[ttul]

While it may be difficult to see things this way, when you put money into a bank, you’re choosing to not invest that money into something else that might generate a better return for you and for society. The small but real risk of losing your deposits in a bank encourages companies and people with money to invest it into other things.

If there is no default risk, then money will be increasingly stored away inside banks, removing much of the healthy risk-taking activity that generates long term growth and improvements in the standard of living.

Rich people know there is a tiny chance of losing their cash if they stick it in a bank. So they buy other things instead. Those things generate real growth in the economy and improve productivity. Banks have to invest very conservatively because of regulations. Without the tiny risk of default, banks would get all the cash and the economy would stagnate.

Another word for this kind of stagnating economy is “the 1970s.”

[mikepurvis]

Most people aren't thinking they're losing their money because the bank sets itself on fire; they're thinking they're losing their money because a savings account interest rate is well below inflation.

[neilwilson]

"The small but real risk of losing your deposits in a bank encourages companies and people with money to invest it into other things."

I'm surprised that belief still persists.

The counter to that, of course, is that the silly instability in the banking system we're now seeing worldwide will destroy risk taking as people scramble to protect their positions.

Look at the damage to stock market valuations. How many banks are thinking about creating loans at the moment?

Banks provide liquidity against real things by creating money. They don't invest, and they don't take in money. All they do is shuffle their balance sheet to try and improve their net interest margin.

This idea that banks will suck up all the money is yet another consequence of thinking about banks backwards. There isn't, and never has been, a fixed amount of money.

Just as you get fancier trapeze moves if you have a safety net installed, you get far more risk taking when the basics operate correctly, safely and without having to think about them.

[kmeisthax]

Low levels of inflation already do what you think insolvency risk does. 2% loss of value per year hurts way more than a 0.001% chance of being completely wiped out.

[peyton]

That’s a ridiculous just-so. What happened when the FDIC raised insured deposit amount to 250k?

[bubbleRefuge]

That make no sense. I don't spend money on things because I'm afraid of loosing my deposit in the bank. My point is if I have 1M I want to deposit safely, then I have to make 5 FDIC accounts instead of just 1.

[roflyear]

That's an argument for no insurance. And it isn't true. People put money in a bank because it is safe. They leave cash cash because it is safe.