The Bank-Run Phenomenon, by Jacob G. Hornberger

A prediction: within the next three years we’ll see substantial bank runs in the U.S. and other countries. From Jacob G. Hornberger at fff.org:

One of the most fascinating phenomena in financial crises is that of bank runs. That’s when panicked depositors rush to their bank to withdraw their money because they’re convinced that the bank is going broke. Everyone tries to withdraw his money before that happens. If the bank does finally go under, the people who failed to withdraw their money are left with a bank that has no money to return to them.

That’s what the FDIC is all about. It insures everyone’s deposits up to a limit of $250,000. The limit used to be $100,000 but U.S. officials, for whatever reason, wanted to make depositors feel even more secure about keeping their money in the bank.

The idea is that people don’t have to worry about losing their money if their bank goes under because the federal government will use taxpayer money to reimburse them. Thus, knowing that their money is “insured” by the government, people have less incentive to rush to the bank to withdraw their money in the event of a potential bank failure.

Of course, one problem with the FDIC insurance is that it enables weaker banks to continue operating, which could make the problem much worse in the future. Without the FDIC, weak banks would go under sooner because people, sensing a problem, would rush to withdraw their money.

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