Home Economics FDIC and the Austrian School

FDIC and the Austrian School

Working late tonight, but I wanted to float an idea relating to an e-mail I received over the weekend from a friend of mine. He asks, basically, how certain industries (such as airlines, for example) that rely mainly on borrowing up front and realizing a return far in the future could exist without the FDIC. (This is an oversimplification; I am just going to briefly touch on it now, and I’ll get more into it and my responses later in the week, when I have a little more free time).

His argument goes like this: government deposit insurance provides a service that no insurer on the market would. Namely, that service is extending insurance to all depositors at no immediate cost. This relieves them of their risk aversion, thus incentivizing them to freely deposit their savings in any bank, scrupulous or otherwise. These banks, then, are able to turn around and lend out these massive savings to producers in these leverage intensive industries. Without FDIC guarantees, however, none of this would be possible and, since the government is the provider solely capable of behaving in this way, it follows that it should provide said service.

I’ll point out briefly that this logic, divorced from the banking specifics, is actually frequently used to defend universal healthcare. I’ll get back to that later in the week, but for now I think there are also more relevant concerns. I think, for example, that my friend and I may be “thinking past” each other on this issue. His e-mail seems mostly centered on the question of whether or not leverage intensive industries could have developed without something like FDIC guarantees, and he seems to lean against that possibility. I, frankly, don’t know the answer to that question. I think that it would be possible that they might have, but I really don’t have enough knowledge about these things to say. On top of that, of course, is the problem of the counterfactual.

To me, though, the more interesting question here has to do with the way in which the “insurance” is functioning, and with larger questions of fractional reserve banking in general. I am not totally decided on where I stand with regards to these issues but, for now, I’ll just say that I am very intrigued by Walter Block’s arguments. Specifically, I think he is on the right track when he suggests that the fundamental problem at the heart of FRB is that it creates more titles to property than property actually exists. If I deposit $100 and the bank loans $90 of it to you, and yet we still have full command over $100 and $90 in our checking accounts, respectively, then a title has been created for you (on the order of $90) to property that is also entitled to me (as part of my $100). Thus, more titles to property now exist ($190) than actual property (the original $100).

These points may seem disparate now, but I will link them together and try to flesh out a pretty solid discussion of this as the week goes on.

No Chronicle column this week, by the way, so be on the lookout for more on this kind of stuff here this week.

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One Response

  1. Alec

    Maybe I missed it in your posts, but one point to make is that good investment requires real savings. FRB, the Fed, the FDIC, and fiat money all work to skew the numbers–making unsound investments look like good investments. Whether or not airlines would exist depends on whether the capital could be raised to start them, which depends on whether enough people are willing to save instead of spend today.