Banking on markets - call for a market-driven insurance system

Reason, May, 1994 by Cornelius Chapman

But if top-down federal regulation will never be able to prop up a banking system that subsidizes bad loans and rewards depositor indifference, why haven't bankers pushed to scrap a system that binds them up with restrictions they universally denounce as burdensome? "I told one of my banking clients that private insurance was the key to the asylum," notes Ely. "He responded by saying, 'What makes you think the inmates want to escape?'" As with most regulated industries, the primary beneficiaries are the suppliers, not the consumers whom the rules ostensibly protect. A world with fiscal winners and losers saddles bankers with much more responsibility and accountability.

A boom-and-bust banking system, of course, was the predictable result of a policy that, however well-intentioned, failed to address economic realities. Even Franklin Roosevelt, a man rarely praised for his fiscal acumen, understood this. In 1933, as he signed into law the bill that created the FDIC, he prophesied that federal deposit insurance would end up subsidizing bad banks at the expense of good ones, costing taxpayers money in the end. Fifty years later, that's an all-too-accurate description of the current banking scene.

Cornelius Chapman is a Boston-based attorney specializing in banking and privatization matters.