The Case for Ending Deposit Insurance

In response to Just in Time Stimulus: Fed Proposes Looser Rules for Large U.S. Banks a reader asked: "If we got rid of deposit insurance, what protection would savers have?"

That's a good question.

The answer is none. But with 100% reserve requirements there would not need to be any, except to protect against theft and fraud. Banks would not be able to lend checking deposits. Savers take a risk on interest-bearing deposits, as they should.

My Proposal

1. End the Fed
2. End fractional reserve lending
3. End the bailouts
4. End deposit insurance
5. Let the free market select what is money

Point number two is the key. A 100% reserve requirement eliminates the need for deposit insurance. Money held for deposit only, has no lending risk.

There is a tiny risk of theft or fraud which could be covered by private insurance. Warren Buffet would probably be willing to undertake the endeavor as risk of theft from banks is extremely small.

If you lend money for interest there should be risk. The risk is banks make bad loans.

Savings deposits and CDs are not really "savings" accounts at all. In both, you agree to let the bank lend your money in return for interest.

Checking accounts are supposed to be available on demand. Banks cannot lend checking accounts under my proposal.