Wall Street Protests

Well, it appears protesters have taken over Wall Street though they seem somewhat incoherent on what they want. There is a hilarious list of demands here:

http://occupywallst.org/forum/proposed-list-of-demands-for-occupy-wall-st-moveme/

I will take this opportunity to give my list of demands with respect to banking.

1) End Federal Deposit Insurance. I was going to have more demands but I decided it was no trying to compete in the number of demands with those protesters. This will do for a start.

This might seen like an antidiluvian view, but FDIC really is a moral hazard that has far reaching consequences. It says to depositors that they can put their money in any bank no matter how careless or careful it is with the depositor's money, it doesn' t matter because the government guarantees they will get their money back. It gives the goverment a pretext to tightly regulate banks because it is the government after all that is on the hook should the bank go under.

It makes banks ironically more careless in their lending practices. As long as they follow the letter of the law or if they can get the laws tweeked or enforced in their favor, they can do what they want. With any luck, if the bank is "too big to fail," maybe it can be bailed out and life can go on as before.

This has become wide spread practice in the industrialized world and it is now one of the root causes of the on-going, scratch that, never ending financial crisis, here and in Europe.

When a large bank threatens to go under or a small country threatens to not repay, governments immediately step forward with offers to bail-out the situation. We had TARP in 2008. We have Germany ponying up more money in Greece in Europe. In both cases, the calculation is it is cheaper to do that than to let the banks fail and then have to reimburse depositors.

The economy goes down and people complain about how much bank executives get paid. More regulations get laid on banks and the economy goes down a little more. We are in a downward spiral and with each step down we hear more calls for more regulations which only make things worse.

Imagine instead the following world:

No deposit insurance. If a bank goes belly up, it gets liquidated and the creditors, including the depositors, get paid off out of the proceeds, the depositors first presumably, then the bond holders and so on. The shareholders likely get nothing. If there is not enough money to make the depositors whole, go after the bank officers, make them liable for the previoous five years compensatioin.

Who cares then what the bank executive makes? If the shareholders want to pay them an outrageous sum why should we stop them? But make the executives liable for loses to the depositors for say up to five years of their compensation.

What it boils down to is personal responsibility. People, be they shareholdeers, bank executives, depositors, should be free to be stupid with their own money and they should not be bailed out.

German and French tax payors should not be bailing out German and French banks that lent to Greece who is not repaying. In the world I just outlined, banks in trouble for making bad loans would simply be allowed to go under and the tax payof would be none the worse for wear.