The problem with deposit insurance

I’ve always thought that the 2008 financial crisis was basically tight money plus moral hazard, with the latter factor playing the biggest role.  I’m no expert on banking, but I’d guess that these three factors increased moral hazard (in order of importance):

1.  FDIC (deposit insurance)

2.  The GSEs (Fannie and Freddie)

3.  Too Big to Fail

I’ve already spent a lot of time discussing the role of tight money, but I also believe that deposit insurance is a massively underrated problem.

A new NBER working paper by Charles W. Calomiris and Matthew S. Jaremski relied on rich set of panel data for banks in states with and without deposit insurance. They found that states that created deposit insurance during the early 1900s tended to see faster than normal rates of deposit growth, and then higher than average levels of bank failures after WWI:

First, we are able to show that deposit insurance increased insured banks’ deposits and loans, and lowered their cash to asset ratios and capital to asset ratios. Second, we find that deposits flowed from relatively stable banks to risky banks. Deposit insurance increased risk by removing the market discipline in the deposit market that had been constraining erstwhile uninsured banks.  .  .  .  Deposit insurance encouraged banks to increase their insolvency risk because doing so did not prevent them from competing aggressively for the deposits of uninsured banks operating nearby. In fact, increasing risk was necessary to fund the higher interest payments that presumably attracted depositors.

The extent to which insured banks attracted deposits away from uninsured banks, and used those funds to expand their lending, depended on the risk opportunities available in their local economic environment. Variation across in counties in the extent to which they produced commodities that appreciated during the World War I agricultural price boom explains between one-third and two-thirds of the observed effects of deposit insurance on deposit growth, loan growth and increased risk taking by insured banks. The fact that a large part of the moral hazard associated with deposit insurance is dependent on the time-varying and location-specific opportunities for risk taking has important implications for empirical analysis of the consequences of deposit insurance in other contexts. The potential costs of deposit insurance may appear low in environments that are relatively lacking in risk-taking opportunities, but those costs can appear much higher when greater risk taking opportunities present themselves.  (Emphasis added)

That’s final sentence is a warning not to become complacent.  Just because deposit insurance didn’t cause many problems in the decades after WWII (when borrowers were bailed out by higher than expected inflation), doesn’t mean that it could not do so in the 1980s or 2000s.

They also show that voluntary insurance systems were less destabilizing than mandatory insurance systems, presumably because they created less moral hazard.

Their paper ends with a warning:

The history of deposit insurance in the United States and internationally has been a process of increasing systemic risk in the name of reducing systemic risk. 


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35 Responses to “The problem with deposit insurance”

  1. Gravatar of Hey You Hey You
    29. May 2017 at 08:29

    Makes sense, but I wonder if a world without mandatory deposit insurance is even politically possible in a democracy. Seems that those who forego voluntary insurance are most likely to be poor. It wouldn’t look good when the wealthy get “bailed out” by insurance when the s hits the fan, while the poor lose everything. I don’t think the public would stand for it.

  2. Gravatar of BC BC
    29. May 2017 at 09:53

    Does the moral hazard in FDIC stem from government not properly setting insurance rates, e.g., charging banks uniform premiums? Suppose banks (or depositors) were required to purchase deposit insurance from private, competitive insurers that could charge banks different rates (or charge depositors different rates based on which banks they deposited their money into). Then, wouldn’t banks be incented away from risky practices because such practices would increase their premiums? As long as deposit insurance rates couldn’t be hiked too quickly, say rates could be reset no more than once per year, then couldn’t we still avoid short-term panics and bank runs while ensuring that insurance rates reflected banks’ long-term risk?

    Also, if depositors, rather than banks, bought the insurance, then any single bank’s deposits would be insured by multiple insurers. That might mitigate the probability that a given bank’s failure, even a large one, causes all of its depositors’ insurers to fail, thus mitigating the probability of a bank run caused by depositors’ loss of confidence in insurers.

