Australian politicians have come up with a brand new way to scam citizens… which smells just like any old way of scamming citizens. The Daily Telegraph - Australia reports in it article that yes "Deposits tax will hurt ordinary Aussies". What's this thing all about?
Australia has sort of Deposit Insurance for banks called the Financial Claims Scheme. Should a bank fail, the FCS will cover the depositor up to 250.000 AUD. The problem is that the FCS is not "well founded" (i.e. bureaucratese for broke). Thus, a new tax is required "for the greater good", of course.
This new "tax" thingy idea has been going around for a few years now but it would seem that finally! all Aussie politicians are in agreement…sort of. A new tax is required. What a surprise…not!
And so these stupid, stupid wise people have decreed that a new tax will be "levied" (i.e. extorted) from banks in a proportion related to their deposits. This proportion is of only 0.05% for deposits up to 250.000 AUD. This is part of the "effort" to raise 500 million for… for what exactly?
There are several net effects that we must take into consideration when this happens. The most obvious is that a tax on savings simply means diminishing capital and when this happens the economy as a whole slows down (see How Taxes Destroy Capital And Why This Is Bad and Taxes - The Force Multipliers).
Additionally, it is more than obvious that banks will simply pass this tax to their depositors, which means lower profits for average people.
Regular Aussies will be hit disproportionally by this new tax, because it only applies to accounts with less than 250.000 AUD.
In addition, taxes never stay static, they always increase. Which means that over time it is guaranteed that this "tiny" 0.05% will become 0.1% and then 0.2% and then… you get the idea. The sky is the limit.
Then we have the problem of where will this money be actually going to. No, we are not talking about the intention of this tax, but the final outcome. The government says that it needs another 500 million and that this tax is part of this "effort" (for whom we must ask… certainly not from politicians… but we digress). Which means that the money collected by this tax is most likely to end up elsewhere but in the FCS system. Which means that when the new economic catastrophe hits, the FCS system will have to be bailed out by the Australian government with… drumroll please… printing!
What the Australian government did is nothing new. Many countries around the world have such insurance scam scheme. And yet, inevitably, all of them sooner or later end up bailing out the insurance.
That's not the point. The point is that in a free market you don't need deposit insurance and this, believe it or not, is a good thing. Actually, it is a very good thing. As there is no "insurer of last resort" in a free market, every bank and every customer stands alone. This is so because providing "insurance of last resort" is simply impossible. There is no insurance company that would take such a bet. They know that when banks begin to fail they do so in chain reactions thus in no time any insurance company will be bankrupt. It's the same reason no insurance company ever insures nuclear electric plants. The potential loss from any accident, even a small one, is so staggering as to make any insurance attempt a foolish idea. Thus, enter the state. As the state can print itself out of any problem whatsoever, the insurance costs for the state are exactly zero (considering that they can create digital money out of thin air at zero cost). Thus, there is no downside for governments. But there is a downside for people. When governments print to pay said insurance they debase and devaluate money. Which means that in such circumstances people are being paid with less worthy (or even worthless) coloured paper.
The conclusion is simple. No such insurance will ever be a good idea. But what is the alternative? The alternative is always the same. When you cannot trust the watchers who will watch the watchers who will watch the watchers and so on, the only solution is that everybody watches their own interests. In a free market, banks want deposits because they make loans with them thus turning a profit. In a free market depositors want to deposit their savings in a bank which pays interests, but only if they are reasonably assured that said bank will return their investments in full first and provide some return on the investment itself second. Thus, in a free market depositors will flock to conservative banks because this conservative approach is the only guarantee they have that their money won't go up in smoke in risky investments. This natural process avoids the need for insurance altogether but if you still wish to gamble your savings with an insolvent bank, you will have all the necessary information to make an informed decision. Thus, everybody watches after their own interest but as a consequence of it, everybody is better off because the entire banking system becomes conservative. And no, this is not economic science fiction. If you bother looking through history in the past where banks were accepting gold and printing their own money, there were listings in the papers as to the "capitalization ratio" of different banks as a scale to rate bank "riskiness". The free market provided a suitable solution with no taxation!
And so strangely enough, not having an insurer of last resort is far better for people than having one!
Australia is following in the footsteps of banana republics and other ludicrous so-called countries. It is doing so, simply because as with any other money-thirsty bunch of politicians, they want to spend to keep their jobs, making such jobs the most expensive jobs in the history of human kind.
Yet, there is always the other view. There is always a person who wants absolute certainty. Fair enough. If you must have deposit insurance with absolute certainty, you will also have government-induced economic destruction with absolute certainly. Your turn to play.
Note: please see the Glossary if you are unfamiliar with certain words.