, and the scheme will never result in a costly bail-out.

rossdavidh 7y ago
Just to reinforce one point: the bank in question could even have MORE of a cushion than other banks, but if the rumor mill hits them instead of other banks, they are the one who goes under. So, it's not even a case of rough justice from the market, it's death by rumor mill. Of all the stupid laws and regulations regarding finance, this is not one of them.

cromwellian 7y ago

The FDIC isn’t public money and there is no congressional appropriation for it. FDIC is funded by bank premiums. Sure if the FDIC goes bust in a massive financial implosion the feds will backstop it, but in such a disaster almost no private orgs have the resources to backstop it. This sounds like an uninformed libertarian rant.

deleted 7y ago
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