  3. Gravatar of d d
    29. May 2017 at 10:26

    well there was the down side, as runs on banks did get started for reason at all, and those could actually kill the bank (and did). did the risky bets by banks get increased by the insurance? no so sure, as there were man examples (of just in the 30s) like National bank. its not like banks were any less risky in the past. with or without deposit insurance. and considering what happened in 2008 where a major insurance company had to be rescued, just how much faith would depositors have in insurance companies (even having multiple carriers would help). course you also might be in state where the insurance board really does nothing (mainly cause the state doesnt fund it to regulate them)

  4. Gravatar of BC BC
    29. May 2017 at 10:53

    One question: if FDIC is govt insurance on only certain types of bank liabilities (deposits) up to a $250k limit and too-big-to-fail is govt insurance on *all* (large) bank liabilities with no limits, then why would too-big-to-fail contribute less to moral hazard than FDIC? Isn’t too-big-to-fail FDIC on steroids, at least for the largest banks?

  5. Gravatar of ssumner ssumner
    29. May 2017 at 11:43

    Hey you, You said:

    “Makes sense, but I wonder if a world without mandatory deposit insurance is even politically possible in a democracy.”

    Was Canada a democracy in 1965? Was Australia a democracy in 2005?

    One possible compromise is to maintain deposit insurance, but only for deposits backed up by Treasury securities. That would remove the moral hazard problem.

    And as for the poor, they are much more likely to be protected by private deposit insurance, as the insurance would probably only cover accounts up to a certain level.

    BC, Yes, a private deposit insurance system would be much better. But even that may fall prey to the “too big to fail” problem.

    d, You said:

    “its not like banks were any less risky in the past.”

    What?!?!? Banks were dramatically less risky before deposit insurance.

    And which bank runs got started for no reason at all?

    BC, Smaller banks find it much easier to take advantage of FDIC, as they are able to take much riskier bets. Big banks tend to be much more diversified.

    In practice, taxpayer funds have been transferred to small bank depositors, not big bank depositors.

  6. Gravatar of bill bill
    29. May 2017 at 12:20

    Most Americans will need some sort of safe account with ready access. The average person has neither the time nor inclination nor ability to evaluate bank balance sheets. My memory in 2008 and 2009 was being afraid for all our business deposits (a few million bucks for various real estate partnerships). Even with the $100,000, then $250,000, limit, we had to open multiple accounts over various banks to keep the money safe. Currency is not a realistic option in this case (I estimate the amounts would have been about 20 cubic feet and 100 pounds of $100 bills).

    Personally, I’d like to see the Post Office act a banking branches for accounts that pay 0% interest and allow the Treasury to be the actual debtor. With the US Treasury being the borrower, the accounts would be risk free with the benefits flowing to the US taxpayer as the Treasury would be borrowing less via bills, notes and bonds.

  7. Gravatar of Jerry Brown Jerry Brown
    29. May 2017 at 12:42

    I agree with Bill @ 12:20. There is a public benefit in allowing citizens to simply store cash assets in a completely safe manner. Something like a Post Office bank would be good for everyone except existing banks.

  8. Gravatar of ssumner ssumner
    29. May 2017 at 13:05

    Bill and Jerry, Keep in mind that the purpose of FDIC is not to protect depositors, it’s to funnel money to banks taking socially excessive risk. This is all about the lobbying power of small banks. If the public wants a safe place to put their money, then the market will provide it, with or without FDIC.

    For instance, I have a checking account at Fidelity that invests in Treasuries.

  9. Gravatar of bill bill
    29. May 2017 at 14:38

    I concur 100% about the lobbying power of banks, and that they take socially excessive risk.

  10. Gravatar of Major.Freedom Major.Freedom
    29. May 2017 at 14:53

    Bill and Jerry, Keep in mind that the purpose of FDIC is not to protect depositors, it’s to funnel money to banks taking socially excessive risk. This is all about the lobbying power of small banks. If the public wants a safe place to put their money, then the market will provide it, with or without FDIC.

    For instance, I have a checking account at Fidelity that invests in Treasuries.

    Sumner, keep in mind that the purpose of “guaranteed” Treasuries is not to protect depositors, it’s to funnel inflation to the Treasury that takes socially excessive risk in borrowing. This is all about the political power of the state. If the public wants a safe place to put their money, then the market will provide it, with or without the Treasury.

    For instance, I have a safety deposit box that contains gold bars.

  11. Gravatar of Major.Freedom Major.Freedom
    29. May 2017 at 14:58

    I’ve always thought that the 2008 financial crisis was basically tight money plus moral hazard, with the latter factor playing the biggest role. I’m no expert on banking, but I’d guess that these three factors increased moral hazard (in order of importance):

    1. FDIC (deposit insurance)

    2. The GSEs (Fannie and Freddie)

    3. Too Big to Fail

    You completely ignored the moral hazard inherent in the central banking system itself. Why would you do that? The whole reason why the Fed was created in the first place was to use anti-market, state power, to bail out *excessively over-extended fractional reserve banks*.

