Danny Blanchflower and I discussed this yesterday. We agreed that the Fed has no choice but guarantee all depositors of all smaller banks in the US right now: unless they do there will be a flood of money to JP Morgan and a collapse in US banking. To pretend there is no crisis in US banking, created by the Fed, would be absurd in that case at this moment. Only state guarantees can prevent that crisis unfolding.
But the question is, what then? What price should be extracted for saving US banks, yet again?
Is it more tax?
Or the reversal of Trump’s regulatory relaxation?
Or more regulation?
And better audit?
Or a levy for the cost of capital that the state supplies to these banks?
The FDIC charges banks an insurance premium for the guarantees made on deposits up to $250k. The FSCS does the same (up to £85k) for UK banks. OK, so the move is now to guarantee larger deposits. Fine, the insurance premium rises. As, umm, we already have in the UK with the Bank Levy. It is precisely and exactly this thing. An insurance premium against the state backing provided against deposits not already covered by the FSCS scheme.
The ‘Tater’s all seeing gaze has failed to note that we already do this.
And we need the reseparation of this public service from the rest of banking, whilst mortgages move to a US model of state backed certainty with rates fixed for the life of the mortgage so that the threat to so many in this country, now being seen as rates rise, is removed forever.
Could this be done? Of course it could. But groupthink denies it because groupthink likes things the way they are.
And that’s just gorgeous. For Dick has now just reinvented Freddie Mac and Fannie Mae. You know, the two sources of vast perverse incentives – why worry about credit risk if the government’s going to buy it anyway – and more than a little market turbulence when they fail. As they did, two weeks after Willy Hutton insisted the country should have that Gordon Mac.