How Do We Fix the Banking Problems and the FDIC?

Usually when I ask a question as the title of my blog post, I go on to answer the question.  With this post today, I am actually struggling to answer this question with a solution that is consistent with my strong libertarian beliefs.

On Monday, November 14, I wrote a post on the problem of the FDIC.  I am completely against having an FDIC that is run by government.  I would not be against the idea of having banking insurance if it took place through the voluntary marketplace.  As I previously said, I am in favor of abolishing most government programs and departments almost immediately.  However, I see major problems with eliminating the FDIC immediately as it would probably cause bank runs almost instantly and really would threaten to take down our whole financial system.

I am certainly in favor of dismantling the current financial system, as it is bogged down with bureaucracy and major government interference.  But I don't want to see it happen with total chaos as millions of people lose the money that is in their checking accounts.

So how do we end the FDIC in an orderly fashion?  We definitely need some kind of a market solution.  We need to somehow phase it out.  The post office is being phased out.  Email and the internet are helping to do this.  The loosening of previous regulations and allowing companies like FedEx and UPS to compete was a big step.  We need to continue to free up competition.  In the case of the post office, the last step is to end the monopoly on delivering first class mail.  Private enterprise will eventually close the government post office.

It is a little harder with banking.  Banks should be allowed to start up without having to abide by government regulations, other than those that strictly relate to force or fraud.  Even here, these laws should come from the state and local levels.  They should not come from Washington DC.  These banks would not have the backing of the FDIC.  The problem here is that it would be difficult for these new banks to thrive.  The FDIC acts as a subsidy to the current banks.  It allows them to take excessive risk and not being held accountable by their customers.  Customers don't really care who they bank with from a safety perspective as they know the FDIC will bail them out.

If legal tender laws were also repealed (a very important thing), then more people might start using gold, silver, or other currencies.  Banks could then operate the way they should in a free market environment, acting as a storage house.  Banks would probably not pay depositors interest on their money, unless the depositor was in agreement that their money was being lent out and that it might not be available upon request.

The amount the FDIC insures was increased three years ago, during the financial crisis, from $100,000 to $250,000.  This needs to stop.  If the FDIC would just stop raising the amount, it would eventually be phased out by the Federal Reserve's inflation.

So I am still not sure how to answer my question of how we fix the whole situation.  It is quite astounding because for all of the things I read on,, and other libertarian sites, I have not really seen this addressed.  The only idea I remember seeing was that of George Reisman.  He advocated that the Fed increase the monetary base and capitalize the banks, but then force the banks into having 100% reserves (no fractional reserve lending).  I don't like this idea for the long term, but I do give him credit for being one of the few people to offer a solution, at least for the short term.

One thing I do know is that the free voluntary market has a way of solving problems.  We need to repeal as many government laws as possible, particularly those in DC.  Laws should exist to protect people and their property from force or fraud.  From a constitutional standpoint, most of these should be coming from the state and local level.  Once these regulations are repealed, the free market will find a way of providing honest banking services.