The banks rely upon Government to make their demand deposits valuable to people and customers. If the Government provides deposit insurance, there is no possibility to keep Government and not allow the banks to cause inflation. The Government do not need to insist on having deposit insurance, however.
Without the Government there would be no one to bail out the banks. It is only with a Government that it is possible to have Fractional-reserve banking, as in a free market it would (eventually) collapse. Government (and forced currencies) is a requirement for inflationary banking because otherwise an insolvent company would be worthless.
It's not possible to both have deposit insurance and allow the banks to fail. Banks are not a normal business if they have deposit insurance.
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