BlogArt: Do Away with (Public) Deposit Insurance

FDIC insurance creates terribly perverse incentives. GMAC is insolvent. It continues to exist only because taxpayers pumped $6 billion into the company at the end of December. In order to survive, GMAC is offering CD rates 80 bps above the national average. It’s a desperation move, common of banks nearing their end.

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Heavily-regulated private deposit insurance makes much more sense. As noted above, deposit insurance is a good thing if it helps to protect the unsophisticated and to stabilize the banking system. But if folks who take risk wish to be protected from it, they should be the ones to pay for the protection.