So now I see Blinder's point about the price of deposit insurance but an assortment of naive questions come to mind:
--(This one's tongue in cheek!) So why even have deposit insurance at all if there are no caps on the amounts insured? Why not just let the market take care of how people figure out where it's safe to leave their money?
--Why wouldn't deposit insurance rates be one barrier to undercapitalization anyway? Is this just part of the general assets too diced up to value issue or did these rates specifically not adjust appropriately for policy reasons?
DC
On Fri, Oct 3, 2008 at 8:44 PM, <dredmond at efn.org> wrote:
> On Fri, October 3, 2008 7:48 pm, Dorene Cornwell wrote:
>
> > 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
>
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