Once the consumer stops looking at safety the banks need to compete on something else.

As I'm reading you, giving away toasters is an expense which causes banks to "reach for yield" and if we made them unstable, they could compete on stability rather than giving away toasters. Since they don't need the toaster money, they stop reaching for yield. But banks always profit maximizing, and they're always going to compete on whatever issues they can. The notion that they'd be less profit maximizing and would compete less on fancy features if they had one more variable to compete on is completely made up.

Also, you do realize that the systemic failure was triggered by institutions that were not at all regulated by the FDIC and don't take insured deposits at all, right? This wasn't overreach by traditional banks. It was primarily the investment banking industry that was taking the major risks. Traditional FDIC insured banks were doing pretty much what they always did. The "risk" aspect of it appeared when the investment banks started to fail, and once that happens, nobody is safe. Traditional capitalization requirements suddenly become "not good enough" and everybody gets burned.

This is similar to the old "Community Reinvestment Act caused all those bad loans!" argument that ignores the fact that most of the loans were originated by institutions that weren't subject to the CRA. The reality is that we already have a parallel banking system that takes in money from consumers, loans it out and invests it, and is not subject to the FDIC or any of our traditional banking regulations. It's called the investment banking industry, and it was the indusry that collapsed spectacularly. When the results of a thought experiment conflict with the results of a real experiment, the real experiment wins.

Removal of FDIC will do two things. Consumers will care deeply about safety.

Yes, so much so that they occasionally panic, run on a bank, and caues it to collapse. We've seen this movie before.

Private companies will offer to insure the deposits at certain banks that they can see are doing safe things with money.

OK, and now we're back to basically the FDIC situation again. You have an insurer that the bank pays for that enforces capital requirements and traditional lending behavior. Just like what the FDIC does. Can you be specific about what these private insurance companies would do that the FDIC doesn't, because FDIC membership comes with pretty substantial regulation about capitalization and what can be done with the deposits. Or even better, can you point to some data that shows that non-FDIC institutions actually behaved better and were more stable during the crash? Because as far as I can tell, the data points in exactly the opposite direction.

What would that solve? The investigations and trials would be done by the very same government, who would control what would get into the open. You'd need open investigations and trials to ensure that the investigations and trials were really "open", and then open investigations and trials to ensure...

What might solve the problem rhymes with evolution.

OK, seriously, the FDIC is a non-issue here. The major problem was on the non-FDIC insured side. We didn't do bailouts to protect FDIC covered accounts, and for the most part, it wasn't FDIC covered money that was at risk. Doing away with the FDIC would not affect any of those things. If you want to talk about how people treat money market funds with indifference, that's great and highly relevant, but it has nothing to do with the isse you're railing against. If you think the picture of the failure is, "Grandma put mony in her FDIC insured savings account and banks lost it in subprime," then you're missing the vast majority of the picture.

The fact is, we haven't had a bank run since the 1930s, and that's 100% attributable to the FDIC. That's a huge win. The fact that we can still have "bank runs" in the money market isn't something you fix by eliminating the FDIC.

Pro atheletes and entertainers aren't paid to make "good" products or to win. They're paid to get viewers. If they do, they're worth the money, regardless of whether the movie was objectively "good" or the game was won. CEOs get paid to run companies well. If a healthy company tanks, by definition, they have failed at their job somewhere along the line unless something really bizarre happened. Top executives are just about the only people who get paid well regardless of their actual measurable value. That's the difference.

Probably two reasons. First, the effect you suggest: less tax avoidance. Second, holding all else equal, tax revenues go up every year becuase GDP grows every year. It takes a pretty substantial cut in rates to drop revenues below their previous year value. It's a lot more sensible to look at the trend line and see if you're below or above trend the following year. I wouldn't be surprised if the Kennedy cuts put us above trend, but I don't think that's something that we can generalize.

I'm trying to find it, but there was a neat piece of reserach from a couple of years ago that surveyed executive compentation policies for various large corporations. As I recall, more than half of the companies had explicit policies that the CEO must be paid a salary above the median for comparable corporations. The good news is that this Lake Wobegon problem is probably self-limiting, given enough time.

How would you draw that up on an a balance sheet? Right now, the books balance nicely: I put $100 in a savings account. That's a $100 liability for the bank plus a $100 asset that hey can do stuff with. Both entries work out. They loan out $90. Now it's a $100 liability to me, $10 in the vault, and a $90 asset in the form of a debt payable to them. All balanced. Are you suggesting that it should be $190 in liabilities now? How would that even work?

I own a pile of bonds as investments right now. Am I totally underwater with liabilities because they haven't been paid back?

