Sunday, 28 November 2021

Deposit insurance is a taxpayer funded gift to private banks and the wealthy.


Over the two thousand or more years for which banks have existed, banks have never ceased to make the entirely dishonest promise to depositors that their money is safe. And with equally monotonous regularity it has transpired (as should have been obvious all along) that the latter promise is indeed spurious and dishonest. (For some literature on banks over the last two thousand years, see for example Fuller, E.W. (2019). 100% Banking and Its Advocates: A Brief History. Cobden Centre. or “Fractional reserve banking in the Roman Republic and Empire”)

Banks' motives in making that promise are obvious: it's to induce saver/depositors to place their money at banks rather than with other institutions which also accept savings and lend out the money concerned: and those institutions are quite rightly prohibited from making the above promise. Plus letting banks indulge in that dishonesty is blatant inconsistency: it equals preferential treatment for banks relative to other institutions;

The ACTUAL REASON for that prohibition is obvious: loaned out money is NEVER SAFE: that is, any bank, mutual fund, pension fund etc is GUARANTEED to make a series of silly loans at some point (think Spanish and Irish banks in the run up to the 2007 band crisis).

So what on Earth induced governments to let banks off the hook when it comes to the “silly loan” problem? Well it's easy: private bank created money became such a dominant or major part of the money creation process, that governments became convinced that privately created money was INDISPENSABLE with banks of course spending millions assisting politicians “come to the right” conclusion on that question

But the latter idea is pure nonsense, since governments and their central banks can create limitless amounts of money any time – as indeed they have done, more or less, in reaction to the 2007 crisis and more recently, Covid.

Who pays for deposit insurance?

It would not be quite so nonsensical if banks and their depositors ACTUALLY PAID for DI. They have in fact been doing so in the US since the early 1930s, for some time, while in the UK various “bankers' poodle politicians” have only recently had to admit that banks and depositors ought to pay.

But even where depositors DO PAY, they only pay for the risk to the DI system of losing out as a result of some bank making a “silly loan” c*ck up.I.e. it is still possible for depositors to earn interest WITHOUT taking any risks worth talking about. That is, DI protects them from losing capital while at the same time they can still earn interest.

The ACTUAL RATE of interest earned is of course at an all time low right now. Though you can still earn significant interest on term accounts. But the actual rate earned is irrelevant: the simple possibility of being able to earn interest is unacceptable because there are only two reasons for paying interest. First, the risk of losing capital and second, the inconvenience of losing access to a sum of money for some period.

But where your money is protected by DI, there's no risk of losing capital, and as for instant or quick access accounts, no loss of access to your money.

Pure genius! Privately issued money plus DI has for most of the time since DI first started enabled the cash rich to have their cake and eat it!

It's a gift to the cash rich, i.e. large depositors and private banks!

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