The government should not protect the banks

Just because people might lose deposits is no reason for banks to be protected. If we take this to the (logical) extreme we can easily see a bank cynically extending credit (to a knowing customer) in the expectation that the government will protect the credit. If banks (and their customers) know the government will stand for their credit then the currency itself loses value. For a currency to retain value requires that no institutions (including banks) are guaranteed. Even bank failure should not be prevented by the state. Even banks should be allowed to fail as should all private companies. Protecting banks does not help the economy (debt does not need to be subsidised) and so there is no justification for it. Bank credit does not need to be guaranteed by the government... it is better for everyone if banks can fail. There is no problem with letting banks fail and providing insurance only increases the money supply or increases the gap between perceived money and real money. If bank credit is guaranteed it should be printed or it should be recognised that there is a big gap between perceived and real money. Without monetisation there will be a banking default which will cause price deflation... to avoid this situation the government should make it clear that banks can fail... otherwise there will be an assumption that bank credit is money. If bank credit is not money then banks can fail and this is how it should be. There is nothing wrong with banks failing... it is a natural part of life. It's worse for the government if there is deposit insurance. Deposit insurance makes the government unpopular.