"the banks who were way over levered would have seen their deposit insurance rates go up, and thus be incentivized to not be over levered."
That relies on the people selling insurance to be rational. Unfortunately, markets can act irrationally for long enough that disaster still strikes when they come to their senses. For example, it took way too long for CDS rates (i.e. insurance on loans) to rise on Greek debt. In the 19th century - before the creation of the Fed - banking crises and depressions were a dime a dozen in the US: http://en.wikipedia.org/wiki/List_of_banking_crises#19th_cen...
Our economy is ruled by people, like our governments are run by people. The higher up you go, the more scope there is for mistakes, and IMO the less likely you'll see good quality market mechanics. Instead, you see power games, financial hostage taking, threats and counter-threats, etc.
That relies on the people selling insurance to be rational. Unfortunately, markets can act irrationally for long enough that disaster still strikes when they come to their senses. For example, it took way too long for CDS rates (i.e. insurance on loans) to rise on Greek debt. In the 19th century - before the creation of the Fed - banking crises and depressions were a dime a dozen in the US: http://en.wikipedia.org/wiki/List_of_banking_crises#19th_cen...
Our economy is ruled by people, like our governments are run by people. The higher up you go, the more scope there is for mistakes, and IMO the less likely you'll see good quality market mechanics. Instead, you see power games, financial hostage taking, threats and counter-threats, etc.