The federal government should expand its guarantee to all bank deposits regardless of size in order to slow bank runs, but it should charge customers for that insurance, hedge-fund manager Nelson Peltz said Monday.

Source: Nelson Peltz says government should insure all bank deposits—for a price

The cost of insurance premiums for unlimited protection would be high – and be paid by customers in the form of low interest paid on your deposits and the addition of new account fees.

And then the bankers could engage in ever more risky investment strategies without fear of losing their customers’ money. This has moral hazard all over it.

The Fed responded to the public health induced economic collapse by creating free money.

Bankers, like SVB, did not manage their investments appropriately in an environment where the Fed jacked up insurance rates too fast and too late. You can see the Fed’s crazy rocket launch at the right of this chart. Compare to past rate hike profiles.

Ineffective public health NPIs, ordered by arrogant public health quacks who had no understanding of their NPI impacts and who foolishly thought we could lockdown the rest of our lives without consequence, crashed the economy.

The Fed responded by dropping interest rates basically to zero – creating free money through the banking system.

Today we are paying those costs through inflation – which lets borrower pay off past debts with future deflated dollars.

The Fed’s main tool to lower inflation is to reduce demand by raising interest rates, making loans expensive – thereby reducing cash for spending.

In fact, the Fed has said that it wishes to align the economy with the available labor supply. Due to the long-standing low fertility rate and the aging out of the upper end of the demographic curves, labor is in reduced supply versus where it had been over previous post War decades. The Fed’s goal, in other words, is to shrink the economy to match the labor supply. Yes, some people at the Fed said that, in so many words.

Thus, we get to the mass layoff phase of this economic situation.

The problem is this reduced labor supply is not temporary – it is effectively permanent because our fertility rate is now about 1.6.

2008 was the peak in the “Baby Boom Echo”. From here it is all downhill. We already see the impacts in elementary school and now middle school closures, occurring nationwide. The leading edge of the new, shrinking youth cohort is about to start college – where enrollments are also falling. As far as schools and colleges go, it is all downhill from here.

Can we immigrate our way out of this? That’s the standard response from economists. Just import more people! But there are multiple problems with that.

  1. 75% of the world’s population lives in countries with population growth below replacement level.
  2. The decline in birth rates is global; India too will soon fall below 2.1.
  3. There will not be enough immigrants willing to relocate to other countries to go around.
  4. Assuming all else remains equal, this labor shortage is a long term trend that will last for the foreseeable future – and get worse.
  5. The Fed appears to be managing this current economic crisis using old rules – and seems possibly oblivious to the root causes of the labor shortage.
  6. The labor shortage becomes a demand side driver of inflation (coupled with the supply side free money).
Coldstreams Skeptic