    With a “lender of last resort” which of course almost immediately turned into a perpetual every day counterfeiter and bailer outer, that creates moral hazard for banks to lend more than what market forces would otherwise permit.

    You don’t want market forces running the monetary system, so to pretend that you are pro-market, by saying “If the public wants a safe place to put their money, then the market will provide it”, is a total self-contradiction because you reject the market providing the public with a safe *money*.

    Sometimes it’s like shooting fish in a barrel on this blog, it is so easy

  12. Gravatar of Benjamin Cole Benjamin Cole
    29. May 2017 at 16:50

    Call me a softy, but I have a problem with Mr. and Mrs. Smith losing $7000 because the banks (with powerful lobbyists and a semi-captive Federal Reserve Board and regulatory system) fail.

    I prefer a system where large institutional investors are at risk if banks fail, such as a requirement that banks issue a thick layer of convertible bonds. Large sophisticated convertible bondholders can form committees and much better monitor bank behavior than run-of-the-mill depositors.

    Bill’s suggestion that the post office operate a simple banking system for ordinary depositors also has its merits, and probably some demerits.

  13. Gravatar of Cloud Cloud
    29. May 2017 at 18:53

    Sorry for the shameless plug, but here is an interview with Prof. Calomiris earlier, which I think gives a bigger picture of the problem of deposit insurance, which you might be interested:

    “… One of the things that are really striking to me is that there is the US in the 2000s is really just one example of a general pattern. In a research which I am doing right now with Sophia Chen at the IMF, we found that the same pattern which Haber and I described for the US is actually a very common pattern all over the world in the last 40 years, and increasingly so.

    The pattern is that the governments, on the one hand, protects banks in the forms of deposit insurance or government bailouts when a crisis happens, or give banks certain opportunities. In exchange, the government asks things from the banks. In the last 40 years, especially across democracies, the thing that the government was asking the bank to do is to get heavily involved in residential real estates funding or to subsidize mortgages.

    One of the thing that has been happening all over the world is that people in democracies are hoping that their governments can come up with programs that would make housing more affordable. The easiest way for governments to do that is to get banks to subsidize mortgage risk. The way the governments get the banks to subsidize mortgage risk is by protecting the banks. They give the banks something in exchange and then tell the banks “OK. Now we have given you the protections. We have given you these new rights. They are very valuable to you. The cost is that you have to do something that we, the government, found politically expedite.” What Sophia Chen and I are finding now is that the story about the US in our book “Fragile by Design” may actually be a broadly-based story….” (http://en.econreporter.com/en/2017/03/game-bank-bargains-created-financial-crisis/)

    As far as I know, that research paper Calomiris mentioned is not out yet. But I am eager to read that one.

  14. Gravatar of Kevin Erdmann Kevin Erdmann
    29. May 2017 at 19:14

    I would love to see you spell out how moral hazard is different with regard to the GSEs compared to the FHA/Ginnie Mae conduit, and what effect moral hazard has on the business cycle regarding both institutions. This seems like a deceptively complicated issue and I think it would be educational for us readers to see your thought process.

  15. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. May 2017 at 04:36

    I haven’t read the Jaremski/Calomiris paper, but Eugene White has trod this ground many times before, say;

    http://econweb.rutgers.edu/ewhite/

    ‘Although long obscured by the Great Depression, the nationwide “bubble” that appeared in the early 1920s and burst in 1926 was similar in magnitude to the recent real estate boom and bust. Fundamentals, including a post-war construction catch-up, low interest rates and a “Greenspan put,” helped to ignite
    the boom in the twenties, but alternative monetary policies would have only dampened not eliminated it. Both booms were accompanied by securitization, a reduction in lending standards, and weaker supervision.

    ‘Yet, the bust in the twenties, which drove up foreclosures, did not induce a collapse of the banking system. The elements absent in the 1920s were federal deposit insurance, the “Too Big To Fail” doctrine, and federal policies to increase mortgages to higher risk homeowners. This comparison suggests that these factors combined to induce increased risk-taking that was crucial to the eruption of the recent and worst financial crisis since the Great Depression.’

