Wait - why is efficiency important? I didn't offer to pay for someone else's idea of efficiency. Why is the state allowing the banking system to rely on it during times of stress? You are just skirting around the issue I raised - why should banks get a special subsidy in times of stress, one that is denied to ball-bearing manufacturers or panel-beaters for example? Or even hedge funds - if they go bust, they don't get a bail out. The only reason I can think of is that the societal disruption is so large that it become politically untenable. But if that is likely to be the case (clearly true in the current system), then the system needs to be changed so that is not the case...NOT tweaked so other people fund it (under forcible coercion i.e. tax payments) to make it a bit less bad. Remember that the deposit insurance limits will not be 'hard' limits, but are subject to whimsical change up, down, or to infinity (e.g. Ireland) based on the backroom dealings and poll numbers of a small number of not-disinterested bankers and politicians, along with the baying lynch mob of the pissed-off public. The fact is, that system is so unstable in crises that all bets are off once one arises. No one will be interested in an academic paper when the shit is hitting the fan, they will be scared and interested in political survival, avoiding loss of life savings, business bankruptcy etc. For example, what if this EU proposal had existed worldwide in 2005? Are we to believe that in the heat of the 2008 panic, the rules would have been followed? Or would some numbers have been plucked out of someone's arse? The problem is not that the banking system periodically goes bust. The problem is people expecting it not to, when it clearly runs a predictable risk of doing so due to its highly leveraged nature, and its tendency to get exposure to speculative manias. What about a shift to a system that would avoid, or seriously reduce this risk, without requiring an arbitrary hidden taxpayer subsidy? For example: a government owned or backstopped bank (or class of banks) which invests purely in t-bills, and charges a fee for handling normal day to day banking operations. All other banks are pure caveat emptor for everyone including depositors. If a private scheme wants to insure them, go ahead - but no tax-funded insurance. Or, only offer deposit insurance to full-reserve banks. Clearly explain the difference. Then, anyone who chases yield by investing in the fractional reserve sector, has no grounds to moan when it blows up again.
I am not sure I completely agree with your point about why the insco's don't get bailed out. Don't think it's a matter of premia, really. I mean, sure, a loss of a life insurance policy feels like it's less of an immediate pain than losing a bank deposit, but it can still be a large loss. At any rate, the point I was making wasn't regarding that. It was more about why, regardless of bailouts, insco's exhibit a lower failure rate than financial institutions. And my response is that it's not because banks face more "black swans" (I hate this term, btw), but rather that they are more leveraged and thus more fragile. As to why banks are that way, it could be a whole bunch of things. For instance, it could be the result of the moral hazard that's been cultivated since Glass-Steagall has been repealed. And yes, my point about AIG was precisely along the lines of what you mention, regardless of deposits. The issue with AIG was that it effectively became much more of a financial institution than a traditional insurer in terms of the size of its presence in the mkt and its interconnectedness. Moreover, the other, particularly egregious thing with AIG was the incredible amount of leverage that they could get away with because of the AAA rating. But, obviously, as they discovered, a rating arb is a double-edged sword. P.S. I am inclined to disagree with you re Buffett's put trade. Given the various "fringe benefits", I think it's a fantastic trade for someone with very deep pockets, regardless of vol. When I think of it as a simple funding trade, it's pretty nifty. P. P. S. Yep, although, obviously, defining what is and what isn't a bubble is a thankless and very subjective task.
Isn't National Savings and Investments in the UK a full reserve bank? And a large t-bills fund that offered money transactions services would be able to be a bank also. Also, why wouldn't a full reserve bank be able to compete? That sounds like saying a t-bills fund can't compete with an equities fund or a 10 year bond fund. If people want absolute safety, a full reserve bank is the closest way to provide that. People invest in t-bill funds, so there is clearly a desire for super-safe places to put money. Also, if a fractional-reserve system is free-riding on society via implicit bailout, one can simply tax it at an appropriate level - which would be the level at which full-reserve banks CAN compete. Or if super-safe banking is perceived as a public good, then provide it from the state as a public service, like nationalised healthcare, defence, courts, public order via police etc. About Greece, I was simply using it as an example of a sovereign defaulting, to back up the main point that the banking system can only be bailed out by the state if the state is actually solvent.
