I agree with every word of Ramesh’s latest column for Bloomberg View.
If Republican overspending drove voters away, they should have lost support first among conservatives. But there was no sign of a demoralized base in 2006. Exit polls found that self- identified Republicans made up a healthy 36 percent of the electorate that year, and they voted for the party’s candidates by roughly the same huge margin they had voted for them in the banner Republican year of 2004. It was among independent voters that Republicans got slaughtered. (House Republicans lost independents by three points in 2004, but 18 points in 2006.)
It seems much more likely that Republicans lost in 2006 because of the bleeding in Iraq, corruption in Washington, wage stagnation and the lack of any agenda by the party to do anything about these or other problems. Some of these issues had faded in importance by 2008, but in that year voters were also ready for a change after eight years of Republican control of the White House and, above all, dismayed by the economic crisis. In 2008, 60 percent of voters said the Republican presidential candidate, John McCain, wasn’t “in touch with people like them” — and 79 percent of people who felt that way voted against him. That’s what defeated Republicans, not a perception that they were doctrinally impure.
Rather than insuring banks, the government should insure depositors individually for losses they suffer on deposits at any FDIC-approved bank, up to a pretty high limit (say $1 million, indexed to inflation). Ordinary households would be unaffected by this change, as most families hold balances far less than the insurance cap. They could continue to deposit funds at the FDIC-approved bank of their choice without fear. Affluent households would no longer be able to play the wasteful game of evading insurance limits by splitting funds among different types of accounts and institutions. The affluent would be expected to monitor and help discipline the firms in which they invest. This is both fair and politically credible. It’s fair, because pushing wealth forward in time requires hard information work, and those who wish to push a lot of wealth forward (and earn interest on top!) should contribute to the effort. It’s credible, because ex post facto bailouts for underinsured depositors would be a hard sell when the underinsured include only wealthier depositors, who would not be reduced to penury but, at worst, to a level of affluence most households never achieve, simply by maxing out their government insurance.
Insuring depositors rather than banks wouldn’t, and doesn’t purport to, resolve the too-big/bad/sexy-to-fail problem. It would be a modest change that would eliminate some of the gaming that permits affluent investors to shirk their duty of discipline, and that would improve incentives to monitor by reducing the likelihood that notionally uninsured depositors get bailed out. But all of this matters very little in a world where even junior, unsecured creditors of some banks enjoy an implicit state guarantee.
Now, this would be only one step. But it certainly resonates with conservative themes, and it addresses a real-world problem.