  16. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. May 2017 at 04:46

    Of course, Scott is no stranger to the work of Eugene White;

    https://www.themoneyillusion.com/?p=12671

  17. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. May 2017 at 05:00

    Also of interest is this paper from Atlanta, written well before 2008 (thus, not hindsight);

    https://www.frbatlanta.org/-/media/documents/filelegacydocs/ACF1AD.pdf

  18. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    30. May 2017 at 05:05

    Oops, forgot this from the Atlanta Fed paper;

    ‘In the early 1980s Paul Horvitz recommended that mandatory bank capital requirements, which had been introduced in the U.S. only a few years previously, be modified to increase the amount held in the form of debt. Since then several proposals have recommended that banks increase reliance on subordinated debt (sub-debt) to serve the role of bank capital. Recent responses to those recommendations include the expressed interest by financial regulatory authorities in the U.S. [see Ferguson (1999) and Meyer (1999)], recommendations by academics and regulatory scholars [see U.S. Shadow Regulatory Committee (2000) and Benink and Schmidt (2000)], and the introduction of a bank regulatory framework in Argentina which has
    characteristics similar to those suggested in recent sub-debt proposals [see Calomiris and Powell (2000)]. More importantly, in the U.S. the 1999 U.S. Financial Services Modernization Act
    (Gramm-Leach-Bliley Act) requires large U.S. national banks to have outstanding debt that is highly rated by independent agencies to fund expansion of financial activities into areas not previously allowed. The Act also instructs the Board of Governors of the Federal Reserve System and the Secretary of the Treasury to conduct a joint study of the potential use of sub-debt to protect
    the financial system and deposit insurance funds from “too big to fail” institutions.’

  19. Gravatar of Philo Philo
    30. May 2017 at 08:38

    “If the public wants a safe place to put their money, then the market will provide it, with or without FDIC. For instance, I have a checking account at Fidelity that invests in Treasuries.” Indeed, the Federal deposit guarantee is a quite superfluous source of mischief; but the average person does not understand that, and thinks of the guarantee as a wonderful free benefit that would be provided by any *caring* government. I do not know how hard it would be to change that view, but probably no one is going seriously to try.

  20. Gravatar of flow5 flow5
    30. May 2017 at 09:34

    Economists: “couldn’t find tits in a strip club”.

    The commercial banks have been backstopped by numerous regulatory enhancements, including the “Shiftability theory” of assets and liabilities, or the “Banking Act of 1935”, and changes since Roosevelt’s “Banking Holiday” and “Emergency Banking Act” in 3/9/1933 (“de facto 100 percent deposit insurance in the reopened banks”). And they’ve had “grist for the mill” since WWII (no more of Nobel Laureate Paul Krugman’s nonsense of “pushing on a string” @ zero bound).

    The “Golden Era” in U.S. economics, i.e., the increase in overall incomes (not the “Great Moderation”), was due to putting savings back to work outside of the commercial banking system (the only channel whereby savings can ever be “activated” by their owners/saver-holders). Savings are only matched with investments, directly or indirectly, through the NBFIs. Never are the DFIs intermediaries in the savings-investment paradigm. Keynes’ “Savings-Investment Identity” is fallacious (“General Equilibrium” model not).

    It isn’t FDIC insurance coverage that keeps the “go-for-broke” looters from “slicing, dicing, and pureeing” and then laundering/fencing, e.g., “NAZI gold”, or in the words of William K. Black “The Best Way to Rob a Bank is to Own One”.

    No, unlike the S&L crisis (where over 1,000 bankers were convicted by the Justice Department), the Great Financial crisis produced few indictments and no convictions (a change in group think). And unlike the S&L crisis, there was no FSLIC guaranteeing of deposits for the non-banks (where the whole GR problem existed). The non-banks were kicked to the curb (via the lobbying efforts of public enemy #1, the ABA), by the DIDMCA of March 31st 1980.

    Like I already said:
    “Qui Vive. You have to be able to observe ->to track. What’s happened is obvious. FDIC insurance was increased and the proportion of time (savings) deposit, commercial bank deposit classification ratios, have increased. Every time the ratio increases, gDp falls (and economic recoveries are stalled).
    Historical insurance limits
    • 1934 – $2,500
    • 1935 – $5,000
    • 1950 – $10,000
    • 1966 – $15,000
    • 1969 – $20,000
    • 1974 – $40,000
    • 1980 – $100,000
    • 2008 – $250,000
    Thus, “in a twinkling…” R-gDp is swallowed up.”
    20 Apr 2017, 03:41 PM

    No, the cost of funds in the “Bank Lending Channel” is zero (as all savings originate within the commercial banking system, i.e., savings deposits are core deposits which have been redistributed), regardless of whether funds are exogenous or endogenous. And Ellen H. Brown’s public-banking, Web-of-Debt: i.e., state banking is a good idea (but not the Bowery Boys’ MMT idea (Warren Mosler, L. Randall Wray, Bill Mitchell, Scott Fullwiler, etc. – as they don’t know a debit from a credit either).

