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Larry Kotlikoff's avatar

Hi Michael,

I mentioned that the FDIC had nothing to back up its claim to be able to cover nationwide deposits in my Jimmy Stewart Is Dead Book. So, I'm with you fully. When this becomes public, we'll have more chance of a bank run, but by the "insured" as well as the uninsured.

best, Larry

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Niskanen Center's avatar

Yeah, I think we should agree with Larry here, not the Rampells. I would add one more point, though. Another scary thing is that Summers MIGHT be right. Maybe the Fed WILL make 100 percent of depositors good, that is, reveal that the true deposit insurance coverage is 100%, not $250,000. Why would that be bad? No, not because it would add to the deficit, silly. It would be bad because it would produce the mother of all moral hazard scenarios. The thing that is supposed to restrain excessive risk taking by banks is not really regulation -- that is a back-up mechanism. What is supposed to restrain risk taking is depositor pressure -- rational people won't put money in banks that take excessive risks. In SVB's case, the risk was an unreasonably long duration gap. In 2008, it was investment in derivatives that the banks themselves (let alone their depositors) didn't fully understand. Who knows what it will be next. But 100 percent deposit insurance coverage will make the next time just that much more likely. (Personal opinion of Ed Dolan, not an official position of Niskanen Center as an institution.)

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