Big Think part 3: John Allison

I am pretty sure the liberal bloggers won’t like John Allison’s interview.  Next to Allison, I’m practically a socialist.  I’ll start off with what I liked, and then discuss what I didn’t like.

Allison was clearly out to pin the blame for the current crisis on the government:

The government owns the monetary system in the US. In 1913, the monetary system was nationalized. If you’re having trouble in the monetary system, by definition, it’s a problem of government policy.

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I think getting rid of deposit insurance would be wonderful. In fact, 10, 15 years ago, the financial services roundtable actually went through an exercise looking at a cross guarantee program among the large financial institutions. I believe that if we put that program in place, similar to what happens with the insurance industry, what the brokerage industry has, we would never have had, even with the Federal Reserve, even with Freddie Mac and Fannie Mae, we certainly wouldn’t have had a misallocation of the magnitude we had. Deposit insurance played a huge role in the big failures, in the Golden West, in the Countrywides, in Washington Mutual, etc., etc. And the reason for that is the FDIC, this is my experience of that career, in good times, they don’t really impose any kind of discipline, and then in bad times they overreact. Right now, the FDIC is tightening like crazy, making it much harder to make loans.

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If we had a co-insurance pool, where the banks really were taking the risk, we would be far more disciplined to make sure the companies that were in our co-insurance pool had enough capital and had the proper kind of risk standards. So I’d vote to get rid of FDIC insurance, not that we don’t need it, we need some kind of insurance, but I think it ought to be an industry-based, industry-controlled pool where we would have a huge motivation to discipline all the participants in the pool.

I am increasingly of the view that moral hazard is the central problem with our financial system.  This is partly because I was already leaning that way, and partly because I found Charles Calomiris’s recent interview on EconTalk to be quite persuasive.  Most people don’t think of it this way, but in 1934 we essentially nationalized the liabilities of the entire banking system.  We teach our students that when you deposit $5000 in your bank account you are actually loaning $5000 to that bank.  Not true.  You are loaning $5000 to the Treasury, and they are re-loaning the funds to the bank.  And the Treasury absorbs the losses if the bank defaults. 
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