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Joe Canimal's avatar

Very apt post, and I hope you'll consider upping your posting frequency during this vexed time—you've got a valuable skillset here.

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Nicholas Weininger's avatar

Tyler Cowen makes the reasonable, if unfortunate, point that we already have an implicit guarantee of all deposits at the biggest banks. And absent some politically palatable way to remove that guarantee, it may be even worse to only guarantee them instead of guaranteeing all the banks.

The model in my head of a naive regulator looks at the problem you pose, of bad banks outbidding good ones for insured deposits, and says: why not cap the rates that can be paid on insured deposits to prevent that bidding war? "Boring safe places to put your money should not earn high returns" seems like an ok regulatory principle on its face. Now, I can envision plausible sounding lines of counterargument to this, e.g. "the regulators do not know enough to set the cap correctly" or "political pressure on th regulators will too easily make the cap meaningless," but it would be useful to spell out which of these are compelling and why.

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