Privatize Deposit Insurance

The US Experience

Federal Deposit Insurance (FDIC) was one of the many big government measures of the early 1930s introduced by President Franklin D. Roosevelt in response to the bank failures in the wake of the Great Depression. The insurance is paid for by banks. According to Wikipedia, the US was the first country to implement a government run deposit insurance.

May I add, the country foremost associated with individual liberty, responsibility, and self reliance became the worst possible offender. The Statue of Liberty is still weeping.

Ever since FDIC was maintained and expanded. It is one of the many examples of federal power grab.

The Great Recession And Silent Bank Runs

I wrote a separate blog about this subject. I would argue without the generous FDIC, the financial crisis would have been less pronounced. Financial institutions tend to have more reserves absent such insurance. As a result of the Great Recession, the FDIC was given even more powers to intervene in the banking system.

Why Privatize?

Has government run deposit insurance not worked reasonably well in many counties of the world? Superficially, this is true.

However, government run deposit insurances are a form of Socialism. As Ludwig von Mises would say, the government run deposit insurance is prone to a spiral of increasing government intervention in private businesses. Historical evidence tends to confirm von Mises’s observation.

If there is a real need for deposit insurance, free markets would discover this anyway and seek solutions for the prospect of a possible bank failure. Why would free markets not offer such insurance, if there was any demand for it? In the absence of government run deposit insurance, bank customers would rather not put all their eggs in one basket, meaning they would more carefully spread their deposits across banks etc. and they would also more closely monitor their banks.

Today, with the easy availability of electronic funds and transfers, any bank customers can instantly transfer their deposits from any bank to any other bank worldwide, thus bank customers can take immediate action. Proponents of paternalism will surely argue that bank customers are too myopic or irrational to guard themselves.

Advantages Of Private Insurance

If banks pay for private deposit insurance it could be a competitive advantage. Private insurers would exert some pressure on banks to behave more responsibly. Insurance premiums would be a price signal indicating which banks are more risky and so on. It would be up to deposit holders to decide how much insurance they really need instead of one size fits all government deposit insurance.