FDIC....

SO wanted to make a poll about a debate I had a couple days ago.....I was giving a guest lecture at a local college(that I attended),,,I know the professor well and used to give lectures there when I was an economist at WaMu...but its been a couple of years since I have spoke to an econ class... I do the same thing now but at a private equity firm but still work primarily with bonds....The topic of credit default swaps came up....and how they should have been regulated as insurance products instead of OTC derivatives...and how we wouldn't be in the mess we are in now if they were......and how it was lack of regulation that allowed this to happen.....

I was trying to point out that regulation doesn't always mean less risk to the economy....I pointed out the regulation of FDIC.....and forcing banks with depositors to have it does the same thing as CDS.....I was trying to point out to them that when you deposit you money in the bank that you are taking a risk....becasue the bank will be lending out 90% or so of the money you deposit.....this is why they pay you interest....becasue of the risk...BUT the interest they pay you doesn't represent the risk you are really taking.....The banks get away with paying you less interest becasue of the "illusion" your money is safe because of FDIC.....Just like people buying CDO's had the "illusion" there bond investment was safe becasue of credit default swaps.....I was trying to explain that credit default swaps and the lack of regulation and the regulation of FDIC are really just 2 different sides of the same coin......

SO anyways here is the poll question......would you rather do away with FDIC...and get paid a better interest rate...or maybe even a lesser interest rate becasue that bank carries a 50% reserve ration and only does asset backed loans.....In the end it would force banks to become less risky with their loans becasue the more risky they are the more they would have to pay depositors in the form of interest to keep their money in that bank.......Although it may also have an effect on credit markets making risky loans almost impossible and freezing credit markets......what do ya think?

I voted keep the FDIC. We already have higher risk products available.

Quote: AZDuffman

I voted keep the FDIC. We already have higher risk products available.

Thats the point....you depositing money in the bank is really not much less of a risk than some "higher" risk investments....it just had the "illusion" of being so becasue of the FDIC......The FDIC is really just like AIG....it doesn't have the capital to insure all the banks in the US......they just do it and cross their fingers it all works out....just like AIG did with CDS's....But the FDIC has the backstop of the treasury to bail them out....like they did in 2009.....

If regulation focused on financial institutions achieving a thorough amount of diversification in their investments wouldn't that take care of some of the problem?

Also, I figure, inspecting institutions diversification is a much easier process of regulation that scrutinizing every move they make.

I'm just throwing this out there -- not sure how it would be applied or even if it would work on that scale.