Continuing the theme of the article the current banking crisis has exposed two conflicting functions of money i.e., store of value and a vehicle of investment both of which are facilitated by banks.
Keeping money safe, whether physically or digitally, comes at a cost. Banks absorb this cost because they make money through credit creation, maturity transformation, and interchange fees. They even pass on some of that profit to depositors. However, each of these banking activities create risk, which is passed onto the deposit holders and is offset, to an extent, by deposit insurance. In low to zero-interest-rate scenarios, banks act as pure custodians as their revenues decline, which is why we saw EU banks charging negative interest rates, i.e., a fee, to maintain customer deposits.
There's a delicate balance and an inherent conflict between keeping money safe and earning yields, the two functions performed by a commercial bank. Customers don't perceive this conflict unless a bank breaks down as SVB did.
I think this crisis is the strongest yet reason to push for CBDCs as only a central bank can fully guarantee a deposit. In terms of systems design, this is a clear delineation of responsibilities.
CBDC: If you want safe custody of your money.
Bank: If you want to lend your money in return for a yield. And as with any lending, you take the risk of a borrower defaulting.
> I think this crisis is the strongest yet reason to push for CBDCs as only a central bank can fully guarantee a deposit
This makes zero sense. A CBDC doesn't have a stronger "guarantee" than normal central bank money, yet it has all kinds of negatives like total surveillance and control.
Most EU banks have always charged a fee for maintaining deposits (at least for private individuals).
In the UK, banking is normally free, but on the continent, you normally pay for the account itself and any cards you may hold. Some banks may offer fee waivers for those whose salaries get paid into the account, or if you have a cardless account etc, but it is fairly common practice to charge a small fee for the bank account itself.
A hybrid solution could be a grade of bank accounts whose deposits are backed 1:1 by short dated government debt.
You get most of the safe custody benefits of CBDC whilst minimising the costs of restructuring the banking system. Customers could still use all the same banking apps and branches.
Such a program could even be eased in over time by steadily increasing the proportion of bank balance sheets allocated to short dated government debt.
In the US there used to be the Glass-Steagall Act "effectively separating commercial banking from investment banking"; established in 1933 but it was partly repealed in 1999.
Not safe from the moralizing pricks (of which there is a surplus in our midst) who the executive or legislature will inevitably try to cozy up to by stealing my money on the basis of some attribute or box that I check.
The biggest challenge facing CBDCs (Central Bank control of Digital Currencies) is that any laws or regulations concerning them can be changed at anytime, without the consent of the governed.
I don't think you're actually proposing anything with that CBDC statement - CBDC doesn't imply any particular policies or mechanisms. It is a non-phrase without a concrete proposal. What exactly is the central bank supposed to do here?
That's cash. CBDC is if you want no control over your money. At the flip of the switch you can be put on a denial of service list. Except unlike when PayPal does it, you can't just switch providers.
Thinking CBDCs are “safe” is extremely naive. They’re a dystopian nightmare. They’re every dictators wet dream. This is why Bitcoin matters. Bitcoin = freedom.
Not to disparage the poster, but these type of comments always come across to me as astro-turfing.
At no point has anyone been advocating for a Central Bank Digital Currency (CBDC) and furthermore the only people who stand to gain from this are the powers that be. I'm vehemently against a CBDC purely because I like to play a thought experiment if I were from the 18th century and landed in the present day, how hard would it be for me to engage with society. A CBDC is 100% the anti-thesis to creating and supporting people.
From what I understand, when someone takes out a loan, a bank doesn't lend out depositors' money. Instead money is "created" by the bank (on behalf of the fed), and the bank needs to pay the fed interest. The bank also needs to pay the loan back by an agreed uppn time (which destroys the money).
Why can we not have a similar system for deposits? A bank takes a deposit, the fed "destroys" the money, but pays interest to the bank. When the depositor wants to withdraw their money, the fed/bank recreates the money.
I guess this is sort of what happens with banks buying bonds from various government bodies, but the banks are managing a mix of bond maturity durations.
If bank runs are a worry, why not do away with this flexibility for the banks?
Basically it’s a bank that puts all its deposits directly with the Fed. There have been attempts to start such a bank in the past and they have been denied a banking charter.
It's not quite right that banks don't loan out their depositors money. They need depositors to be able to make loans. Stashing depositors money at the Fed keeps the bank from making loans.
