> Blinder's right: totally removing caps on deposit insurance is a dumb
> idea, almost as dumb as it sounds to hand out $700B without demanding a
> preferred equity stake. Raisng the cap to $250K probably is marginally
> stabilizing.
In normal times Blinder would have a point. But these times are far from normal. The problem is that the US financial system is having a massive heart attack - a.k.a. a silent banking run. This isn't conspiracy theory wingnuttery, this is cold, hard fact - interbank lending has stopped cold. The Fed is stepping in to try to intermediate financial flows, Brad Setser has the latest here:
http://blogs.cfr.org/setser/2008/10/02/give-the-fed-a-bit-of-credit/
Roubini argues we should remove the deposit insurance cap and guarantee all deposits, but only for 6 months, i.e. long enough to stop the crisis, but short enough to prevent moral hazard issues from arising, which sounds reasonable to me.
-- DRR