Ep. 252 Bob’s Reaction to the Bernanke/Diamond-Dybvig Nobel Award
Bob Murphy Show
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Government Deposit Insurance and the Diamond Dip Big Model
In the diamond dip big model, there's various contractual mechanisms that you'd think the private banks could adopt to avoid a suboptimal outcome in terms of social welfare. The problem is if the bank makes an offer contractually, but they don't know how many people are going to take them up on it because the number of the people who are going to end up needing their money or wanting their money back after one period is a random variable. If that happens, so when they get to that part of their model, then they show up, see free market fails and then the government can come in and with adequate policy regulation can fix it.
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