#6 - The government provides insurance for individuals' bank

[anureet]

Hello,
I am extremely confused by this question. Your explanation states that " It does make sense, given the context, to believe that the argument assumes that the banks pass the cost of insurance on to their customers indiscriminately".
How can we assume that? Am I missing something in the stimulus. Because from my interpretation of the stimulus Banks pay for the premiums for insurance and not the depositors.

Regards,
Anureet Bhatti

[Rachael Wilkenfeld]

Hi Anureet,

It's true from the stimulus that the banks pay the costs for the insurance. However, just because they pay for the insurance, doesn't mean they don't pass that cost along to customers.

Have you ever rented those short term car rentals like ZipCars? One of the things they advertise is that they cover insurance. Don't worry, they say, we have insurance covered. But even though they aren't making you pay directly for the cost of insurance, you better believe they work that cost into the price of the rental. They pass that cost along, even though they directly pay the premium.

Similarly here, even though the banks directly pay the premium for insurance, they probably pass that cost along to the customers. The question is if the cost is being passed along in a fair way, to the people who benefit from that insurance.

Hope that helps!

[emilyjmyer]

Hi!

I was extremely confused on this question, but I want to check to make sure that I understand it now.

The stimulus states that the government provides insurance and that the bank has to pay the premium for this insurance. But, if depositors are the one's benefiting from the insurance, then they should bear the cost of it. Thus, they bear of the cost of it by paying for the premium.

Answer choice C is correct because we assume that the bank does not already have a system of making depositors pay for their premiums.

If the banks had a way to ensure that depositors paid for their premiums, then every time that a depositor opened an insured account it would give them lower interest than someone who opened an uninsured account would get. The lower interest rate is the way that the bank is able to pay for the insurance premium.

Because in the stimulus we are told that banks pay for the premium we can assume that they do not have a system of having depositors indirectly pay for the premium through something like lower interest rates?

Thanks!

[Adam Tyson]

Right, Emily! To simplify the argument, the author thinks it's unfair to make the banks pay when it is the depositors who get the benefit. The author must be assuming that the banks aren't passing the cost on to the customers in some way. If they were passing on that cost then the author would no longer have a reason to think it's unfair, because the depositors would already be bearing the cost, albeit indirectly.

[kristinajohnson@berkeley.edu]

"The government provides insurance for individuals' bank deposits, but requires the banks to pay the premiums for this insurance. Since it is depositors who primarily benefit from the security this insurance provides, the government should take steps to ensure that depositors who want this security bear the cost of it and thus should make depositors pay the premiums for insuring their own accounts."

(Correct) answer choice C says, "Banks do not always cover the cost of the deposit-insurance premiums by paying depositors lower interest rates on insured deposits than the banks would on uninsured deposits."

Negating answer choice C would say, Banks do ALWAYS cover the cost of the deposit-insurance premiums by paying depositors lower interest rates on insured deposits than the banks would on uninsured deposits. BUT I don't understand how this weakens the argument, to me it's just restating the part of the premise that says "but requires the banks to pay the premiums for this insurance." So it's just a confirmation??? If anything it seems like C weakens the argument because it's like, banks don't always (0-99% of the time) cover the cost which is NOT what the stimulus says, the stimulus says banks pay (100%?) ???

The things that make the most sense, but I'm still struggling with, is the part of the premise in the stimulus that says, "Since it is depositors who primarily benefit from the security this insurance provides," and the part of answer choice C that says "Banks do not always cover the cost of the deposit-insurance premiums by paying depositors lower interest rates on insured deposits than the banks would on uninsured deposits." Here, the best I can do, or the most I can understand is that if depositors primarily benefit, then banks don't primarily benefit, but I don't see how banks don't primarily benefit in this answer.

Is this negation: Banks do ALWAYS cover the cost of the deposit-insurance premiums by paying depositors lower interest rates on insured deposits than the banks would on uninsured deposits saying banks ALWAYS come out as benefiting just as much or more than depositors because they recoup their costs "by paying depositors lower interest rates on insured deposits than the banks would on uninsured deposits?"

Please help. I feel this has been the hardest question I have ever encountered.

[Dana D]

Hey Kristina,

First, I want to make sure you've read Jon's explanation of how the negation technique would apply to answer choice (C), because I think it's really well done.

Imagine if banks ALWAYS cover the cost of the premiums by simply paying the depositors less money on insured accounts/deposits: if that's the case, then having the government "make depositors pay the premiums" is impossible, since they're already "paying" by receiving lower rates! So to answer your question of why it's relevant if banks are still covering the cost, it's HOW banks are covering the cost that's critical: depositors get less money on insured deposits, and the difference is what pays the insurance (the difference, of course, belonging to the depositors themselves).

Banks: "want that deposit insured? Yes? Okay, we'll give you 2% interest. Don't want it insured? We'll give you 4%." By varying the rates to cover the insurance cost (and always doing it), banks are making the depositors pay for that insurance already, hence the conclusion that the government should make depositors pay is absolutely destroyed! And that's why the assumption negation technique is such a powerful tool.

So to address the rest of your post - the author is saying if you want to have your $$ insured, you as the customer should pay for that, not the banks. But if the negated answer choice (C) was true, banks aren't really 'paying' for these insurance premiums - they're charging customers who want to insure their money less in interest than non-insured customers (2% versus 4%). So it's not a matter of the banks versus the customers benefitting - the customers are still always benefitting because they are getting their $$ insured. But if the banks are charging different prices for insured customers, then the author's argument that the customers need to pay for their own insurance is basically moot, because the banks are already covering that cost via their different pricing.

Does that help?