    The $23.6 billion lawsuit against R.J. Reynolds and the Sandy Hook lawsuit against the Remington Arms Co. (Bushmaster AR-15 — the type of semiautomatic rifle used in the attack), should be used as archetype lawsuits against the ABA.

  21. Gravatar of d d
    30. May 2017 at 09:42

    history of bank runs
    https://en.wikipedia.org/wiki/Bank_run

    going back to the 16th century

  22. Gravatar of Randomize Randomize
    30. May 2017 at 10:20

    Dr. Sumner,

    “One possible compromise is to maintain deposit insurance, but only for deposits backed up by Treasury securities. That would remove the moral hazard problem.”

    This is a great idea. It could be structured something like:

    1. The first $X dollars per protected checking & savings accounts are to be held in treasuries.

    2. All dollars above that amount or in non-protected accounts (like money markets) would be unprotected.

    Cash/asset ratios could be eliminated and there would be no more incentive for the wealthy to spread their dollars around multiple accounts when, if they desired security, they could just buy the treasuries directly.

    Peoples’ savings would be held rather than insured by the federal government so there would be no moral hazard for the banks. TBTF could (hopefully) be a thing of the past as the treasury would not be forced to choose between propping up a failing bank or bailing out all its FDIC accounts if they let it go bankrupt.

  23. Gravatar of Major.Freedom Major.Freedom
    30. May 2017 at 16:43

    And what “backs” the Treasuries when taxation is insufficient?

    That’s right, inflation, which introduces moral hazard into the economic system.

  24. Gravatar of Major.Freedom Major.Freedom
    30. May 2017 at 16:52

    In other news:

    GAME OVER FOLKS

    Step by step proof that DNC IT worker Warren Flood manufactured Russian fingerprints on DNC leaks.

    For anyone who has a modicum of computer programming knowledge and experience, you can know the final nail has been put into the coffin.

    Spread the word.

    MSM exposed as frauds.

    Democrats exposed as frauds.

    This blog exposed as an unintentional but not really unintentional fraud:

    http://investmentwatchblog.com/proof-that-dnc-manufactured-the-russian-controversy-in-june-2016/

  25. Gravatar of Major.Freedom Major.Freedom
    30. May 2017 at 17:38

    Inflation is contracting:

    https://www.federalreserve.gov/releases/h8/current/

    The all-important C&I loan growth contraction has continued, over the past two months another 50% has been cut, and what in early March was a 4.0% annual growth is now 2.0%.

    https://www.federalreserve.gov/releases/h6/current/default.htm

    M2 rate is declining (M2 is a measure of the fundamental source of credit expansion).

    Can’t tell me I have been a chicken little or broken clock on this, haven’t commented on it in a long time. If I am right, another feather in the cap for me, and Sumner will likely be too late just as he was too late in 2008. 2006-2007 I was already writing about likely recession as it was during that time that inflation of money and credit began its decline. Decline in spending occurred later on.

    Another guesstimate/prediction:

    When the crash happens, many people will be pointing their fingers at Trump, but just as 2008-2009 wasn’t Obama’s fault, this one won’t be Trump’s fault.

    I expect Sumner to contradict his entire monetary worldview and blame Trump in some way.

  26. Gravatar of Benjamin Cole Benjamin Cole
    31. May 2017 at 01:46

    OT from Nikkei Asian Review

    “The active job openings-to-applicants ratio in Japan for April was 1.48 (seasonally-adjusted), hitting its highest level since February 1974, according to data released by the Ministry of Health, Labor and Welfare on Tuesday. March’s figure was 1.45.”

    —30—

    Yet Japanese companies complain about soft sales, and an expensive yen, and much less about labor costs, which are not rising anyway.

    Japan runs big fiscal deficits and big QE.

