A New Moral Hazard in the Banking System

One commonly hears the argument that the FDIC creates moral hazard in the banking system, because depositors aren't worried about the soundness of their banks. I find this argument broadly dubious, since I have no idea how the vast majority of depositors could possibly be expected to have informed opinions on the soundness of their banks. Moreover, during the Great Depression, local wealthy people--who did have quite a lot of knowledge about the banks, and the local economies into which they lent--got hammered along with the rest of America.

But this suggests that there is a different, more plausible form of moral hazard operating right now: (more)