Politics
Out of context: Reply #5384
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- TheBlueOne0
"Which brings us to the real question: if these naturally occurring forces [of creative destruction] have proven themselves effective [in capitalism] so many times across multiple industries
, decades and centuries, why do we fight it so defiantly when it comes to banks? The obvious answer is that banks are different because we as consumers have our money there. If a Silicon Valley startup files for bankruptcy, the only likely losers are their ostensibly wealthy investors, and possibly their lunch catering company. However, when a bank fails, the potential losers are every depositor in the bank, as was demonstrated during the Great Depression. The federal government tried to alleviate this fear by creating the FDIC which acts as "insurance" for bank customers against a possible bankruptcy. This worked for awhile until a combination of deregulation and increased bank mergers led to the rise of huge behemoths whose total deposits far exceed the FDIC's or anyone's ability to insure them.All successful insurance models are based on the theory that the maximum size of any individual claim is a tiny fraction of the money available, and the odds of a large percentage of clients filing claims at the same time is very, very small. Auto insurers spread their risk through millions of car policies across the country and no single claim from any client can have a large impact on their overall reserves.
Recent numbers from the FDIC suggest that it currently has approximately $55 billion on hand. The FDIC also has lines of credit with the Treasury department for situations where its cash on hand proves inadequate. This all sounds well and good until you look at what it's charged with insuring. By its own math, The FDIC estimates that the $55 billion of reserves is insuring $4.4 trillion in deposits, a 1.25% ratio. The problem with this is not the ratio of reserves; it's the distribution of deposits. Bank of America, as an example, currently has more than $600 billion in deposits. That exceeds 10x the amount the FDIC currently has and more than the US government has injected into the entire banking system to date. The 6 largest banks by deposits have over $2 trillion in combined deposits, almost 50% of the total of the country's bank deposits."