Stashing money at the Fed is possible by the way, and effectively does destroy the money (or rather, takes it out of the economy).
Banks can deposit money at the Fed earning exactly the interest rate that the Fed controls. This effectively takes that money out of the economy. That is generally rather bad, because it stifles growth. But in case of inflation, it can sort of help. That is part of why the Fed interest rate helps regulate inflation.
But generally speaking, you want loans to be made! It helps good and productive ideas get of the ground. It is core to Western economies. Hence the Fed is quite scared of narrow banking. They want to be the 'borrower of last resort'.
>when someone takes out a loan, a bank doesn't lend out depositors' money. Instead money is "created" by the bank (on behalf of the fed), and the bank needs to pay the fed interest.
Commercial banks can not create loans out of thin air during normal operation. They either have to use depositors' money or share holders' capital. In other words, bank's liabilities (e.g. user deposits) should not exceed its assets (loans to users, securities, reserves at Fed, etc.). There are games which can played with how assets worth is measured (e.g. mark-to-market vs. mark-to-maturity), but otherwise the rule must be followed by banks.
>Why can we not have a similar system for deposits? A bank takes a deposit, the fed "destroys" the money, but pays interest to the bank. When the depositor wants to withdraw their money, the fed/bank recreates the money.
When a bank receives a deposit, it has to decide what to do with it. It can either loan it to someone (either directly or by buying bonds), invest (e.g. by buying stocks), pay it as a dividend to share holders (assuming it has far more assets than liabilities), or keep it in bank's reserve account at Fed. In the later case it gets payed roughly the key interest rate. This is why rate hikes suppress inflation (at least in the near term), banks instead of deploying their capital into the economy deposit it at Fed, thus temporarily removing it from circulation. It also means that cost of loans in the wider economy rises accordingly, since banks will not loan without a sufficient premium to the Fed's rate.
If I'm a bank why would I want to get X% interest from the Fed when I can instead get X+Y% interest from some other investment option[0]? Yes the risk is higher, but typically only marginally so. Obviously you have big failures like SVB & others, but the reality is that those aren't common.
It also lets the bank pass on the increased rates to customers. The current fed interest rate is ~4.5%, but there are banks out there right now where you can get >5% in a savings account[1]. Your system would remove that option for consumers.
[0] Other option being some regulatorily approved option, not throw it all in the latest crypto ICO
>The bank also needs to pay the loan back by an agreed uppn time (which destroys the money).
Perhaps you can clarify by what you mean by 'destroyed'.
To my knowledge once the bank has 'created' the money it will always exist in the system. However it has devalued all other money by a small amount which we understand today as 'inflation'. So it's not clear to me what you mean by destroyed.
> when someone takes out a loan, a bank doesn't lend out depositors' money. Instead money is "created" by the bank (on behalf of the fed), and the bank needs to pay the fed interest. The bank also needs to pay the loan back by an agreed uppn time (which destroys the money).
Why can't I do that with the central bank directly? Why the rent-seeking middleman?
Creating money out of nothing is a mechanism to get large projects off the ground. Without it, it would be difficult to fun infrastructure, R&D, etc. like most mechanisms, it can be used in good and bad ways.
Yes, that's how it works. There's this amazing animated movie from 2011 that explains how banking works and the history of banks: "The Collapse of The American Dream Explained in Animation" [1] It has almost 10 million views.
When fed started raising interest rates to curb inflation, the prevalent wisdom was that the average consumer has too much money because of low rates and is spending way too much. The thought was raising rates would curb their spending and bring prices down slowly. However, it turns out the average consumer is very principled with money and is handling it very well. The rich/corporations like banks, VCs, companies felt super rich with the raising stock and began taking on abnormal risk. This was not expected by many. It may eventually lead to the average consumer getting hurt as a repercussion of the failure at the top though. Of course even the crisis of 2008 was caused by exuberant bankers. You need to have access to lots of money to cause lots of damage.
It requires great political training to believe the best person to spend your money isn't you — e.g. some people believe the poor can't be trusted with money, and so on (socialism etc)
Interestingly enough, the graph of bank failures looks like the ones Mandelbrot shows in his works about transmission errors if I recall correctly (can't check right now). My conjecture is that markets encode information rather than other things like value etc. Failures are just transmission errors.
