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.
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.