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Culture War Roundup for the week of March 13, 2023

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Commercial banks could offer higher interest rates on deposits, lend out their own capital, or issue bonds. If this didn't provide sufficient funding for whatever amount of lending the government wanted to see, the government itself could loan money to banks to re-lend.

Really though, the easiest patch to the system would just be for FDIC insurance to (officially) cover unlimited balances, or at least scale high enough that only the largest organizations had to worry about it. It makes no sense to require millions of entities (if you include individuals of moderate net worth) to constantly juggle funds to guard against a very small chance of a catastrophic outcome that most of them aren't well positioned to evaluate the probability of. That's exactly the sort of risk insurance is for.

If the concern is that this will create moral hazard because banks that take more risks will be able to pay higher interest rates and fully-insured depositors will have no reason to avoid them, the solution is just for regulators to limit depository institutions to only taking on risks the government is comfortable insuring against. Individuals should be allowed to take on risk to chase returns, but there's no compelling reason to offer this sort of exposure through deposit accounts in particular. Doing so runs contrary to the way most people mentally model them or wish to use them.

This results in a fully socialized lending system with the government making all the decisions. Which is likely where we're headed ANYWAY, I'll grant, but it seems like a bad end.

Why not require banks to buy insurance instead of government regulation? Get market pricing on risks instead of government fiat?

Insurance is a key if not the main function of the US government and many other governments. They can print money. There’s no insurance company big enough to insure. SVB. Maybe a consortium could also insure a little. But the insurance industry is not bigger than the banking industry. They couldn’t insure a bank issue that is systematic with multiple failing. You would move the stystematic risks for bank failure to banks failure causing insurance failure. AIG had a quant insurance unit that insured some financial risks and surprise surprise they sold it too cheap and blew up.

Why not require banks to buy insurance instead of government regulation?

Forcing banks to buy insurance still is government regulation.

Yes it is. I should’ve made it clear. One is command and control (ie you must do XYZ). Think old school environmental regulation. The second is more like a carbon tax. It regulates via pricing arguably allowing a more accurate risk.

Who are you going to buy global financial collapse insurance from? What counterparty can be relied on to pay out in such a scenario?

Who are you going to buy global financial collapse insurance from? What counterparty can be relied on to pay out in such a scenario?

You gotta have physical. Physical gold, yes. But also physical land you can reach, physical guns, and a physical body of followers you can trust.

In the case of global financial collapse the dollar is probably worthless so who cares?