Luís Carlos Calderón Gómez (Cardozo; Google Scholar) presents Too Hard to Insure at UC-Irvine today as part of its Tax Policy Colloquium hosted by Natascha Fastabend:
New kinds of private money—such as stablecoin—are thriving, with increasing circulation, growing acceptance, and rapid technological innovation. But this new money has an old problem: its vulnerability to runs. Bank runs can destabilize even well-regulated and healthy banks, and their spread can catalyze and amplify a system-wide financial crisis. Since the 1930s, policymakers have sought to protect our financial system from bank runs through public deposit insurance and other emergency response mechanisms. Those historically effective policy tools, however, are unavailable or ineffective in stopping bank runs on these new types of money. The Article proposes a new, if unconventional, solution to the financial contagion risks of these new kinds of money: taxation. A Pigouvian tax—unlike banking regulation or traditional response mechanisms—can reduce the risk of financial contagion by forcing private money issuers to internalize the social costs of contagion in their private decision-making.
In this Article, we make the case for such a tax, discuss its main design features, and explain how tax instruments can partly replicate the success of public deposit insurance and why tax instruments are better equipped to solve this problem than traditional tools.
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