Capitalism and Freedom in the 21st Century Podcast• Mar 27, 2026• 1:12:33Interview

Banking Systems and Crises from Deposit Insurance to Stablecoins with Charles Calomiris

From Capitalism and Freedom in the 21st Century Podcast

Charles Calomiris•Emeritus Professor of Finance, Columbia Business School

Executive Summary

The conventional understanding of bank runs, epitomized by the Diamond-Dybvig model, is flawed; runs are driven by fundamental risk, not random coordination failures, and FDIC insurance has created significant moral hazard.
Historically, U.S.
banking crises were caused by politically-motivated branching restrictions that prevented diversification, a problem not seen in systems like Canada's.
Government policies, particularly subsidies for risky housing finance, were the primary cause of the 2008 financial crisis, and subsequent reforms like Dodd-Frank were intentionally ineffective.
is on a path to 'fiscal dominance' within five years, where the Fed will be forced to monetize government debt, leading to sustained inflation of at least 10%.

12 quotes

Concerns Raised

The U.S. is on an unsustainable fiscal path that will lead to fiscal dominance and high inflation within 5 years.
Government deposit insurance and bailouts create severe moral hazard, encouraging excessive risk-taking that leads to larger, taxpayer-funded crises.
Financial regulations like Dodd-Frank are often politically compromised and ineffective, creating a false sense of security.
The U.S. regulatory system is 'unserious' and fails to properly supervise banks, as seen with Silicon Valley Bank.

Opportunities Identified

The rise of stablecoins and fintech offers a path to an 'unbundled' and potentially more stable financial system.
Adopting a banking structure with fewer restrictions and greater diversification, similar to the historical Canadian model, could enhance stability.
Imposing higher reserve requirements could be a tool to mitigate the inflationary consequences of fiscal dominance.

Key Themes

The Political Origins of Banking Crises

The speaker argues that banking systems are 'fragile by design' due to political bargains that favor certain groups, like borrowers. He cites U.S. branching restrictions and government subsidies for risky housing finance as key examples of politically-driven policies that create systemic instability, contrasting this with Canada's historically stable, nationally-branched system.

This theme reframes financial instability not as a market failure but as a predictable outcome of political intervention, suggesting that durable reform requires addressing underlying political incentives rather than just technical regulation.

Deconstructing Bank Run Narratives

The episode challenges the Nobel-winning Diamond-Dybvig model, asserting that real-world bank runs are responses to observable, fundamental risks, not self-fulfilling panics. It also debunks the popular belief that FDIC insurance solved the Great Depression's banking problems, arguing it was the 1933 bank holiday and that deposit insurance primarily serves to subsidize credit and creates moral hazard.

This critique undermines the foundational justification for many modern banking regulations and government backstops, suggesting they may be addressing the wrong problem and inadvertently increasing long-term systemic risk.

Impending Fiscal Dominance and High Inflation

A strong prediction is made that the U.S. will enter a state of 'fiscal dominance' within five years. In this scenario, the Federal Reserve will lose its independence and be forced to monetize government debt to prevent a fiscal crisis, leading to a sustained period of high inflation, potentially 10% or more annually.

This is a significant macroeconomic forecast that challenges the consensus view on future inflation and monetary policy, with profound implications for investors, businesses, and long-term financial planning.

The Unbundling of Financial Services

The future of finance is envisioned as a move away from traditional, bundled banking toward a system of specialized entities. In this model, stablecoins would function as narrow payment banks holding safe assets, while lending would be conducted by separate, market-funded institutions, reducing the systemic risks associated with combining deposit-taking and lending.

This highlights a structural shift driven by technology (fintech, stablecoins) that could fundamentally reshape the financial landscape, offering a potential path to a more stable system but also posing challenges for incumbent banks and regulators.

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Topics

Banking History Financial Regulation Deposit Insurance Bank Runs Diamond-Dybvig Model Moral Hazard 2008 Financial Crisis Fiscal Dominance Monetary Policy Federal Reserve Inflation Stablecoins Fintech Dodd-Frank Act Canadian Banking System Branching Restrictions Housing Finance Silicon Valley Bank (SVB)

Processed Apr 2, 2026 yt-dlp + mlx-whisper + Gemini