Deposit Insurance – Does it Protect You Or the Bank More?

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                                                                            Today, we seek protection for things we regard to be important. For example in life, I believe most people have life insurance. Similarly, to protect bank deposits, governments provide security by implementing deposit insurance.

As many of you know, the aim of deposit insurance is to protect your savings in the bank. This helps provide a sense of security to savers and thus prevents mass withdrawal of savings (known as bank runs) in countries. With this, the structural integrity of banking in countries is maintained and this stabilize financial markets.

However, the kind intentions of governments to protect savers encourages bankers to take more risks with savers’ money. This is because bankers know that the government will pay for their mistakes, since the money risked is insured by the state. History has shown and proven this fact repeatedly. One recent example would be the recent financial crisis in US where banks who lose savers’ money in financial games are bailed out by the Federal Reserve’s printed money.

However, it should be noted that only big banks with political influence are bailed out. For example, Goldman Sachs, JP Morgan, etc. For small banks, they are usually gobbled up by the big banks to gain market share, leading to oligopolies where they gain greater power. If the prize of risking savers’ money for big banks are bailouts that increase their capital, wouldn’t it be reasonable that deposit insurance protect bankers more than savers?

Also, bailouts increase national debt which definitely has to be repaid by higher taxes. This cause taxpayers to bear the burden where the big banks get the free money to lend people. In the long run, this will increase inflation drastically. To make it worse, there have been many supply bottlenecks in commodities for years and this is bound to cause imported inflation for importing countries like China and US. Both of these would add fuel to the fire of inflation, burning the purchasing power of money worldwide faster.

With policies strongly tilted towards the interests of bankers and inflation, I don’t think saving would be a viable strategy to build wealth. I believe that during such periods of high expected inflation, investments that can effectively hedge against inflation would be better ways to build wealth compared to saving. I may be wrong for this but I believe many of you see the advantage bankers have over us and will take action to build wealth with methods other than saving.

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