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By A Smith (anonymous) | Posted January 27, 2009 at 00:47:44
Ryan, there is nothing wrong with a bank run. It's simply the way the market filters out those banks that place bad bets. By doing this, it incentives banks (and their officials) to make good loans, or face serious social repercussions. The alternative is to socialize all bank risk, essentially forcing those who make good investments to subsidize those who do not. By guaranteeing deposits, the government allows banks to take on risks they would not otherwise, simply because they know their co-investors (depositors) will be bailed out by other people's money.
If the government forced individuals to stand on their own, people would not be as likely to give their money to just any bank, they would be much more conservative. This would decrease the number, not abolish, the number of banks that have acted like hedge funds in recent years, including CIBC and others.
I am not arguing that there wouldn't be winners and losers after abolishing government insurance, just that the economy as a whole would be less prone to bad ideas such as "buying a home is a great investment". This would also ensure that capital was doled out with greater care in the future, thereby decreasing the chance of throwing good money after bad.
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