    I guess there must some parts of Japan’s economy that conform to what orthodox Western macroeconomists insist is gospel…just not the big stuff.

  27. Gravatar of Bart klein Ikink Bart klein Ikink
    31. May 2017 at 07:52

    If you want to have low interest rates (or even negative interest rates) you may need deposit insurance. Otherwise there would be a risk premium on holding money in a deposit account. I think this is Economics 101. If you want to reduce risk in the financial system, you need to set a maximum interest rate because interest is a reward for risk. The best maximum interest rate (in theory) is zero, but market conditions should allow for that to happen. You can’t force interest rates down. You may want to read the following paper which deals with all these thorny issues:

    http://www.naturalmoney.org/feasibility.html

  28. Gravatar of Randomize Randomize
    31. May 2017 at 08:00

    Major Freedom,

    You said “And what “backs” the Treasuries when taxation is insufficient? That’s right, inflation, which introduces moral hazard into the economic system.”

    On the day that taxation can’t pay the debt service, your dollars aren’t going to be worth much anyway. Whether it’s by default or inflation, it’s a fact of fiat currency.

  29. Gravatar of jimP jimP
    31. May 2017 at 08:23

    Scott –

    https://www.bloomberg.com/news/articles/2017-05-31/a-new-way-to-control-inflation-from-san-francisco-fed-president

    You may already be aware of this – but if not it is real interesting.

    Jim

  30. Gravatar of Major.Freedom Major.Freedom
    31. May 2017 at 18:36

    Randomize, the scenario I have in mind is the one where taxation WOULD have been insufficient had it not been for inflation, in which case there isn’t a direct default, but a “why are my dollars worth so much less now” default.

    At any rate, even taxation itself introduces moral hazard. Milton Friedman famously wrote about the differences in quality of spending depending on whose money a person is spending.

  31. Gravatar of Ken P Ken P
    31. May 2017 at 18:48

    On the FDIC, I think at the very least it was a bad idea to cover money that wasn’t insured (over the limit).

    “Just because deposit insurance didn’t cause many problems in the decades after WWII (when borrowers were bailed out by higher than expected inflation), doesn’t mean that it could not do so in the 1980s or 2000s.”
    I always assumed that the sting of the depression kept the appetite to borrow down.

    The age old root cause is pretty simple: Borrowing short term (from depositors) and lending long term (to mortgage holders, etc.) is not a problem… until it is.

    John Cochrane makes a lot of sense to me on this topic-

    http://johnhcochrane.blogspot.com/2016/05/equity-financed-banking.html

  32. Gravatar of Njnnja Njnnja
    1. June 2017 at 03:47

    Saying that systematic risk increases with deposit insurance, but ignoring the systematic risk reduction benefits of deposit insurance to depositors, is unfairly constraining the analysis so that deposit insurance looks bad.

    And the argument that private deposit insurance solves the problem is laughable. That simply changes the problem from requiring individuals to evaluate the risk of their bank, to requiring individuals to evaluate the wrong way risk of their deposit insurance company. And even if you assume that people could somehow do that, the actual risk distribution is just getting shifted to the tails, which generally has a very poor history of working well.

  33. Gravatar of Brian W. Brian W.
    1. June 2017 at 04:51

    May 21, 2013 Why the whole banking system is a scam – Godfrey Bloom MEP

    • European Parliament, Strasbourg, 21 May 2013

    • Speaker: Godfrey Bloom MEP, UKIP (Yorkshire & Lincolnshire)

    https://youtu.be/hYzX3YZoMrs

  34. Gravatar of ssumner ssumner
    1. June 2017 at 06:13

    Ben, Again, if people want safe assets, the market will provide them.

    Thanks Cloud, That sounds quite interesting.

    Kevin, I’m not an expert on that topic, but AFAIK, both sets of institutions create moral hazard.

    I doubt they have much impact on the business cycle, which I see as being driven by Fed policy.

    Patrick, Thanks, I do now recall that White article.

    Philo, Good point.

    Randomize, Yes, that’s one way to reform FDIC.

    Ken, Cochrane has lots of good ideas on banking.

    Njnnja, I agree that private deposit insurance has sometimes failed. That’s not the sort of solution I am referring to. I am talking about deposits that are invested in safe assets, such as Treasuries.

  35. Gravatar of ssumner ssumner
    1. June 2017 at 06:15

    Thanks JimP, That’s price level targeting. I favor the same concept, but for NGDP.

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