There should be a deterrent to the younger generation imho. Those amateurs in politics know that it doesn't really matter if they make a complete balls-up. They get a big payday and a gold plated pension whatever the outcome. Letting crooks like Nixon off the hook just encourages the wrong sort of attitude. Incompetents like Bush jnr and that peanut farmer should have faced charges imho. If they want the job and make pledges etc to get elected they should deliver. The general public believed their spiel and voted them in. How were they to know better ? It just goes to show how useless democracy is. The public goes with the promise of big handouts etc. That's no way to run a country. More suited to a 3rd rate banana republic. The US should take a look at their competitors. It is no magic formula that they are catching up the 18th century system. Greed etc is NOT good regardless of Wall St. clever dicks.
Well, the best reason that I can think of is that it seems that this is the best thing to do, based on available empirical evidence. This is further theoretically corroborated if you perceive (as most societies do) banking as a public good. After all, the government doesn't allow water and sewage or police and fire services to lapse during times of distress, for example. Well, that's the thing, I kinda agree... But, like I mentioned above, bank runs have been studied pretty exhaustively. There's a LOT of thought that has gone into the various possible ways to address them. Among the people who have contributed to this discussion are people I have some respect for, such as Walter Bagehot and Milton Friedman. And the conclusion is that there doesn't seem to be a "good" way of doing this, other than some combination of deposit and liquidity insurance. Obviously, this is not to say that no other solution will ever be found and, clearly, the modern banking systems present new challenges. Yet again, I would refer you to an excellent "Banking on the State" paper by Haldane & Alessandri, which talks about these issues. Yes, agreed, but that's democracy for ya, innit? Yep, I would have no problem whatsoever with such an arrangement. Obviously, if you're a libertarian, relying on the government to manage yet another aspect of society would be anathema to you, but I think I can handle it. Again, I am not sure you could have two of these co-existing within a single marketplace.
NSI is HMT or, in their own words, an Executive Agency of the Chancellor of the Exchequer (just a way to issue gilts to retail investors). And, I assure you, HMT isn't a full-reserve entity by any description. Well, again, like I said before, there's a whole weight of historical precedent suggesting this. YES and YES! Yep, with you now. Yes, exactly the point I was trying to make.
n.b. FDIC insurance premiums ("assessments") are paid by the depository institutions themselves. Rates paid vary by formula according to risk category and other factors. For a well capitalized bank in the lowest risk category the current assessment rate is about 12-16 b.p. and can range much higher depending on risk category. The rates now are notably higher than the pre-2008 rates. There was a period prior to 2008 when some well capitalized banks in the lowest risk category paid a zero assessment rate! Obviously risk assessment is subject to error.
Why does the real price matter? Because whenever money is lent or invested, there are two sides to it. One is the investing side (return) and the other is the repayment side (the risk). In a perfect world the risk and return would fall on the same entity. That is, the person getting the return would have to account for the default ratio or go out of business. Insurance is closer to that model, in that insurance companies not covering their a**** (AKA risk will cease to exist). So a full reserve banking system would not fail longer term IMO. But through the magic of fractional reserve and derivatives, suddenly the rewards are taken by some individuals, and the risks are borne by others. (similar to politics [I like the definition by Robin Williams? - poly means many, tics are blood sucking insects and thus politics are many bloodsucking insects]). So there is ultimately no check on excessive risk-taking in our current banking system. That is the source of the systemic risk. If the true cost (aka risk value) can't be determined longer term, then failure is certain eventually in a world of high sigma events. That is the underwriting default risk of the loan.
Absolutely right. See the Chicago plan from 1933. Instead we got the FED plan - pump up the world, refinance everything until the problems go away. That battle lost was the beginning of the end IMO.