Monday, May 14, 2012

Time to End the FDIC

As most people are already aware, J.P. Morgan Chase lost some money. Well, maybe this is how the congress would put it, since $2 billion is chump change to them, but this is a big deal. Chase may go down for this one. They invested poorly and are now in pretty bad shape.

So what does this have to do with FDIC? Well, how many people who have money saved with Chase have looked into their business plan, their profit margin, their investments, or anything? They do not need to. Savers just put money into a bank and do not care how the bank is run because they are covered by FDIC. In essence, this allows banks to do whatever they want as long as the savers keep coming in. Banks then only need to market well to stay in business. Is it any surprise that the big banks have stayed as the big banks for as long as they have?

What does this mean for economic efficiency? If banks can do whatever they want, then they are not interested in making the best investments. This is a net loss for the capital structure of our economy. Instead of loans going to the best projects, it goes to whoever the banks like most. This is pretty similar to the problem that we have with government spending.

And the alternative? Without FDIC, savers would need to look at the business practices of banks to determine who is doing the best and where their money would be safest. This would ensure that at least we are tending toward optimal investment.

This is a great opportunity to open up a debate about the merits of FDIC. Without FDIC, would Chase have been big enough to have had this great of a loss? I doubt it. It is time for FDIC to end and allow for more competition in the banking industry.

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