No problem.

I also probably threw you for a loop by talking about something good coming out of it, that of getting rid of the idea of deposit insurance as being a good thing. I get off on a tangent and forget about what the original reply was about.

I have really mixed feelings about deposit insurance. First off, I agree with your rule of law comment. Absolutely. If insurance is in place it should be honored. My deal with the deposit insurance is the moral hazard it creates. For each individual depositor it is a great deal. Who would not want it? But it is a guarantee that if actually needed in any significance could not be honored and it gives depositors a misplaced feeling of confidence, or maybe an indifference attitude, as to the financial ability of the institution to perform. It essentially makes people not care. Go for the best deal, highest interest offered, best freebees offered and who cares if the place fails? FDIC will step in and no problem. I loose nothing because of the insurance.

So in a way I was mixing two different aspects and confusing the subject. First, if it is law, it should be upheld. If it is a poor law it should be changed. If insurance is in place the customers relied on it and it should be honored. Second issue is, should there be insurance at all? Or as some suggest (that seems like a good idea to me) have two different kind of accounts. One that pays no interest and truly IS a deposit, deposited for safe keeping like an kind of warehouse should keep something for safekeeping. The account holder would pay fees for the services and safekeeping of the money and the money would always belong to the account holder. No insurance would be needed except for the case of embezzlement or theft which would be a very minimal cost borne by the account holder through the fee structure. There would be no danger of loss because the bank would not loan that money out. The other kind of account would be just like the ones we currently have but would be explicit that the funds were the property of the bank and were loaned to the bank to do as they please (, within regulatory limits, essentially what we have now but is insured). No FDIC insurance on this. If the bank fails you are an unsecured lender and SOL.

If there were two kind of accounts like I describe above, in normal times most people would go for the account that pays interest, has free checking and all the goodies. BUT.... if they did go for this account they would pay a lot more attention to the soundness of the institution they patronized. And if the bank got a little flaky the first stage of the bank run would involve people walking in the front door and saying, "you know I think I will transfer all my account funds from the free account that pays interest over to the account where I pay you to store my money". Because the money in the "storage" account is not fractionally reserve loaned out and the money is always property of the account owner. That would give early warning to both the bank management and regulators that something funny was going on and problems need to be addressed.

But would the Banks go for this? Hell no. There is good money in using deposits for your working capital and as long as there is a government backstop in the way of lending the full faith and credit of the government printing press to back up the bank funded deposit insurance. It is a good gig. Why would banks want to give it up if they don't have to?

As far as a person being in debt or out of debt, I don't really care. That is an individual preference that is about as relevant to me as what hair spray a woman uses. I have opinions on debt as a tool in business, but who chooses to use the tool or not is irrelevant to me. I don't think any more or less highly of a person no matter what his personal preference for debt is. Just like I don't hold it against a person because he drives tractor brand A over B or pickup brand whatever. It is just an individual business and personal decision.

John