Mutual Enmity: Deposit Insurance and Economic Democracy

Abstract

Economists delight in perversity, such as the idea that private vice promotes public virtue. Our contrarian instinct to identify the unintended consequences of good intentions manifests itself in claims that public spending crowds out private, that higher taxes reduce government revenue, that minimum wages create unemployment, et hoc genus omne. This rhetorical trick is normally used to promote a neoliberal agenda but social economists can play the game too. I want to argue that deposit insurance, among other policies nominally intended to protect or promote the interests of individual consumers, has in fact undermined the mutual organizations that serve consumers best in the long run and has ultimately simply concentrated power and served the interests of large institutional investors and their managers. Between 1989 and 2000, the ten largest UK building societies demutualized and, by 2009, none remained as independent entities, having either been acquired by larger banks or nationalized. Demutualization was an indirect consequence of a more general financial liberalization that began in the case of the UK with the deregulation of bank lending in 1971 together with the abolition of exchange controls in 1979 and removal of the corset on bank lending in 1980. These developments, together with the removal of certain tax privileges, undermined the interest rate cartel operated by the Building Societies Association since 1939, of which the main effect had been to keep