This makes sense. Prices are literally encoding information - first the demand for the item being priced and then the cost of supplying the item. The price of beef is signaling a lot of phenomena including consumer tastes, weather, costs for feed, slaughter, and transportation, etc.
You could argue that central banks putting non-market pricing on the money supply distorts the information that a market-priced money supply would transmit effectively - and that's why all these crises seem to originate in the finance sector.
Why do we even need banks? If they make money by lending money that mostly belong the people (state/feds) anyways, I guess we all would be better if banking was just a state monopol.
I guess I'm just missing some points here so maybe someone can help and explain me why this is a bad idea?!
We need banks because they make it possible for the rich to gamble with the income of the poor.
If your deposits are backed by mortgages or other secured loans you and the bank expect an added return for the "risk" - which is really just making a bet that enough people can pay something extra to compensate for those who default.
This is presented as "how things are" but it actually makes no sense - not least in failing to explain why most of the population is so starved of cash, in spite of long working hours, that it has to borrow at all.
That aside - there's a feedback loop which pushes investors to riskier and riskier lending, sometimes supported by more and more extreme kinds of fraud. Eventually, but somewhat predictably, the system suffers logistic collapse. Because that's what happens to recursive systems with permissive parameters.
In my understanding, the role of banking is to take on the intrinsic risk when doing money allocation.
1. The central banks control supply (by controlling their interest rates)
2. The banks allocate resources (lending out with a risk premium)
3. Consumers and entrepreneurs use the money for value creation.
To me it seems like banks ought to be able to fail. The problem is that banks have gotten the responsibility of the money infrastructure (the cash to e-money transition) which we can not afford to fail.
We should lift the money infrastructure responsibility of banks.
> If they make money by lending money that mostly belong the people (state/feds) anyways,
Naa most of the loans are not using other people's money, banks just create money out of thin air (aka put a record in some database table) and that entry is your loan money.
There are things called Government Savings Banks. The UK has National Savings and Investments (NS&I [1]), which allows individuals to save money with unlimited protection (though I think their accounts typically allow maximum amounts of a few million pounds). The UK government uses this as a form of raising money. I believe other countries have similar schemes.
The government doesn't want to be responsible for making all the loans banks do. It's not easy to do and if the government makes bad ones and loses money people will complain.
The point being that there is a peak, that is to say bank failures are positively correlated. If they were negatively correlated or independent you wouldn't see peaks so much.
Nothing to see here, just garbage collection time. Everyone's successful when interest are low or near zero. Degens feel naked now with the higher cost of capital from interest rates.
Pretty Simple fix. Have the fed backstop all depositors to infinity. Today there are no limits on the number of 250k FDIC insured deposits. Logically the same thing as insuring a single account to infinity.
Backstops have a cost, and infinite backstop subsidizes risk taking activity of deposit taking institutions.
I'm not even saying that what was done in the wake of SVB and Signature was wrong, per se, but making it formal policy that all deposits in a bank are insured is a fundamental change to the foundation of banking in the US. It may be "right" or it may be "wrong", but the one thing it is not is "simple", because the consequences could be far reaching, unintended, and unpredictable, both short term and long term.
While it may be difficult to see things this way, when you put money into a bank, you’re choosing to not invest that money into something else that might generate a better return for you and for society. The small but real risk of losing your deposits in a bank encourages companies and people with money to invest it into other things.
If there is no default risk, then money will be increasingly stored away inside banks, removing much of the healthy risk-taking activity that generates long term growth and improvements in the standard of living.
Rich people know there is a tiny chance of losing their cash if they stick it in a bank. So they buy other things instead. Those things generate real growth in the economy and improve productivity. Banks have to invest very conservatively because of regulations. Without the tiny risk of default, banks would get all the cash and the economy would stagnate.
Another word for this kind of stagnating economy is “the 1970s.”
If there is infinity backstop, I will simply create a bank and lend millions to my friends and promptly go bust. They get paid out by the government and I walk away. They do the same for me. We laugh at the poor taxpayer who foots the bill.
The money behind the $250k isn’t magic and can’t just be multiplied like that. each FDIC-insured bank pays a premium for each qualified account. 10x the accounts means 10x the money into the pool. So it scales logically.
This is a separate issue from the recent trend of the US federal government helping ensure that all deposits, even those beyond the limit, get assumed/recovered.
