The Cato Institute’s Mark A. Calabria observes the high correlation between state deposit insurance and thousands of banks going belly-up in the 1920s. Yet even at the peak of the Great Depression’s 1933 bank failure, just 2 percent of deposits were lost.
Franklin D. Roosevelt opposed FDIC insurance, arguing it was “quite dangerous” and would “lead to laxity in bank management and carelessness on the part of both banker and depositor.” He was right.
While eliminating FDIC insurance might be a political bridge too far, it should at least be limited. The FDIC insures deposits up to $250,000 and since the end of 2010 has provided unlimited coverage for non-interest-bearing consumer and business accounts.
If all financial institutions were free to compete and to fail, serving shareholders and customers rather than Washington overlords, it would spur innovation and economic growth and curb systematic risk.
It ought to be possible to cobble together a political coalition of right and left willing to drive a stake through the heart of TBTF.
Eric Grover is a principal at Intrepid Ventures.