4. A history of deposit insurance on the web site of the FDIC notes: "Some have argued at different points in time that there have been too few bank failures because of deposit insurance, that it undermines market discipline, and that it amounts to a federal subsidy for banking companies." (a) (b) ... What does it mean to describe deposit insurance as undermining "market discipline"? From this perspective, why might deposit insurance lead to too few bank failures? In what sense might deposit insurance be considered a federal subsidy for banks? (c) If deposit insurance has these potential drawbacks, why do economists and members of Congress overwhelmingly support it?

4. A history of deposit insurance on the web site of the FDIC notes: "Some have argued at different points in time that there have been too few bank failures because of deposit insurance, that it undermines market discipline, and that it amounts to a federal subsidy for banking companies." (a) (b) ... What does it mean to describe deposit insurance as undermining "market discipline"? From this perspective, why might deposit insurance lead to too few bank failures? In what sense might deposit insurance be considered a federal subsidy for banks? (c) If deposit insurance has these potential drawbacks, why do economists and members of Congress overwhelmingly support it?

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter12: Money And The Banking System

Section: Chapter Questions

Problem 3DQ

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Question

4.
A history of deposit insurance on the web site of the FDIC notes: "Some
have argued at different points in time that there have been too few bank failures
because of deposit insurance, that it undermines market discipline, ... and that it
amounts to a federal subsidy for banking companies."
(a)
(b)
What does it mean to describe deposit insurance as undermining
"market discipline"? From this perspective, why might deposit insurance lead to
too few bank failures?
In what sense might deposit insurance be considered a federal subsidy
for banks?
(c)
If deposit insurance has these potential drawbacks, why do economists
and members of Congress overwhelmingly support it?

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