from Patrick McKenzie | by Patrick McKenzie

Patrick McKenzie


over 1 year ago

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A concept that I find useful for understanding the logic of deposit insurance is "local elites." In the typical context for a bank failure, a small town's community bank, you are trying to insure the mayor, the pastor, the principal, many local business owners, etc.

People often say you're trying to move the aggregate actions of many small depositors, which is... true to a point. But there is an assets curve, and a) the local elites have most of the assets and b) the local elites disproportionately spread run risk.

One reason is that the local elites are heavily networked, both with themselves, because the elite is the elite, and with everyone else, because the elite is the elite. And in addition to being networked, they are listened to.

Applicability of this to a world in which your local elite might be e.g. someone who has a Tiktok is left as an exercise to the reader.

Anyhow, when you think of deposit insurance limits, there are a variety of considerations that go into setting that number, but one lens is "At what number is a critical mass of your elites *not* panicking?"

One reason the number has been pulled up over time is that, given a constant town picked at random from middle America, the constituents of local elites are just much, much richer than they used to be, partly because nation/world is and partly Other Economic Changes Since WWII.

Some sociologist should try actually making some semblance of a rigorous list of Most 100 Influential People In Anywhere, USA 2023 edition and then compare it to their best approximation for the 1953 or 1993 editions. That would be sort of fascinating, right?

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