Megan McArdle (I wonder if I should call her Jane?) has an interesting blog item up inspiring by the house voting to raise the ceiling of FDIC insurance.

I posted a few comments there, and then I thought, what the heck might as well blog 'em here too.

Although some of the people who caused the S&L debacle were crooks, I don't think it is fair to generalize that much. They weren't really comparable to high school kids, either. (I assume Megan is using this analogy to indicate irresponsibility.) Rather, they were reacting rationally given their circumstances. With no downside risk, it is sensible to shoot for the highest possible upside. Actually what amazed me about that scandal is how many of the S&Ls did not engage in high risk investments, not how many of them did.

Regarding bank runs and the business cycle: Bank runs were not the cause of damage to the banking system in the 30s. Rather, they were a symptom. Bank runs are a valuable corrective in a free fractional reserve banking system. (Note though that fractional reserve banking is by nature fraudulent, and would be better gotten rid of.) The damage in 1930 was ultimately caused by the Fed, inflating the currency and causing a speculative boom in the 20s. Folks interested in understanding banking and the business cycle should check out The Mystery of Banking, by Murray Rothbard.

In fact, people should check out The Mystery of Banking in spite of being disinterested in banking. Anyway, I think so. I am always amazed by how many smart people are ignorant of economics. I think that for a pundit (and aren't we all at least two days per week?) to be ignorant of economics is rather like a biologist being ignorant of evolution. Yet, so many are.

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