4 ms·

FDIC is to insure people, not the institution. At that point, the institution has failed, so their skin is long gone.

eru 5y ago
Expectations about what happens in the future drive behaviour in the present. Or more concrete: without something like FDIC banks have some incentive to arrange they balance sheet in such a way that it's (a) safe, and (b) simple and transparent enough to convince customers that it's safe. Customers have an incentive to look for banks that are simple and safe. (Customers don't have to do the balance sheet analysis themselves. They can rely on third parties.) With something like FDIC, customers don't care how risky their bank is. In fact, more risk is better if that ever so slightly raises the returns available. (FDIC charges insurance premiums, but they are not properly risk adjusted.)
- snowwrestler 5y ago
  If natural incentives obviated the need for the FDIC, we would not have the FDIC, because both banks and incentives pre-date the FDIC by hundreds of years. It was created for a reason.
  - dnautics 5y ago
    note that the FDIC was created AFTER the Fed, so you don't know that the reason isn't that "the fed fucked things up and created an economic environment that necessitated the FDIC".
  - eru 5y ago
    That's a rather rosy view of how laws and regulations in general come about. First, the stated reasons might not be the real reasons. Second, the stated reasons might be the reasons as intended, but the people making the laws might still misunderstand what's actually happening. See eg https://www.alt-m.org/2021/05/20/how-u-s-government-paper-currency-began-and-how-private-banknotes-ended/ https://www.alt-m.org/2021/05/20/how-u-s-government-paper-cu... for some wider background.
- arcticbull 5y ago
  ... which is why strict regulations exist to cover what banks can and cannot invest in. Retail banks can't just YOLO reserves into GME lol.
  - eru 5y ago
    In the regulatory environment of 19th century Canada or 18/19th century Scotland, they could have. And those places had very stable banking systems during that time. The Canadian experience is especially instructive when compared to its tightly (but fragmentedly) regulated neighbour in the south. In any case, 'strict' but fixed regulations but shielding customers from consequences just leads to gaming of the regulations. It's better to give customers (and other stakeholders) skin in the game, and reduce the regulation to perhaps a duty to disclose truthfully. Then customers can police their banks.
    - arcticbull 5y ago
      Your plan literally never works. It simply never works. It’s a lovely theory that in the real world doesn’t yield results. You get shit like Nikola, like Theranos - all that had sophisticated accredited investors looking at the books, not just randos, and look how that turned out. Ones dead and the other is pushing cars down hills in PR stunts worth billions in market cap. The directionality around regulation is clear: without it, rivers caught fire. Then we got environmental regulations and lo and behold, no river fire. The idea that customers can just police the environment is equally baseless. Customers aren’t experts in finance or the environment. That’s why we delegate the work to a group of experts who are. Banks are too important to yolo. Retailers can get their risk on elsewhere.
      - eru 5y ago
        Huh? What I described worked really well in eg Scotland and Canada. See https://www.alt-m.org/2015/07/29/there-was-no-place-like-canada/ https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
        5y ago

eru 5y ago

Expectations about what happens in the future drive behaviour in the present. Or more concrete: without something like FDIC banks have some incentive to arrange they balance sheet in such a way that it's (a) safe, and (b) simple and transparent enough to convince customers that it's safe. Customers have an incentive to look for banks that are simple and safe. (Customers don't have to do the balance sheet analysis themselves. They can rely on third parties.) With something like FDIC, customers don't care how risky their bank is. In fact, more risk is better if that ever so slightly raises the returns available. (FDIC charges insurance premiums, but they are not properly risk adjusted.)

snowwrestler 5y ago
If natural incentives obviated the need for the FDIC, we would not have the FDIC, because both banks and incentives pre-date the FDIC by hundreds of years. It was created for a reason.
- dnautics 5y ago
  note that the FDIC was created AFTER the Fed, so you don't know that the reason isn't that "the fed fucked things up and created an economic environment that necessitated the FDIC".
- eru 5y ago
  That's a rather rosy view of how laws and regulations in general come about. First, the stated reasons might not be the real reasons. Second, the stated reasons might be the reasons as intended, but the people making the laws might still misunderstand what's actually happening. See eg https://www.alt-m.org/2021/05/20/how-u-s-government-paper-currency-began-and-how-private-banknotes-ended/ https://www.alt-m.org/2021/05/20/how-u-s-government-paper-cu... for some wider background.
arcticbull 5y ago
... which is why strict regulations exist to cover what banks can and cannot invest in. Retail banks can't just YOLO reserves into GME lol.
- eru 5y ago
  In the regulatory environment of 19th century Canada or 18/19th century Scotland, they could have. And those places had very stable banking systems during that time. The Canadian experience is especially instructive when compared to its tightly (but fragmentedly) regulated neighbour in the south. In any case, 'strict' but fixed regulations but shielding customers from consequences just leads to gaming of the regulations. It's better to give customers (and other stakeholders) skin in the game, and reduce the regulation to perhaps a duty to disclose truthfully. Then customers can police their banks.
  - arcticbull 5y ago
    Your plan literally never works. It simply never works. It’s a lovely theory that in the real world doesn’t yield results. You get shit like Nikola, like Theranos - all that had sophisticated accredited investors looking at the books, not just randos, and look how that turned out. Ones dead and the other is pushing cars down hills in PR stunts worth billions in market cap. The directionality around regulation is clear: without it, rivers caught fire. Then we got environmental regulations and lo and behold, no river fire. The idea that customers can just police the environment is equally baseless. Customers aren’t experts in finance or the environment. That’s why we delegate the work to a group of experts who are. Banks are too important to yolo. Retailers can get their risk on elsewhere.
    - eru 5y ago
      Huh? What I described worked really well in eg Scotland and Canada. See https://www.alt-m.org/2015/07/29/there-was-no-place-like-canada/ https://www.alt-m.org/2015/07/29/there-was-no-place-like-can...
      - 5y ago