Hacker News Reader

Comment by avidphantasm | Hacker News Reader

What if the Federal Reserve offered retail banking. Would it stabilize the banking sector? They wouldn’t be forced to try to find loans to pay interest on deposits. Where do private banks add value over what the Fed could do. ELI5.

View on HN

Banks use deposits to extend loans to other customers. A narrow bank wouldn't do that.

Couldn’t the Fed just offer retail loans at the Federal Reserver rate, with maybe some kind of premium if inflation is high, or discount if inflation is low? What am I missing? Why do we need all these banks, some of which catastrophically explode every decade or so?

I mean, you would be substantially increasing the size of government. The federal government currently employs about 3 million workers. The banking sector employs 1.4 million. To perform similar functions, the US government would need (at least) a similar number of employees. That is probably politically disagreeable.

They would be employees of the Fed, not the Federal Government, no? Also, I am not afraid of a big government so there’s that. Also, they would be paid well, but not get insane bonuses, etc. so that’s a distributive plus in my book (i.e., less wealth concentrated in a tumescent financial sector).

> Banks use deposits to extend loans to other customers

"Money creation in the modern economy" from the Bank of England is worth a read - it explains why this isn't the case.

https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...

This is nitpicking. While that paper is a good read and important to understand how banking works, the parent commenter's point about how money creation works, and how a narrow bank would not participate in it, is valid. Deposits _are_ a source of funding that a bank considers when making loans, even if a bank does not "turn deposits into loans."

I have been reading about this topic recently and still don't really understand how 'new money' is being created. In a loan, the bank creates an IOU that didn't exist before and doesn't point to a stack of $$ on the shelf. But it does point to the bank, and the bank itself has tons of customer deposits. And if I take that IOU and give it to a car dealership who puts it in their bank, for the transfer my bank will take actual money from the general pool of customer deposits. AND I have to pay back the loan which goes into the general pool. So while specific money isn't earmarked, the IOU represents money that the bank has right?

I guess a way to ask the question would be: if i were to liquidate all assets of a bank and call in every loan, would that be >= all customer deposits?

Also been thinking about this. If you look at this article, read section titled “money creation process” https://en.m.wikipedia.org/wiki/Fractional-reserve_banking

If I deposit $5 in my bank account, and then the bank keeps $1 in reserve and lends out $4, then they just added $4 to the money supply. I can withdraw my $5, and the loan-taker can withdraw their $4. This is possible because there’s a reserve pool of money which is not loaned out, and because people tend to just leave the money in their account.

At least that’s my understanding. Happy to be corrected

For a solvent bank, assets >= liabilities. Customer deposits are liabilities on a balance sheet.

The banks don’t want the competition but in theory it could be done, perhaps through the USPS, and as a modified form of I-bonds or something.

Was this not tried with little uptake? Or am I thinking of a Treasury Direct product?

You may be thinking of iBonds themselves. Universal banking has been proposed a number of times and the banks squeak each time (the last time resulted in changing how overdrafts were calculated iirc).

Some other countries already provide banking via their postal system. And the US has a toe in there with postal money orders.

Yeah, if there’s too much cash sloshing around then this idea helps because the banks don’t need to find places to put all their deposits.

What happens normally though is that everyone banks at the Fed and the banks don’t have any deposits and so loans freeze up, which is bad.

Thats what China does and what CBDCs are about. See: Tofu Dreg projects and social credit score system. With privatization you get decentralization.

The Fed is already decentralized, no? There are branches in different regions throughout the country with their own governance, and a central board of governors to oversee the whole thing. I guess what I am asking is, why not treat banking like the utility that it is. Their is a natural monopoly on currency issuance after all, no?

Is it? The Chinese already do this. Go look at how its working out for them, the pros and cons are clear and obvious.

What do tofu dreg projects (poorly constructed buildings) have to do with banking in China?

It's the state giving itself no bid contracts. There's no financial risk (except to the buyers) and the officials who secured it get the money. The buildings aren't made to a high standard because there's no accountability for when they fail. The officials who would hold them accountable are the ones who assigned the nobid. The people who got it built already made their money.

Thats what ghost cities are about. CCP financing cities almost no one will live in to make money off the no bid contracts. People buy property in the ghost cities to move in and/or as an investment (its government-secured right? what could go wrong?) but then housing prices crash (because supply far exceeds demand), the lower classes are left holding the bag and legally prevented from refinancing. So they're making payments on a property that they bought at $300,000 even though it would only be worth $50k if they got it appraised & refinanced.

It's only possible if the government is also the bank. It's a totally conflicted situation.

Reply on news.ycombinator.com