Back to Libertarians

As I've said, I often read what these guys are saying, usually since I disagree with them, but because I'd like to know why they think what they do.

They tend to accuse non-libertarians of following dogma, but the quote in this post suggests that they too are under the heavy influence of dogma:

federal insurance had the benefit of further entrenching the power of small banks, which would otherwise be a competitive disadvantage relative to their larger banking peers. We adopted the FDIC not as a part of a well-thought out plan to stem banking problems based on past evidence; but rather to satisfy the small bank lobby responsible for banking fragility in the first place. 

Deposit insurance only came in because of the small banks lobby? Got some evidence for this as opposed to your suspicion given the dogma you adhere to religiously?  There's further evidence to support this if you read the actual article that the quote is taken from; it rails on from stupid US regulation restricting the geographic cover of US banks to basically suggest banks would be ok without regulation and that deposit insurance only came from that botched regulation.

Is it possible (optimistic I know) that actually governments operated on an economic efficiency basis? The free market will perfectly well provide insurance if a number of conditions relating to the risk being insured against are in place. If not, then it might be that government intervention of some form is necessary. Those conditions are that the probability is:

• Known and estimable.
• Less than one.
• Independent between policy holders.
• Exogenous to the policy holder.

Of these, I think it's fair to say none hold. This doesn't justify intervention, since moral hazard will exist regardless of who provides the insurance - banks will still take more risk once insured than they would if not insured.

However, adverse selection says that in this case, insurance premiums rise and hence small banks may not be able to afford them - perhaps why they lobbied in the first place. A simple intervention here would be to make insurance compulsory. Most libertarians seem to think everyone else jumps on the boat of state production at every opportunity, kind of forgetting that as economics we are aware of many possible solutions, and would like the one that distorts outcomes as little as possible.

Is it also possible, taking the economist's hat off again, that governments simply provided insurance in a simple fashion because they were interested in the little man whose deposit might be lost? That governments were actually representing their constituents as opposed to businesses when making these decisions? Not in the dogmatic libertarian mind: Governments only exist to be lobbied by big (and small!) business, and are always and everywhere malevolent beasts in their minds.