People NEED to take responsibility for their own actions…. relying on the government wipe their noses and asses is one of the reasons we got into this mess……. That and this bullshit entitlement mentality ie. socialist.

Ken,

From wikipedia…

“As of 2008, Fannie Mae and the Federal Home Loan Mortgage Corporation (Freddie Mac) owned or guaranteed about half of the U.S.’s $12 trillion mortgage market.[6]”

http://en.wikipedia.org/wiki/Fannie_Mae

Regarding the FDIC, please understand that the FDIC only has capital on hand to insure less than one half of one percent of all bank deposits. One large bank bankruptcy would essentially render the FDIC insolvent. Who is on the hook in that event? The United States government.

Ah, Jeff, nice call. Very nice.

Ken-

The gov’t shouldn’t be purchasing 50% of all mortgages. You can dress it up any way you want, but the fact remains that when the gov’t is lining up to purchase 50% of all product, some terrible incentives will be created.

Had either BOA or citibank went bankrupt (like they should have), the FDIC would have been insolvent. Perhaps the gov’t would have demanded that non-bankrupt banks bail those depositors out, but what’s important is that this system provides incentives for banks to take inappropriate risks and for depositors not to give a shit.

“The premiums are set based on the prevailing risk.”

Ken, you’re a smart guy. I hope you can realize the absurdity of that statement. I’m pretty sure you agree that financial markets can in no way be accurately predicted. What makes you think that bank “risk” can be accurately predicted?

Ken, imagine a friend or family member approached you and asked to borrow, say, $5000. It’s not all the money in the world, but its also not a trivial sum. What would your first question be? (actually think about it for a second)

My guess is that you’d have two questions. 1. What are you planning on doing with the money? 2. How do you plan to pay me back? Does that sound about right? Perhaps some people would simply react by saying “ok” and not giving it a second thought, but I’d imagine most people would be interested in the two questions I posed above.

So how does this apply to banking? When the average american (or even a high-income american) gets his paycheck, what does he do? He gives it to a bank. Does he care what happens to the money or is he worried about how he’s going to be paid back? No. Well, why not? The FDIC.

Please tell me you can at least partially recognize the distortions that will take place under this type of arrangement. If I don’t care how I’m going to get paid back, I don’t care which bank I give my money to. This eventually will result in money flowing to the most aggressive risk takers. Eventually these bankers will take risks too large for their capital. This system MUST end in bank panics. We witnessed this in 87 (S&L crisis) and in the current crisis.

Before you get all worked up, I’m not trying to say that insured deposits were the sole cause of the current mess. I’m not even saying they were a main or primary cause. (Although I could probably make that case for the S&L crisis) I’m just saying that insured deposits create tremendous moral hazard and perverse incentives that will continually precipitate financial calamity.

(Another point (but unrelated): if the FDIC is as successful as you claim it is, why not simply take the “F” out of “FDIC?” In other words, why not completely privatize the FDIC? If the government backstop you argue makes no difference (because its never been used), why not get rid of it entirely. Customers could then decide if they want to place their money in “DIC” (pronounced Dee Aye See, not DICK, haha) banks or not.)

And one other thing, there is a basic flaw in your logic.

You are saying that if we insure deposits then we are more likely to get financial calamity because of the moral hazard created. In other words, what you are saying is the more you try to protect people from something, the greater risk you actually create for that thing happening and ultimately in a bigger way. So using that same logic you would have to say that the more you try to protect people from moral hazard, then you would actually create a more immoral society, right? If you try to protect and coddle people from being exposed to immorality, then in fact somewhere down the road you will have a huge “immorality calamity”. Using your logic, if protecting people from losing their money leads to financial calamity then you also have to say that protecting people from immorality would eventually lead to a morality crisis, right?

By “for-profit” I meant the bankers set the insurance premiums with a profit motive just like any other insurance business. They don’t set them in such a way that they can stick it to the govt. And besides, the govt is under no legal obligation to insure anything under the FDIC.
It’s completely funded by the bankers.

Moral hazard is all about morals. Its about protecting people from the negative consequences of their actions, thats a morality issue. But regardless, there is still a flaw in your logic. On one hand you are saying protecting people is better, and on the other hand you are saying not protecting them is better.

I disagree with you and Taleb about financial risk being different from physical risk. If that were true you would have to say the entire corporate structure is flawed. Why? because the whole purpose of incorporating is to protect the individual employees from financial losses sustained by the corporate entity. The corporate structure is a form of financial insurance. Bankruptcy is just another form of financial insurance. You can be absolved of billions of dollars in losses if you run the company into the ground and claim bankruptcy. Some companies knowingly abuse this (like AIG, Enron, etc) but most companies don’t. If what you and Taleb are saying (that financial insurance causes what you are insuring against more likely to happen) was correct then most companies would run rampant ripping off everyone they could in a mad dash to bankruptcy.