I don't have to make the case. The status quo, developed over literal centuries of bank regulation, is generally to let depositors take a haircut. Because depositors having skin in the game is an important check on the risk levels at for-profit banks.
If people want to argue for infinite free deposit insurance for the rich, they're the ones who need to make the case that the increase in moral hazard and increased taxpayer burden is worth if for the public to take on.
But if there's some sort of support-the-businesses goal in here, I think it's better to just argue for a government corporation that's a non-profit deposit-only bank that takes no risk and pays no interest. Then, if you're correct that there are a large number of safety-seeking people with millions in cash who just want to focus on entrepreneuring, they'll have an option that has zero failure risk.
I expect if we created that, though, it would see very little use, because people are happy to take risks when they think they can get away with them. And quite a large number of people are apparently also willing to ask Uncle Sugar for a bailout when their gamble doesn't come up like they wanted.
> The status quo, developed over literal centuries of bank regulation, is generally to let depositors take a haircut
Only if you go by common wisdom pre-Great Depression, which helped cause the Great Depression. But the opposite lessons have been learned since. That's why the FDIC was created in the aftermath of the Great Depression. It's the basis of the Nobel Prize winning Diamond–Dybvig model which inspired the TARP in the GFC which actually returned a profit to taxpayers. If depositors have too much skin in the game, it creates the potential for a bank run, which benefits nobody and harms everybody.
> increase in moral hazard
Which is where regulations need to come in. That's the bargain. You get FDIC guarantees, and I get to regulate you. It's a better bargain than the old wild west of bank runs and financial collapse.
Anyway, depositors as agents aren't good mediators of a bank's risk. There are too many informational asymmetries for that to be a good mechanism to rely on.
I am not saying we should rely on it. I'm saying rich depositors having some skin in the game is a valuable component of a for-profit banking system. And it's hardly ancient thinking to suggest that financially sophisticated players should use a little of that sophistication when picking a bank. You could read Bair's "Bull by the Horns" for somebody who understood the 2008 crisis very well but had big concerns about the moral hazard that bailouts create.
If the rich really want a risk-free bank, I'm all for the government creating one. No loans, no interest, no profit, just deposits and withdrawals, unlimited guarantee.
But I expect that won't happen, because the rich don't actually want pure safety. They want to privatize the gains from risk and socialize the losses. And the more they come to think that's achievable by, say, hysterically encouraging bank panics, the more we'll suffer for it.
The moral hazard that the GFC bailouts created mostly pertained to bailing out shareholders and executives, not bailing out depositors. Let's be careful to make this distinction.
There is some marginal added moral hazard from guaranteeing deposits, you are correct, but I believe this should be counteracted by regulation, executive compensation clawback laws, etc. We have learned from the Great Depression, the GFC, Diamond-Dybvig, that the systemic risk of bank runs isn't worth the marginal reduction in moral hazard from not guaranteeing deposits. If you don't have trust and confidence among people (and businesses, not just the "rich" in the abstract) that their money is safe in a bank, then all you need is social media panic and you can cause a financial crisis for no reason. This is a risk especially now in the age of social media.
The $250k amount was implemented because they thought it was enough to stop these kind of bank runs. After what we saw with SVB, we need to update our model of reality. $250k was proven to not be enough.
Taxpayers won't pay for anything. If there are any losses, it'll be socialized amongst other banks. I don't see the issue. The alternative of risking more bank runs seems a lot worse.
Approximately any business with this much cash has a rich person running things. So yes, let's stick with "the rich" as the group of interest.
Socializing the losses among other banks is not getting paid directly by taxpayers, but the money comes from somewhere. Making good banks cover bad banks just creates new moral hazard.
The basic notion of our current system is that for-profit banking is a generally good business and that we just need to limit systemic risk. Your thesis is apparently that for-profit banking is essentially unsound. That's not an argument for a bit of fiddling with the regulations. It's an argument to end for-profit banking.
Which, personally, I'm all for. Many people are claiming they just want their bank to be a utility, a magic mattress to stuff their money in. In which case, let's make banking deeply boring, and put the hundreds of billions per year in profits to better societal use.
> Making good banks cover bad banks just creates new moral hazard.
This misses something crucial. Socializing the losses among banks reduces the incentive for the industry to pursue lobbying efforts that are misaligned with the general public. It also directly refutes the wrong narrative that has been floating around that it's going to be poor little taxpayers bailing out the fatcats yet again.
> Your thesis is apparently that for-profit banking is essentially unsound. That's not an argument for a bit of fiddling with the regulations. It's an argument to end for-profit banking.
I disagree. Many industries need active government involvement to align them with the public good. Absent regulations and oversight, factories would be dumping waste in the street and rivers. Are factories "essentially unsound"? Just because we need government involvement to remove the "essential unsoundness" of factories, doesn't mean that I think it would be good for all factories to be shut down.
If you eliminate the FDIC, guess what, banks will still be profitable, just like they were in the 19th century, and just like factories would be profitable if we eliminated all environmental oversight. Only we'll get a terrible financial crisis every so often.
> So yes, let's stick with "the rich" as the group of interest.
Let's not. If we are talking about systemic risk and economic contagion, using the word "businesses" is better because it makes it clear what would happen if we follow your prescription. If we use the word "rich" (which many would assume to mean "rich individuals" since that's the context this word is often used in), we're playing rhetorical hide the ball with the consequences.
> Socializing the losses among banks reduces the incentive for the industry to pursue lobbying efforts that are misaligned with the general public.
That's not true. Individual banks will push for lower regulations because their execs want a chance at fat profits that they get to take a slice of. Just like SVB did.
>It also directly refutes the wrong narrative that has been floating around that it's going to be poor little taxpayers bailing out the fatcats yet again.
It does not.
Here the taxpayers are not directly bailing out anybody. But they are backstopping it, and have increased the risk they will have to to directly pay in the future. And they are indirectly doing so, because anybody with a bank account, which is basically everybody, is going to be paying more for loans or getting less in interest. If you'd like to hear an actual banker explain that, last night's Marketplace had a segment talking with a regional bank CEO where she talks about why she's not happy with having to pay for somebody else's losses.
If people want to argue for infinite free deposit insurance for the rich, they're the ones who need to make the case that the increase in moral hazard and increased taxpayer burden is worth if for the public to take on.
But if there's some sort of support-the-businesses goal in here, I think it's better to just argue for a government corporation that's a non-profit deposit-only bank that takes no risk and pays no interest. Then, if you're correct that there are a large number of safety-seeking people with millions in cash who just want to focus on entrepreneuring, they'll have an option that has zero failure risk.
I expect if we created that, though, it would see very little use, because people are happy to take risks when they think they can get away with them. And quite a large number of people are apparently also willing to ask Uncle Sugar for a bailout when their gamble doesn't come up like they wanted.