A little more on privatizing FDIC insurance.

A little bit more on Cato’s 15 years of financial deregulation.

Matt Yglesias takes a closer look at the pre-crisis Cato arguments against the CRA. Dismantling the CRA has long been a goal for Cato,going back to the very first financial reform policy document I can find online (1995). Sure enough, in 2003 the argument was: “Finally, by increasing the costs to banks of doing business in distressed communities, the CRA makes banks likely to deny credit to marginal borrowers that would qualify for credit if costs were not so high.” Which is to say, it’s keeping people with huge credit risks from getting mortgages. Ummm, nice job CRA? I like how that talking point has changed overnight for the right.

Back at Netroots Nation 2009, Chris Hayes was on a panel with the Roosevelt Institute’s Rob Johnson and Chris noted:

Think about FDIC, how would we design FDIC today?…What we would do is, we wouldn’t set up an independent government agency which works very well, has worked smoothly, has prevented bank runs, since the bad old days of bank runs…we wouldn’t do that today. The banks would be like ‘what? you are just going to step into this market?’ What we’d do today if we were designing FDIC is we’d choose a bunch of the banks and we’d subsidize them insuring other banks…This is a massive conceptual problem.

Yup. And here’s Cato in (1997) saying the same exact thing, that we could create some sort of “individual bank mandate” to purchase private deposit insurance:

Congress could easily expand the use of contractual regulation. For example, it could require all financial services firms that accept deposits, provide insurance, or directly access the payments system to negotiate a “safety-and-soundness” contract with a private-sector entity that would monitor the financial services provider’s compliance with the terms of its regulatory contract and protect depositors and insureds against any loss should Hie financial services firm become insolvent. Such a contract would specify the prudent practices to which the firm would agree to adhere in order to operate in a safe-and-sound manner. The monitoring firm’s fee undoubtedly would be risk sensitive, reflecting the financial institution’s probability of failure. The private sector could easily assume this most important function, which government bureaucrats have performed badly.

The funny part is that this scheme of “banks insuring other banks” has a terrible track record; I bet nobody can point to a successful implementation of it. When it fails how credible is it that the government will let the economy collapse?

Also what they wanted in the 1990s on FDIC would have given a huge amount of power to the ratings agencies over our commercial banks, who would have been the likely people to step in and get paid by the commercial banks to give ratings to the commercial banks. And as we found out in 2008, the moment when these “safety-and-soundness” contracts would most likely be called in for collateral calls is during a crisis when nobody is credible to actually pay them out, creating panics, which perpetuates itself.

Only the government is credible to step into this situation, and having a clear rule of cutoffs for how depositors will and will not be covered is the appropriate way to do it.

It’s not clear to me how grandma with $15,000 in her checking account is going to keep large national banks in check, but if one is freaked out about “moral hazard” of you not worrying your liquid savings disappearing in a panic (ie – when you need it most) there are haircuts and other neoliberal ways to adjusting this. I’m not worried about this, but if you are there are ways to go about it – that’s not what they are suggesting. They want it completely gone.

If I came up with a scheme that would reintroduce “polio” into our daily worries you would find me not credible