Comment 28309

By Ryan (registered) - website | Posted January 26, 2009 at 13:59:19

A Smith wrote:

If government dislodged itself from this industry (abolish deposit insurance), there would still be leveraged financial institutions, however, there would also be more banks akin to a vault. These banks would charge people higher fees to safe keep their assets, but the end result would be an industry far less risk tolerant and much more conservative when it comes to allocating capital.

This is just so utterly, profoundly ahistorical that I don't even know how to respond to it in a way that might penetrate your incorrigible dogmatism - but I'll reply anyway just in case anyone else reading this should be tempted by your simple, compelling, and utterly false claims.

Prior to federal banking regulations coupled with deposit insurance, banks were highly and repeatedly susceptible to panics and runs, and people just trying to live their lives and use necessary banking services saw their savings disappear - over and over again.

The best thing that ever happened to banking was for it to fall under federal regulation. It ushered in the longest continuous period of stable, predictable economic growth in history.

The financial crisis we're going through right now has much to do with the fact that in the 1990s, parallel financial institutions started forming outside the margins of the regulations - and neoliberal governments, believing as you do that markets know best and governments can't do anything right, refused to heed the warnings and update the regulations to encompass these new financial instruments.

As a completely predictable (and preventable) result, the new institutions grossly misjudged their exposure to risk and overleveraged themselves, taking down real savings, real economic activity and legitimate financial institutions down with them when their arcane investment structures started unwinding.

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