I don’t know why you’re being downvoted - it’s the only thing that makes sense. If the fed doesn’t, then we’ll just see a huge boom in middlemen offering accounts that automatically spread across 250k chunks behind the scenes. They already exist as a niche product, but would become mainstream with more failures. Either way the fdic is insuring the same total amount of money, so may as well cut out that inefficiency and overhead of forcing everyone to have spreaders.
Banking failiure is very simply a failiure of regulation because of its conflict with capital. The customers of banks give banks money as loans that have a small % of risk and have a small yield, but banks are able to take on more risk than that % and have the profit imperative to do so, so they will do it if they can.
It's awfully easy to say this and make your analysis after the fact. But past results aren't indicative of the future. See also: Taleb's The Black Swan
What was the black swan event here, exactly? sounds like simply a bunch of slopiness? Also, why are you so sure we are after the fact and not in the middle/beginning of it?
Alright. What do you mean by a wave? How did any of the 3 previous bank failures collapse "in waves"? Based on your graphic why did the S&L failure have more financial institutions fail towards the end of thr wave, but the 2008 crysis had more fail at the start?
The graph is beautiful but really, none of the analysis done even discusses waves, or how a bank failure can progress.
Finally, you make a point towards the end that SVB made a mistake and we don't know how widespread it is... Can we look at the pretty graph to other scenarios when a bank made a mistake and was isolated?
I somehow felt cheated at the end of the article, as if I expected some analysis but only found surface level news. This feels like a piece that should have been 2-3x long, and could have explored how each of the previous failures evolved over time.
perhaps....it's because they are not independently operating.....wow!! physics has analogy for quantum particles....banks....they act independent...but they arent
Is there another bad assumption today?
The recent failure of Silicon Valley Bank has raised fears
of a new banking crisis. One way to look at SVB's failure
is: SVB assumed that interest rates won't rise.
what i don't understand: how did they handle the banking crisis of the eighties? Somehow that one didn't manage to kill the economy, how?
A healthy economy has ups and downs, and if you have a bigger up there needs to be a corresponding down. In 2008 we made major decisions to prevent a needed correction down, it turns out all that did was kick the can down the road, and if we kick it down the road again we're just in for another problem.
You're applying proverbial thinking to an extremely complex, emergent system. The reality is that many aspects of the economy can be manipulated, but the consequences of doing (or not doing) anything never completely clear. People are constantly pointing to indicators that they feel are signs of the apocalypse, the excess of central bank activism, or the ineptitude of politicians to enact fiscal policy. Out of a million different assertions, some of them are going to eventually be right.
Overly simplistic and just not true. There is nothing in observed or theoretical economics that says every “up” has to be exactly balanced by a same sized “down”. We would never get anywhere in aggregate if that was the case - net zero is clearly not what has happened over the last 100+ years.
The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 repealed part of the Dodd–Frank Wall Street Reform and Consumer Protection Act passed in 2010:
Articles that only look at the numbers miss the elephant in the room, which is that policy controls economics. That's why academics generally don't subscribe to ideas like deregulation, at least they didn't before the Reagan administration began chipping away at public funding for universities to rein in the rabble of hippies opposed to war/monopoly/neoliberalism:
At nearly every turn for 40+ years, our elected officials have made unpragmatic decisions. They push revisionist history and constrain debates to 2 ends of an approved axis of narratives so that people who think outside the box are demonized as fringe. Which is very not meta, and for me one of the great disappointments of the modern era, especially in how it's bamboozled the minds of so many thought leaders in tech.
Is that political? These policies affect our money and work and the trajectories of our lives. Are we supposed to just not seek working solutions anymore because they don't please the status quo? Every win for concentrated wealth is another pressure convincing people to vote against their own self-interest. Which creates the negative feedback loop we're trapped in, where every loss is compounded by further loss, enabling polarizing candidates who sell their vote to the highest bidder to consistently win at the highest levels of government.
vishnugupta|2 years ago
Keeping money safe, whether physically or digitally, comes at a cost. Banks absorb this cost because they make money through credit creation, maturity transformation, and interchange fees. They even pass on some of that profit to depositors. However, each of these banking activities create risk, which is passed onto the deposit holders and is offset, to an extent, by deposit insurance. In low to zero-interest-rate scenarios, banks act as pure custodians as their revenues decline, which is why we saw EU banks charging negative interest rates, i.e., a fee, to maintain customer deposits.