A minimum checking balance is a backdoor fee. It's money you don't earn interest on that you're loaning them for free. Just multiply your checking balance by the amount of interest you'd earn in a year if you had it sitting in your savings account and that's your fee. It's a minor issue with interest rates being very low these days, but it's a bigger deal under more normal circumstances.

The FDIC is paid for by premiums paid by the member banks. It receives no appropriations from Congress. Is it a good idea now?

gosh, that's why I never switched from the original Master of Orion, which is what I still paly on a MacBook retina.

And, of course, nethack, the only game that *matters*

hawk

The problem at the top end is that for "superstars" it's less of a market and more of an auction. Auctions are really good at finding the best use of an asset with a known usefulness (e.g. a pile of raw metal or a rare automobile part), but they're practically guaranteed to overpay for assets whose value is a function of estimated future performance.

Think of it this way: Let's all estimate how well NBA superstar X will do next season (in terms of ticket dollars produced, which is a function of his total awesomeness next year). If you put all of our estimates together, we'll probably get a bell curve, and it's pretty likely that the center of that bell curve is a solid guess for the real results (at least, if we repeat this experiment enough). That's a good idea of what the upper limit on "market price" would be if that guy was a commodity. But he's not. There's only one of him. And he's going to go to work for the person who made the estimate waaaay over in the rightmost tail. How often is that guy right? Not very often. Repeat this over time, and you end up with a class of superstars that often get paid more than they actually produce.

I don't have a good solution for it, but the superstar phenomenon is a real thing that tends to produce this weird result.

Yeah, the age of bank runs was a real blast. The problem with the idea that we can all carefully assess whether our bank is "safe" enough for our deposits is that "safe" doesn't just mean that they're financially sound and well-run. "Safe" also means that the other depositors aren't going to panic and cause that financially sound and well-run bank to collapse anyway. Those runs are unpredictable herd behavior events, and no bank is safe from them.

The interesting thing about our big collapse was that what we saw was a "run" on the money markets. The FDIC did away with traditional bank runs (yay!), but over time, we found a way around the old model of taking insured deposits and loaning them out. We created a big money market for short term credit between banks, and banks started getting big chunks of their low rate short-run financing that wasn't insured, and when the panic happened, that channel froze up. Practically speaking, it was a lot like a bank run, and if left to wind down on its own had the potential to take out any otherwise healthy financial institution. Doing away with the FDIC doesn't do away wtih the money market run problem. It leaves that problem in place and adds back in the classic Mary Poppins style bank run.

True, financial services are really critical, but they are still clearly extracting far more value than they should be in a lot of cases. Much of what the finance industry does is intermediation--they're middle men. In a normal, healthy, functioning market, those services should become fairly commoditized and the price of those services should drop. The fact that huge profits are being made year after year is an indicator that something is wrong with that mechanism.

Executive options were actually a reform, to align the interests of executives with those of stockholders. They worked in one direction (up), but not the other--once the options were "under water", the executives had no reason *not* to "swing for the bleachers", risking whole company.

The solution is to align in *both* directions, so that the executives lose when the company loses, not just wins when winning.

This could be accommodated with a couple of changes in the tax code. Require a large part (majority) of high compensation to be in the form of stock: if your pay for the month is $100k, you get $60k of that as stock at current market prices. We need a (politically unpopular) tweak: this would currently create taxes on $60k. Instead, give the stock at a 0 basis, so there is no tax now, but the entire amount is taxed when sold--and require that the shares be held for a minimum number of years.

At this point, when the shares go down, so do the executives' worths. with options, stock going down merely increases the incentive for risky behavior seeking high gains.

But what do I know--I just have a Ph.D. in economics.

(doc)hawk

My guess is that each of those people is worth every penny. Why? Because they're entertainers, and the value of an entertainer is very easy for their employer to figure out. Butts in chairs, eyes on screens. If you dumped Maddow and replaced her with some newbie, even if that newbie was really skilled, you'd probably lose your audience.

CEOs are a much more interesting case. Is it really the case that nobody could do the same quality job for less than $10M? Almost certainly not. Nobody in the executive team who makes a fraction of that is qualified? Doubtful. It's hard to figure out how much a CEO will be worth when you hire him. It's even hard to figure out how much he's worth after he's been working there for a while. There are tons of factors involved.

Some theorize that for public companies, a "superstar" CEO is less about hiring somebody who can run the company and more about investor confidence and buy-in. In that sense, they're more like entertainers than managers. That's why they can jump from fireball to fireball and still get great contracts. As long as they put eyeballs on the screen during the financial news and get people buying stock, they're winners.