A history of deposit insurance on the web site of the FDIC notes: “Some have argued at different points in time that there have been too few bank failures because of deposit insurance, that it undermines market discipline, … and that it amounts to a federal subsidy for banking companies.”
a. What does it mean to describe deposit insurance as undermining “market discipline”? From this perspective, why might deposit insurance lead to too few bank failures?
b. In what sense might deposit insurance be considered a federal subsidy for banks?
c. If deposit insurance has these potential drawbacks, why do economists and members of Congress overwhelmingly support it?