The visible hand in economics

Why the price on deposit insurance is too low – at least in the US

Posted on: November 21, 2008

So the deposit insurance schemes being introduced around the world have the explicit aim of “saving the world economy from Armageddon”.  Even so, when I spent a couple of weeks in the US I got the distinct impression that this scheme will lead to more (even more substantive) issues down the track.

Here is a list of interesting things I heard on Ads (or saw on billboards) in the US:

  1. Now, thanks to the deposit insurance scheme, we don’t have to check your credit (Ad),
  2. The world is America’s ATM (Billboard),
  3. Need a $200,000 loan to start a business – with no credit check? (Ad).

Add to this the already poor nature of savings in the US, and the fact that there is no individual responsibility in the housing market or even in the realm of taxes (every third ad is either about getting a lawyer to lower your taxes or getting a lawyer to push the government to give you extra benefits).

Ultimately, I think the US has some structural issues that need sorting – trying to keep consumers borrowing to maintain short-term growth feels like the government is creating a ponzi game in favour of the initial consumers that were involved.

11 Responses to "Why the price on deposit insurance is too low – at least in the US"

who sets the parameters for the deposit insurance in the US, the fed/treasury or the politicians?

it’s interesting because if it wasn’t for the Reserve Bank we would have the same situation here….

“who sets the parameters for the deposit insurance in the US, the fed/treasury or the politicians?”

I actually know very little about the set up for the US scheme, I was just interested in the comments I was hearing overseas😛

It would be good to hear from someone who knows, or to look it up – however, Friday’s are too busy to do things like that😛

crack is a helluva drug

I don’t see the connection you are trying to make. Deposit insurance (by which I understand FDIC deposit insurance) doesn’t really related to the lax lending standards or poor savings rate, in my opinion. I agree lax lending standards should be improved not encouraged. I agree banks should not evade sensible regulation of financial instruments and then expect to be bailed out when their gambles fail. I agree the savings in the USA need to be increased dramatically – people have to not just stop living beyond their means but live within their means while including savings for the future. But FDIC insurance is a very good program, that pays for itself, and a wise thing to continue.

My point is that if the risk premium is set too low then a deposit insurance scheme that is guaranteed by government will lead to excess risk taking.

Adverts that are stating that the new scheme allows them to give large loans without a credit check indicate to me that there is some excessive risk taking going on!

[…] prudent (as lenders and households actually do face the risk associated with there decisions, unlike the US […]

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