The sound money proposal

Last night I gave a talk at the Libertarian Alliance (I believe the video will shortly appear here). The proposal is: “2 Days, 2 Weeks, 2 Months" (also see my comments here). There was a good discussion afterwards, and I was rightly put to task for identifying deposit insurance as a key problem. Indeed when I talk about deposit insurance, I am implicitly referring to taxpayer funded deposit insurance. There is nothing wrong at all with private deposit insurance, and indeed note that the Financial Services Compensation Scheme is industry (not government) funded.

But this brings up a curious possibility - recollect that 100% reserve advocates often claim that banking and insurance are not comparable, because whilst the former abuses it's creditors that latter do not. So what if, instead of offering a 100% reserve account with a storage fee a bank offers a slightly less than 100% reserve account with a fee for deposit insurance? Wouldn't this satisfy the argument that such desposits need to be "safe"? And by definition this is an insurance, and not a banking product. I don't know the answer, but it's these sorts of innovation that make it very difficult to prescribe particular forms of banking.

Another interesting topic during the Q&A was the strategy for reforms. My plan is written to be a set of guidelines that could be followed when the next banking crisis hits. To be sure, we can't just sit back and think that if we have an alternative it will even be considered, let alone used. Hence the importance of the Carswell Bill, which seeks to solve the problems within banking from where we stand today. I did raise the possibility, however, that a public debate would reduce the chances of radical reform.

Think of the difference between how Estonia and the Czech Republic adopted the flat tax - my own work* suggests that when you have a Prime Minister who's only read one economics book in his life, uncertainty about the right policy solution, and a void of debate - radical solutions become possible. With a large civil society you run the risk that the economically ill informed media majority corrupt that debate and spread ignorance. We know that people's priors tend to favour regulation over freedom - whilst I am a public intellectual and seek to debate economics on as wide a platform as posible, I am a realist in the sense that giving ideas an airing doesn't automatically lead to greater acceptance.

* 2008 “The Spread of the Flat Tax in Eastern Europe: A Comparative Study” (with Paul Dragos Aligica) Eastern European Economics Vol. 46 No. 3 pp. 55-74  *

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