[quote=UCGal]One small quibble with this… as I read it, the non-recourse loan is backed by the FDIC. Now the FDIC doesn’t have enough money to bail out the banks that are failing, but they do have a line of credit… But, in theory, they will charge the remaining (non-failed) banks higher premiums to make up for these losses…

So at least some of the transfer of wealth is from healthy banks to sick banks – with the taxpayer covering the losses in the meantime.

I forgot where I read this, but it made sense.[/quote]

Insurance premiums are peanuts compared to the dollar amounts we’re talking here. The FDIC may run out of money. So what? It has an unlimited line of credit. We’re talking dollars, remember? Who prints the dollars? Uncle Sam!

Very different from the situation in Argentina in 2001. They could print all the pesos they wanted, but they needed to come up with U.S. dollars to pay back their loans. I’m not saying that we’re on easy street here in the USA. Just because we can print all the dollars we want only means that we (FDIC included) will never run our of cash. But there are costs: namely, high or very high 1970’s style inflation.

In any case… having healthy banks subsidize insolvent banks will make the latter survive longer than what they should. We’ll have a long slump as they had in Japan since their asset bubble bursted in 1989-90. That doesn’t make sense to me.