The Third of the Three Causes of the 2009 Great Recession

During the 1980s and 1990s, the level of debt among banks and other financial companies increased enormously. In 2008, for example, just the problem assets of both Lehman Brothers and Merrill Lynch were twice as large as the firm’s total capital. When the crunch came, far more firms went under than would have had their borrowings been lower.

Why the excessive debt? Because of the federal government’s guarantee of bank accounts. With the guarantees, depositors care only about the convenience and the interest rate paid. They care little about the safety of their deposits. That's supposedly the government’s job. 

 

If the guarantees were repealed, people would become very concerned about the safety of their bank deposits. Banks and other financial companies would immediately lower the risk on their investment assets, fearing the withdrawal of funds by wealthy people who could pay for audits. This would reduce the risks of the entire financial industry, benefiting everyone, including the poor.