There's a delicate balance and an inherent conflict between keeping money safe and earning yields, the two functions performed by a commercial bank. Customers don't perceive this conflict unless a bank breaks down as SVB did.
I think this crisis is the strongest yet reason to push for CBDCs as only a central bank can fully guarantee a deposit. In terms of systems design, this is a clear delineation of responsibilities.
CBDC: If you want safe custody of your money.
Bank: If you want to lend your money in return for a yield. And as with any lending, you take the risk of a borrower defaulting.
nkuttler|2 years ago
This makes zero sense. A CBDC doesn't have a stronger "guarantee" than normal central bank money, yet it has all kinds of negatives like total surveillance and control.
pnut|2 years ago
https://www.investopedia.com/terms/c/central-bank-digital-cu...
frozenwind|2 years ago
d1sxeyes|2 years ago
In the UK, banking is normally free, but on the continent, you normally pay for the account itself and any cards you may hold. Some banks may offer fee waivers for those whose salaries get paid into the account, or if you have a cardless account etc, but it is fairly common practice to charge a small fee for the bank account itself.
spacebanana7|2 years ago
You get most of the safe custody benefits of CBDC whilst minimising the costs of restructuring the banking system. Customers could still use all the same banking apps and branches.
Such a program could even be eased in over time by steadily increasing the proportion of bank balance sheets allocated to short dated government debt.
kzrdude|2 years ago
dsfyu404ed|2 years ago
Not safe from the moralizing pricks (of which there is a surplus in our midst) who the executive or legislature will inevitably try to cozy up to by stealing my money on the basis of some attribute or box that I check.
clarge1120|2 years ago
See Credit Suisse.
roenxi|2 years ago
hanniabu|2 years ago
That's cash. CBDC is if you want no control over your money. At the flip of the switch you can be put on a denial of service list. Except unlike when PayPal does it, you can't just switch providers.
cflynnus|2 years ago
GenericDev|2 years ago
At no point has anyone been advocating for a Central Bank Digital Currency (CBDC) and furthermore the only people who stand to gain from this are the powers that be. I'm vehemently against a CBDC purely because I like to play a thought experiment if I were from the 18th century and landed in the present day, how hard would it be for me to engage with society. A CBDC is 100% the anti-thesis to creating and supporting people.
In short, boo to OP, I doubt their legitimacy.
retube|2 years ago
hkt|2 years ago
> Bank: If you want to lend your money in return for a yield. And as with any lending, you take the risk of a borrower defaulting.
Ideally, depositors in a CBDC would also get at minimum the central bank rate.
amelius|2 years ago
Similarly, the App Store mixes "Store" with "Content filter". We should be able to choose both independently.
zizee|2 years ago
Why can we not have a similar system for deposits? A bank takes a deposit, the fed "destroys" the money, but pays interest to the bank. When the depositor wants to withdraw their money, the fed/bank recreates the money.
I guess this is sort of what happens with banks buying bonds from various government bodies, but the banks are managing a mix of bond maturity durations.
If bank runs are a worry, why not do away with this flexibility for the banks?
meh8881|2 years ago
Nah it’s simpler.
You put a dollar in the bank. The bank loans 80 cents to Bob. Bob puts 50 cents of that 80 cents in the bank. The bank loans out some of that.
Even without going beyond Bob, the same dollar is now in the bank twice. That’s what people mean by money being created.
Negitivefrags|2 years ago
Basically it’s a bank that puts all its deposits directly with the Fed. There have been attempts to start such a bank in the past and they have been denied a banking charter.
xyzzyz|2 years ago
https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-... https://johnhcochrane.blogspot.com/2019/03/fed-vs-narrow-ban...
rocqua|2 years ago
Stashing money at the Fed is possible by the way, and effectively does destroy the money (or rather, takes it out of the economy). Banks can deposit money at the Fed earning exactly the interest rate that the Fed controls. This effectively takes that money out of the economy. That is generally rather bad, because it stifles growth. But in case of inflation, it can sort of help. That is part of why the Fed interest rate helps regulate inflation.
