#6 - The government provides insurance for individuals' bank

[Administrator]

Complete Question Explanation

Assumption. The correct answer choice is (C)

The stimulus concludes that the government should make depositors pay to insure their own accounts. Currently, the government requires banks to pay for the insurance, but the stimulus argues that since depositors are primarily the beneficiaries, the government should make sure that people want the benefit are the ones who pay for it.

A bank very likely passes its costs on to its customers, and the argument very specifically mentions “those who want (insurance),” so it does not make sense to believe that the argument speaks against the unfairness to banks. 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, thus making customers who do not benefit from the insurance pay for it anyway. Since you are asked to identify the assumption, you should focus on that.

Answer choice (A): Whether or not the government pays for the insurance for loans that banks make, it the cost of insurance could still be distributed unfairly among customers, so this incorrect response is not useful.

Answer choice (B): The argument concerned whether the current situation is fair to each customer, not whether private rather than government insurance could be utilized. Furthermore, this choice fails the negation test, because even if private insurance is possible, altered government insurance could still be the correct solution. This choice is incorrect.

Answer choice (C): This is the correct answer choice. The argument must assume that the banks do not already pass the cost on to depositors on the basis of whether the deposit is insured. If the banks were to give insured depositors lower interest rates than it gives depositors who are uninsured, that would make it likely that the bank passes the cost only to the primary beneficiaries.

Answer choice (D): Whether or not the government limits insurance protection up to a defined amount, it could still be true that the cost should be passed to depositors who want the insurance, so this choice is irrelevant and incorrect.

Answer choice (E): This incorrect choice may have been attractive, because it hits on the possibility that some depositors may not want the insurance. However, this choice only explains that the government allows uninsured accounts, which does not address the possibility that the cost is distributed to each customer, regardless of whether the customer receives the service. Furthermore, even if the government does not allow uninsured accounts, banks could still pass the cost of insurance only to depositors, and every depositor might want the insurance, so this choice fails the negation test.

[eyeofthetiger]

Hi team,

I've narrowed my Contenders to (C) and (E). I'm not sure that (E) is relevant to the argument in any way, though I can't explain it in words. I know I need to be able to do that to go forward, but initially it just seems that if all deposits require insurance, then that has nothing to do with the assumption we are looking for.

As for ruling out or picking (C), I'm trying to make a hypothetical to understand what effect interest rates on insured and uninsured deposits would have on the argument.

I know the reasoning above is incomplete, but does it seem that I'm on the right track? And generally speaking, I seem to always have trouble with insurance questions. I trust it isn't because they psyche me out, but I'm wondering if this is another typical "personal" problem that people have and can easily overcome (other examples being "scared" of a science passage, for instance.)

Thanks!

[Lucas Moreau]

Hello, tiger,

You are correct in that E is not relevant. We're talking about the deposit accounts that have insurance - uninsured accounts just don't matter.

For C, try the Assumption Negation method. What if C was not true? If so, then banks would always cover the cost of insurance, and thus there is no question of whether customers should be made to pay premiums - they already are! The government doesn't need to do anything if the problem is already taken care of.

Hope that helps,
Luke

[eyeofthetiger]

Thanks Luke.

There are still two things that I am unhappy with, although I do understand the reasoning.

Firstly, why does answer (C) include that extraneous information? Why didn't the answer finish after the word premiums? It seems to me that by adding this information, not only do the test-makers try to confuse you (which they successfully did me), but they also open another interpretation to the answer, which is that it is bunk because it mentions uninsured deposits which are irrelevant.

Secondly, when using the Assumption Negation Technique, I'm not really satisfied that it hurts the conclusion. The sub-conclusion "since it is depositors who primarily benefit" leads to the conclusion that the depositors should "pay the premiums". Now, when we negate (C), and we know that banks always cover the cost of deposit-insurance premiums, how in the heck does that have any bearing on what the government THINKS should be done about payment? As I read it, the government wants depositors to pay because they benefit, not because the bank is or isn't paying.

Any thoughts would be appreciated. Thanks.

[Jon Denning]

Thanks for the follow up! Let me see if I can add a little bit to the discussion here and hopefully clarify a few things.

First, the reason that (C) continues after "premiums" is because it's trying to demonstrate that depositors with insured deposits aren't already paying for them. That is, it's critical to the argument that the conclusion to force customers to pay for the premiums is possible...(C) shows that customers aren't already always paying for the insurance (banks aren't always giving lower rates on those deposits already), so it's still a possibility that the conclusion can be viable.

Again, I think the assumption negation technique works beautifully here, and I'll elaborate on Lukas's explanation of it. 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.

Make more sense?

[eyeofthetiger]

Holy smokes, that'll do it.

Thanks very much!

[Oscarg104]

Hi, I do not understand the explanations given to this question at all. what in the stimulus is supposed to make me assume that banks are not always covering the cost of the deposit-insurance premiums? If anything, I thought that being that the stimulus is making an argument for depositors to bear the cost instead of the banks, one should assume that the banks are indeed the ones covering the premiums as of this moment.

Please help me get some clarity, thanks!

[Malila Robinson]

Hi Oscarg104,
I think it may be the wording of the answer choice that is throwing you off, so let me try rewording it.
Answer C is saying: Paying depositors lower interest rates on insured deposits than the banks would on uninsured deposits is not always the way that banks cover the cost of the deposit-insurance premiums.

So this is not saying that banks don't always cover the cost of deposits. It is saying that they don't always use a single method to cover the deposits (Paying lower interest rates on insured deposits than on uninsured deposits).

Hope that helps!
-Malila

[wapet1]

okay, author claims that

1. banks pay the P for the insurance.

2. But Depositors are the one getting benefits from it.

3.Thus, the depositors are the one who must bear the cost of the insurance.

author drew a conclusion based on a situation that the banks( who is paying for P currently) is NOt charging any cost for the insurance to the customors/depositor ( basically answer c is saying). If this is not true in other words the banks have been charing depositors a certain amt of money to cover the insurance P, the conclusion falls away (if so what is the purpose asserting that depositors must bear the cost of insurance?)


Is my approach right? ... it took me awhile to understand in this way. please let me know if I am wrong.

thanks

[James Finch]

Hi wapet,

The issue I see with your diagram is that the stimulus actually has a fourth step to an ultimate conclusion that uses your step 3 as a premise: because the depositors should bear the cost, depositors must be made to pay the premiums. As you note, however, "cost" is a much broader term that may encompass "insurance premium" among many other things, such as interest rates and fees, that a bank may charge. So the stimulus is assuming that the premiums are the totality of the cost, and thus the banks are paying the total cost of insurance for the deposits.

Of course if you've ever done business with a bank, even if only to open a checking account, that idea should be laughable. Banks may be paying the deposit insurance premiums, but have a myriad of ways to profit from their account holders off of ostensibly "free" products. Answer choice (C) reflects this possible criticism by naming one of the possible ways that the banks could effectively charge consumers for the deposit insurance.

Hope this helps!