A popular belief among the economic commentariat today is that the mere existence of the Federal Deposit Insurance Corp. represents "moral hazard." With bank deposits insured, the common thought is that bank executives feel more comfortable taking massive risks because their losses will be covered by the taxpayer. Well if we ignore that banks themselves fund the government bureaucracy that is the FDIC, the hypothesis about deposit insurance and moral hazard is questionable. Indeed, by virtue of bank executives having much of their net worth tied up in the banks they run (bonuses are heavily weighted toward restricted stock in the bank, as opposed to cash), it's a bit of a reach to suggest that deposit insurance--which doesn't protect the share prices of banks from collapse--somehow fosters excessive gambling meant to imperil that same net worth. But what critics often fail to ask is why savings accounts are so sacred, and why the government-chartered FDIC, as opposed to a private version, has to insure those accounts. The answer we commonly hear is that without federally mandated deposit insurance, individuals would hide money under mattresses and banks would have no savings to lend.

read more