Decius wrote:

Hijexx wrote:

Curious what your take is on this:

Ben Bernanke's Hush Money

A hell of a lot of meandering without getting to the point. Seems to be opposed to the FDIC. Seems to touch the edge of an uninformed rant about immigrants but pulls back after making at least one stupid assertion. I basically stopped reading after "Foreigners do not... buy American goods." If you could explain what the point is I can tell you what I think. Yes, banks are based on the assumption that everyone won't simultaneously withdraw their money. That only happens when there is a panic. The FDIC provides a reason not to panic, thus usually preventing bank failures. Thats perfectly logical. Its not a moral hazard, unless you are opposed to banking, which takes us over the cliff of a wide array of radical notions that are of no practical use right now.

Based on what we know about Indymac one of the problems that we have is a lot of people are depositing large sums of cash in bank accounts. In some cases more than the FDIC insures. Thats stupid, and it reopens the risk of bank runs. The right answer to it is probably stock market annuities with set upper and lower bounds for return...

Just reread this (I was at work earlier, not a lot of time to sit and think) and I think I missed your point about "If you could explain what the point is..." I thought you were just giving up once you reached the mention of "foreigners" and refusing to read further until that point was addressed.

As far as I can tell, the point of the article is an exploration of what happens as the circuit breakers each get tripped. The FDIC can fail. Indymac bank will probably wipe out 10% of the FDIC's coverage. Indymac was not on the FDIC's watch list either.

So who backs up the FDIC? Is it the Federal Reserve as this article postulates?

"Moral Hazard" is an FDIC defined term, it wasn't used haphazardly in the article to make a character judgement:

http://www.fdic.gov/bank/analytical/quarterly/2007_vol1_2/index.html

In the insurance context, the term "moral hazard" refers to the tendency of insured parties to take on more risk than they would if they had not been indemnified against losses. The argument is that deposit insurance reassures depositors that their money is safe and removes the incentive for depositors to critically evaluate the condition of their bank. With deposit insurance, unsound banks typically have little difficulty obtaining funds, and riskier banks can obtain funds at costs that are not commensurate with their levels of risk. Unless deposit insurance is properly priced to reflect risk, banks gain if they take on more risk because they need not pay creditors a fair risk–adjusted return. A truly risk–based assessment discourages such risky behavior. The moral hazard problem is particularly acute for insured depository institutions that are at or near insolvency but are allowed to operate freely because any losses are passed on to the insurer, whereas profits accrue to the owners. Thus problem institutions have an incentive to take excessive risks with insured deposits in the hope of returning to profitability.

The article you linked has a great illustration of moral hazard as defined above.

I also think there is a clear distinction between "banking" and "fractional reserve banking." I don't find it radical to distrust an economy based on fractional reserve banking.

So yeah, main thrust of the article is painting a hypothetical situation of "what happens when people stop trusting the economy?" It's worth a read to the finish. It doesn't really provide any answers, just food for thought.

WRT to "stock market annuities with set upper and lower bounds for return" are you referring to equity-indexed annuities?

RE: Subprime lending not main trigger of real estate bubble