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Forum Post: The big FDIC anomaly.

Posted 2 years ago on Feb. 10, 2012, 9:01 a.m. EST by arealpolitik (154)
This content is user submitted and not an official statement

If you invest in the stock exchange or your own business, there is no government sponsored insurance for you. And quite right: engaging in commerce is laudable, but the risk is entirely yours. You might make a million, or you might lose your investment.

In contrast, if you deposit money in a bank, and the bank lends to, or invests in businesses or mortgages, you get government sponsored insurance: (FDIC in the U.S., and something similar in most other countries).

Now why does government sponsor (or even subsidise) the insurance of commercial activity in the latter case but not the former? There is absolutely no reason.

Of course those who deposit money in banks want to have their cake and eat it: they want 100% safety plus the nice rates of interest that come from investing in commercial activity. And banks are more than willing to accommodate this “have your cake and eat it” activity – as long as government sponsored insurance is there to underwrite the charade.

This charade should be closed down. Depositors should have to come clean: they should be given the choice of 100% safe accounts, and in contrast, accounts where their money is invested in businesses, mortgages, etc.

Money in safe accounts should not be invested: it should not even be invested in government bonds since the value of the latter can rise and fall. Perhaps the money should be deposited at the central bank, where it will earn little or no interest.

But depositors WOULD HAVE instant access to their money, since the money has not been locked away in some business or mortgage. Plus there is a good argument for offering government sponsored insurance for this money. There is possibly no STRICTLY ECONOMIC argument for this insurance, but there is certainly what might be called a “human rights” argument: i.e. everyone should have the right to a 100% safe bank account.

In contrast, there is no reason for government to organise insurance for money in “investment” accounts. Nor is there any reason to allow depositors instant access to their money: the money has been locked away in businesses or mortgages. That’s where the money is. Investors in General Motors cannot all withdraw their investment at once, so why should those who lend to banks who in turn lend to General Motors have instant access to their money?

Bank runs.

One big advantage of the above “two account” system is that it would greatly slow down bank runs. As regards 100% safe accounts, there would be no reason for depositors to take part in a run because their money is safe. But if they wanted to take part in a run, they’d get their money.

As to those with investment accounts, they just can’t have instant access their money. So they COULD take part in a run, but the run would take place more slowly than under current arrangements.

The non-existent deflationary effect.

Ralph Musgrave - Ralphanomics has contributed 136 articles. Read More: http://www.thejeffersontree.com/the-big-fdic-anomaly/

2 Comments

2 Comments


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[-] 1 points by freewriterguy (882) 2 years ago

well money deposited in banks are not directly insured as invested money into other peoples business ventures. i beleive what gives banks the ability to invest in business ventures is the fractional banking, where if 100k is deposited they can legally loan out 900k against it, but only 100k would be fdic insured, not 900k. Right?

[-] 1 points by jomojo (562) 2 years ago

The gaming of banking laws designed to protect small accounts, has been abused to protect casino bankers. The FDIC insurance, was to keep us from cashing out, during a bank run. The small depositors do not risk 300% of their assets, and are more important than they know to bank liquidity.