The recent spate of bank failures and the Biden Administration’s response has some talking about raising or eliminating the federal deposit insurance limit of $250,000. It’s important to remember, however, that what we call deposit “insurance” in no way resembles actual insurance. Federal deposit insurance, and every other form of insurance touched by government, is better described, in the words of Murray Rothbard, as a “fraudulent racket.”
Insurance is, in many ways, the market process at its most beautiful. We exist in a constant state of uncertainty—a fact that is “implied in the very notion of action,” according to Mises. You cannot know whether, in the next year, your business’s sales will improve, your house will burn down, or the price of gasoline will skyrocket. All you can do is use your judgment and the knowledge available to make the best-informed decision and act.
However, some uncertainties—such as whether your house burns down—possess unique characteristics. Mises used the term class probability. And Rothbard followed Frank Knight in using the word risk, which they distinguished from uncertainty. Mises summarizes the difference:
Class probability means: We know or assume to know, with regard to the problem concerned, everything about the behavior of a whole class of events or phenomena; but about the actual singular events or phenomena we know nothing but that they are elements of this class.
In my words, these risks are nearly impossible to predict on a case-by-case basis. But when they are grouped into specific homogeneous classes of events, we can be reasonably certain about how frequently they will occur. With that near-certainty, insurance providers can offer coverage tailored to the class probability of these risks.
That’s what I meant by beautiful. When left alone, the market process allows people to trade their exposure to risk in a world full of uncertainty and varying levels of risk aversion. On top of that, insurance works as a way to funnel cash from the healthy and able to the old, sick, and downtrodden who need it, relying not on the expropriation of wealth but on voluntary, win-win transactions.
And as many libertarian scholars like Rothbard and Hans-Hermann Hoppe have argued, an insurance model would most likely be used to provide things like protection services in the absence of a state monopoly. There is a lot the insurance model can do. But it requires a free market.
To work, the insurance model rests on the provider’s freedom to properly classify risk and both parties’ ability to walk away from the transaction. Remove either or both of these elements, and what remains is no longer insurance.
Obamacare did both. Providers were prohibited from classifying risk based on preexisting conditions, and individuals were forbidden from choosing to go without health insurance. The Act represented a large step away from the insurance model towards the crony third-party payment scam that defines today’s rotten healthcare system. Interventions have also warped car insurance, flood insurance, and more—bringing about higher prices and riskier behavior.
The government also runs its own “insurance” programs like Medicare. But because they’re tax-funded and protected from the feedback of consumer choice, these “insurance” schemes are more accurately described as wealth redistribution programs.
Federal deposit insurance falls into this last category. The government-run Federal Deposit Insurance Corporation (FDIC) is not classifying risks, and depositors are not choosing plans based on their risk aversion and financial status. Instead, the FDIC uniformly covers all deposits up to $250,000—a limit some now want to eliminate.
This isn’t insurance. As Rothbard wrote, it’s “a massive bailout guaranteed in advance” that props up the banking sector and subsidizes the fractional reserve system. In other words, it’s a fraudulent racket that funnels cash from the downtrodden to the pockets of wealthy bankers. That sounds like the opposite of insurance.