But generally speaking, you want loans to be made! It helps good and productive ideas get of the ground. It is core to Western economies. Hence the Fed is quite scared of narrow banking. They want to be the 'borrower of last resort'.
fuoqi|2 years ago
Commercial banks can not create loans out of thin air during normal operation. They either have to use depositors' money or share holders' capital. In other words, bank's liabilities (e.g. user deposits) should not exceed its assets (loans to users, securities, reserves at Fed, etc.). There are games which can played with how assets worth is measured (e.g. mark-to-market vs. mark-to-maturity), but otherwise the rule must be followed by banks.
>Why can we not have a similar system for deposits? A bank takes a deposit, the fed "destroys" the money, but pays interest to the bank. When the depositor wants to withdraw their money, the fed/bank recreates the money.
When a bank receives a deposit, it has to decide what to do with it. It can either loan it to someone (either directly or by buying bonds), invest (e.g. by buying stocks), pay it as a dividend to share holders (assuming it has far more assets than liabilities), or keep it in bank's reserve account at Fed. In the later case it gets payed roughly the key interest rate. This is why rate hikes suppress inflation (at least in the near term), banks instead of deploying their capital into the economy deposit it at Fed, thus temporarily removing it from circulation. It also means that cost of loans in the wider economy rises accordingly, since banks will not loan without a sufficient premium to the Fed's rate.
dgrin91|2 years ago
It also lets the bank pass on the increased rates to customers. The current fed interest rate is ~4.5%, but there are banks out there right now where you can get >5% in a savings account[1]. Your system would remove that option for consumers.
[0] Other option being some regulatorily approved option, not throw it all in the latest crypto ICO
[1] https://www.ufbdirect.com/
s_dev|2 years ago
Perhaps you can clarify by what you mean by 'destroyed'.
To my knowledge once the bank has 'created' the money it will always exist in the system. However it has devalued all other money by a small amount which we understand today as 'inflation'. So it's not clear to me what you mean by destroyed.
andrepd|2 years ago
Why can't I do that with the central bank directly? Why the rent-seeking middleman?
pharmakom|2 years ago
Jerry2|2 years ago
[1] https://www.youtube.com/watch?v=mII9NZ8MMVM
mrfox321|2 years ago
If they took large losses or lent out too much, inflation would skyrocket.
yalogin|2 years ago
endtime|2 years ago
I'm sure it was all the low rates, and not at all due to printing 40% of the money supply in two years and mailing people checks.
mhh__|2 years ago
fedeb95|2 years ago
padobson|2 years ago
You could argue that central banks putting non-market pricing on the money supply distorts the information that a market-priced money supply would transmit effectively - and that's why all these crises seem to originate in the finance sector.
sgsag33|2 years ago
TheOtherHobbes|2 years ago
If your deposits are backed by mortgages or other secured loans you and the bank expect an added return for the "risk" - which is really just making a bet that enough people can pay something extra to compensate for those who default.
This is presented as "how things are" but it actually makes no sense - not least in failing to explain why most of the population is so starved of cash, in spite of long working hours, that it has to borrow at all.
That aside - there's a feedback loop which pushes investors to riskier and riskier lending, sometimes supported by more and more extreme kinds of fraud. Eventually, but somewhat predictably, the system suffers logistic collapse. Because that's what happens to recursive systems with permissive parameters.
madsbuch|2 years ago
1. The central banks control supply (by controlling their interest rates)
2. The banks allocate resources (lending out with a risk premium)
3. Consumers and entrepreneurs use the money for value creation.
To me it seems like banks ought to be able to fail. The problem is that banks have gotten the responsibility of the money infrastructure (the cash to e-money transition) which we can not afford to fail.
We should lift the money infrastructure responsibility of banks.
sumedh|2 years ago
Naa most of the loans are not using other people's money, banks just create money out of thin air (aka put a record in some database table) and that entry is your loan money.
roflyear|2 years ago
xioxox|2 years ago
[1] https://en.wikipedia.org/wiki/National_Savings_and_Investmen...
HDThoreaun|2 years ago
watismymalk|2 years ago
andreareina|2 years ago
wesapien|2 years ago
bubbleRefuge|2 years ago
insaneirish|2 years ago
Backstops have a cost, and infinite backstop subsidizes risk taking activity of deposit taking institutions.
