The Rudd government has made its first big mistake in handling the financial crisis. The just-announced proposal to guarantee bank accounts up to $20 000 is worse than useless. Given that lots of people hold more than $20 000 in individual bank accounts, they have an obvious incentive to diversify, which means large scale withdrawals. The possibility of this turning into a run is far from remote. Turnbull’s suggestion of $100 000 is better, but the only serious option is an unlimited guarantee.

Update Some good news on this. Once we have a guarantee of $100K or more in place, the extra liability associated with an unlimited guarantee will be modest, while the gain in simplicity will be substantial, and the argument for exercising direct control over bank lending will be unanswerable. Of course, as a colleague pointed out in the course of email discussions on this point, the real problem is the banks’ reliance on overseas borrowing. I’ll be discussing some proposals on this before too long I hope.