Posted by Sada Mosler on September 26th, 2008
Once again, we are seeing that using the liability side of banking for market discipline doesn’t work.
That’s why deposit insurance exists in every sustainable banking system in the world.
It’s also why a floating foreign exchange rate is ‘superior’ to a fixed foreign exchange rate. With fixed foreign exchange rates, there is no such thing as credible deposit insurance.
The remaining weak link in US banking system liquidity is the interbank market.
The reason we have an interbank market is the remaining institutional structure that utilizes the liability side of banking for market discipline.
This includes the $100,000 cap on FDIC insured bank deposits and the Fed demanding collateral from banks when it lends.
Remove these two remaining obstacles for Fed member banks, and bank liquidity normalizes with no ‘cost’ or additional risk to government.
Unfortunately, no one in government seems to comprehend basic monetary operations and reserve accounting.
Including most if not all of the FOMC and the Treasury Secretary.