> This is exactly why banking regulations (e.g., FDIC) were invented.
But the FDIC suppresses the natural heightened attention and due diligence tendencies of the free market. There isn't any risk for someone giving their money to a badly-managed corporation, so they do it without thinking. The customers face no risk, so the custodians start taking crazy bets because it isn't their money and so they don't really face much risk either. If anything the FDIC should be cast as a serious moral problem, people with money are being allowed to take no-care no-responsibility stances when their capital is being used harmfully.
And I'm not sure where this argument comes from that capitalists wouldn't care about their money. One of the things that people most reliably care about is the safety of their money, to the point where it is hard to parody. The main issue that I see is they are acting while weighing up the (reasonably high) odds of bailouts happening.
> The customers face no risk, so the custodians start taking crazy bets because it isn't their money and so they don't really face much risk either
But these weren't a shady schemes that offered unbelievable returns, just basic bank cards - No 15 year old is going to, is able to, or should be expected to audit the vendors that the 'bank' account they use for holding their allowance in uses.
I mean, there is an assumption in your post. That assumption is that a 15 year old should be able to give their money to some untrustworthy stranger to do who-knows-what and expect to get the money back.
It is a weird double standard to me given the thread root post. I don't think people should be giving money to others thoughtlessly. If you aren't capable of understanding the consequences of your investments - as this 15 year old clearly isn't - don't invest. There is this whole financial system where we know that the people involved are sub-competent, a lot of the financial incentives that would flush incompetents out of the system have been removed, and then we expect this 15 year old to support their operations financially.
To me that seems kinda silly when we put it together. This 15 years old can just put the money in a known full-reserve bank. We don't have those because responsible custodianship is uneconomic with things like the FDIC floating around, but that is a regulatory problem.
> I mean, there is an assumption in your post. That assumption is that a 15 year old should be able to give their money to some untrustworthy stranger to do who-knows-what and expect to get the money back.
No I’m saying companies shouldn’t be able to look like banks without being regulated like them. This could be through a government agency, or a rating or industry organisation that guarantees orderly shutdown.
If the travel industry can ensure tourists aren’t stranded abroad when travel agencies go bust why can’t fintech.
> There isn't any risk for someone giving their money to a badly-managed corporation, so they do it without thinking
The problem us that consumers are not capable of figuring out whether a corporation is well managed or not. They have neither the information nor the analytical abilities. Analysts, even specialists in risk, and regulators often get it wrong! Very few people saw the 2008 collapse coming. Some of us had doubts about particular institutions (Northern Rock, first UK bank to go, in my case) or about the level of bad mortgage lending, but very few people, and very few of those who were supposed to know,saw it coming.
> And I'm not sure where this argument comes from that capitalists wouldn't care about their money.
Where did you get that from? The problem is that people who are in charge of other people's money will risk it for various reasons, often due to a conflict of interests.
Edit: to add, the problem is really "agency issues" - was trying to avoid terminology.
> The problem is that people who are in charge of other people's money will risk it for various reasons, often due to a conflict of interests.
Thank you for your response.
I wanted to amplify this point. This sort of thing is very common in hierarchical organizations. de Mesquita and colleagues have a model that fits reality quite nicely, and indicates a reason for this behaviour.
Does the existence of a seat-belt suppress the "natural heightened attention" (whatever this is) of the driver?
> There isn't any risk for someone giving their money to a badly-managed corporation, so they do it without thinking
I have no insight to the institutions I give my money to; if they operate on American soil, I "understand" that they have been regulated and brought up to standard by the State.
The fact that a consumer depositing their money in the bank has to do "due diligence" or needs to be blamed when the institution (company?) goes belly up is laughable.
> Does the existence of a seat-belt suppress the "natural heightened attention" (whatever this is) of the driver?
No. If there is a crash the driver will still be involved in the crash. Seatbelts are a risk-reduction technique, FDIC is risk transfer.
> I have no insight to the institutions I give my money to...
The good news is you're pretty normal. However the observation is you're enabling a bunch of rather untrustworthy people who don't care about your interests and it is pretty easy to imagine that story ending worse than if you were in a position where you either demanded some insight or didn't give them money.
> Does the existence of a seat-belt suppress the "natural heightened attention" (whatever this is) of the driver?
I love this analogy. It neatly highlights that an individual, no matter how "attentive" can still be acted on by external forces. And also, implies that said individual is always affected by those around them, because they share their environment with others.
I find that same have difficult grasping these points, at times.
But the FDIC suppresses the natural heightened attention and due diligence tendencies of the free market. There isn't any risk for someone giving their money to a badly-managed corporation, so they do it without thinking. The customers face no risk, so the custodians start taking crazy bets because it isn't their money and so they don't really face much risk either. If anything the FDIC should be cast as a serious moral problem, people with money are being allowed to take no-care no-responsibility stances when their capital is being used harmfully.
And I'm not sure where this argument comes from that capitalists wouldn't care about their money. One of the things that people most reliably care about is the safety of their money, to the point where it is hard to parody. The main issue that I see is they are acting while weighing up the (reasonably high) odds of bailouts happening.