Unpronunceable pseudo,
The idea that government should not allow any bank to fail is silly. Bank failures are needed to discipline banking practices - the same is true of other industries. A run would exercise strong market discipline for enhancing overall banking stability on the long run, putting bankers on full alert.
Kam Hon Chu 2011, Deposit Insurance and Banking Stability :
As long as a run is on an individual bank but not on the banking system as a whole, deposits are just redistributed from the bank that is perceived by depositors as more risky, and hence run on, to other safer and financially sound banks.
Note, also, that an isolated banking failure does not threaten the banking system as a whole. See once again The Theory of Free Banking (p. 115) :
But there is reason to suspect that, under free banking, panics would be unlikely even without deposit guarantees. As Gary Gorton has shown in several articles (Gorton 1985a, 1985c; Gorton and Mullineaux 1985), in a market where bank liabilities are competitively bought and sold there would not be any risk-information externality. Note and deposit exchange rates would reflect potentials for capital losses depending on the soundness of underlying bank loans and investments. Chapter 2 showed how note brokerage systematically eliminates note-discounting except when it is based on risk-default generally acknowledged by professional note dealers, including banks themselves. In short, note brokerage produces information on bank-specific risk. With such information available to depositors, no information externality could cause bank runs to spread indiscriminantly through a banking system. After confirming through the newspaper that there is no discount on the notes he holds, a bank customer would feel no urge to redeem them in a hurry. Gorton also points out that, even though no distinct secondary (arbitrage) market exists for the risk-pricing of deposit liabilities, so long as notes and deposits of any one bank are backed by the same asset portfolio (as would be the case under free banking) the existence of a secondary note market provides depositors with all the information required to prevent them from staging a redemption run.
Previously in his book, he wrote (pages 29-30) :
One of the more common tasks the clearinghouses take on is to serve as a credit information bureaus for their members. By pooling their records, Ruritania’s banks can discover whether people have had bad debts in the past or are presently overextended to other banks. This allows them to take appropriate precautions (Cannon 1900, 135). Through a clearinghouse banks can also share information concerning forgeries, bounced checks, and the like. Clearinghouses may also conduct independent audits of member banks to assure each member bank that the others are worthy clearing partners. For example, beginning in 1884 the New York Clearinghouse carried out comprehensive audits to determine its members’ financial condition (ibid.). Others, such as the Suffolk Bank and the Edinburgh clearinghouse, took their bearings mainly from the trends of members’ clearing balances and the traditional canons of sound banking practice. Those two clearinghouses enjoyed such high repute that to be taken off their lists of members in good standing was a black mark for the offending bank (Trivoli 1979, 20; Graham 1911, 59).
Even on the assumption that a free banking scheme does not prevent banking crisis, the banking system would be more unstable under regulated banking system anyway. See Legal Restrictions, Financial Weakening, and the Lender of Last Resort (Selgin, 1989).
“It’s almost like you randomly quoted a section of a book that was tangentially related to the discussion just to make it look like there’s something there.”
Please, don’t speak as if you were more knowledgeable than me on free banking.