I'm not even saying that what was done in the wake of SVB and Signature was wrong, per se, but making it formal policy that all deposits in a bank are insured is a fundamental change to the foundation of banking in the US. It may be "right" or it may be "wrong", but the one thing it is not is "simple", because the consequences could be far reaching, unintended, and unpredictable, both short term and long term.
ttul|2 years ago
If there is no default risk, then money will be increasingly stored away inside banks, removing much of the healthy risk-taking activity that generates long term growth and improvements in the standard of living.
Rich people know there is a tiny chance of losing their cash if they stick it in a bank. So they buy other things instead. Those things generate real growth in the economy and improve productivity. Banks have to invest very conservatively because of regulations. Without the tiny risk of default, banks would get all the cash and the economy would stagnate.
Another word for this kind of stagnating economy is “the 1970s.”
pharmakom|2 years ago
If there is infinity backstop, I will simply create a bank and lend millions to my friends and promptly go bust. They get paid out by the government and I walk away. They do the same for me. We laugh at the poor taxpayer who foots the bill.
Lightbody|2 years ago
The money behind the $250k isn’t magic and can’t just be multiplied like that. each FDIC-insured bank pays a premium for each qualified account. 10x the accounts means 10x the money into the pool. So it scales logically.
This is a separate issue from the recent trend of the US federal government helping ensure that all deposits, even those beyond the limit, get assumed/recovered.
klipt|2 years ago
TechBro8615|2 years ago
dalyons|2 years ago
DoesntMatter22|2 years ago
The fed has already been using a lot of that 250. And this is likely not over. Not to mention this seems like it spread overseas
unknown|2 years ago
[deleted]
lapcat|2 years ago
xupybd|2 years ago
Maybe there needs to be regulation that forces banks to hold way more cash?
nly|2 years ago
nathias|2 years ago
personjerry|2 years ago
twelve40|2 years ago
laserbeam|2 years ago
Alright. What do you mean by a wave? How did any of the 3 previous bank failures collapse "in waves"? Based on your graphic why did the S&L failure have more financial institutions fail towards the end of thr wave, but the 2008 crysis had more fail at the start?
The graph is beautiful but really, none of the analysis done even discusses waves, or how a bank failure can progress.
Finally, you make a point towards the end that SVB made a mistake and we don't know how widespread it is... Can we look at the pretty graph to other scenarios when a bank made a mistake and was isolated?
I somehow felt cheated at the end of the article, as if I expected some analysis but only found surface level news. This feels like a piece that should have been 2-3x long, and could have explored how each of the previous failures evolved over time.
kderbyma|2 years ago
unsupp0rted|2 years ago
MichaelMoser123|2 years ago
dehrmann|2 years ago
kneebonian|2 years ago
acjohnson55|2 years ago
dalyons|2 years ago
Lapsa|2 years ago
zackmorris|2 years ago
The Gramm–Leach–Bliley Act of 1999 repealed the Glass–Steagall Act of 1933:
https://en.wikipedia.org/wiki/Gramm–Leach–Bliley_Act
The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 repealed part of the Dodd–Frank Wall Street Reform and Consumer Protection Act passed in 2010:
https://en.wikipedia.org/wiki/Economic_Growth,_Regulatory_Re...
Articles that only look at the numbers miss the elephant in the room, which is that policy controls economics. That's why academics generally don't subscribe to ideas like deregulation, at least they didn't before the Reagan administration began chipping away at public funding for universities to rein in the rabble of hippies opposed to war/monopoly/neoliberalism:
https://theintercept.com/2022/08/25/student-loans-debt-reaga...
At nearly every turn for 40+ years, our elected officials have made unpragmatic decisions. They push revisionist history and constrain debates to 2 ends of an approved axis of narratives so that people who think outside the box are demonized as fringe. Which is very not meta, and for me one of the great disappointments of the modern era, especially in how it's bamboozled the minds of so many thought leaders in tech.
Is that political? These policies affect our money and work and the trajectories of our lives. Are we supposed to just not seek working solutions anymore because they don't please the status quo? Every win for concentrated wealth is another pressure convincing people to vote against their own self-interest. Which creates the negative feedback loop we're trapped in, where every loss is compounded by further loss, enabling polarizing candidates who sell their vote to the highest bidder to consistently win at the highest levels of government.
whenanother|2 years ago
[deleted]
saenns|2 years ago
chrisco255|2 years ago
https://en.wikipedia.org/wiki/List_of_banking_crises https://en.wikipedia.org/wiki/Panic_of_1873