America will soon see a wave of bank mergers?
economist.com
economist.com
Like - you wanna spend 30K on a car and you have it in cash? take loan
you'll lose a some $$, but you'll be building your history.
It's a kind of arbitrage. If you're losing money overall, you're doing it wrong.
If we assume 8% returns and you only put 50% in the stock market and your loan costs 2% interest then your total benefit is only 4%. Putting all of it might get you 6% but you are now taking a significant amount of risk.
The issue is with very large banks. They have rigid underwriting deparments and poor CS, so if you approach them as a first-time buyer who isn't already leveraged to the hilt, they will make it a long and painful process. Mortgage agents are a prime target for AI replacements, because all they do is relay information between you and the underwriting departments that make the real decisions.
Other people have pointed out that when you take a loan for something you can afford, you can use the money you would have spent on other things in the meantime. (As long as you're confident that you'll keep making enough money to make your payments for the life of the loan.)
I'm not sure they're all that available or popular (they're highly dependent on your landlord having the correct paperwork and such) but the place I rented an apartment last year had this available and it did get reported
Personally I've never owned a credit card, I always pay with a debit card or cash. 20 years ago I refused to participate in the credit scoring system and still stand by it.
* you think you can make more money by investing your 30k and letting it grow and compound
* you are very prudent with your cash on hand and would rather have immediate access to liquid cash than save a little bit on interest which you pay down over the course of <term>
Some of the dynamics here are a bit different when market returns are not looking great/steady and money isn't cheap anymore.
Mortgages especially. Mortgage interest is tax deductible and makes it easier for high tax bracket individuals to outperform their loan by investing.
Since 2017, not really, due to tax law changes. Cap of $10k but that includes state taxes paid also.
Curious how the parent commenter had great credit with no seasoned lines of credit. It's one of the biggest factors in the score.
Months before seeking a mortgage loan, learn the score's equation and appease it.
and for those of you who refuse to talk to people when spending multiple hundreds of thousands or even millions of dollars, well... this is what you get to deal with.
the first step to not being a mark is understanding what you don't know, and working with people who do. you may still get marked to a certain degree, but at least you'll end up with a 2.x% interest rate like i did and no messages from the computer saying "you're too poor to buy this product, so run along now little man" when it clearly isn't true.
Especially if you have an unusual situation, brokers and personal bankers will know how to handle it.
I had 0 credit history in Canada (literally a completely blank printout), but wanted to buy a house now that I'm a PR. A personal banker was able to work with a copy of my US credit report (Canadian banks don't/can't pull this on their own), and proof of assets in the states. The first item on my Canadian credit report was cosigning a mortgage at prime rates.
Fixed that for you. The big banks have one thing going for them, they're big. That means they will have a wide network and a large service organization, but most feel no need to meaningfully compete for your business. You're going to use them because they're big. You're not going to get meaningful interest on your deposits at a big bank, because they don't need your deposits; bankrate shows me rates up to 4.75%, with banks I've heard of at 4.3%, Ally at 3.75%, my credit union at 2.5% (at least it's moving up, although the pace of increases is a lot slower than the decreases were :/), and Chase is at the national average of big banks: 0.02%. Certainly, 0.02% was understandable in the zero-rate environment, but I'm pretty sure it's been Chase's interest rate for the last 30 years (no data, just a hunch). Mortgage rates float in and out of competitiveness, especially if you jump through the hoops for a relationship discount; that's a good business where volume means profit at origination, and it's easy to sell the loans if they want to (that's part of why their underwriting is so cookie cutter; gotta make it easy to resell).
If you're in the SF Bay Area, you should really check out the local credit unions; some of them are pretty decent. Co-op/shared branch banking takes care of most of the access issues, but you might want to be aware that after hours telephone service is directed to a shared branch call center. My credit union holds and services the mortgages they originate, which means you don't have to deal with the servicing changed dance, and also they're able to do limited paperwork rate adjustments for a reasonable fee; much simpler than a refinance.
Your credit wasn't near-perfect. You hadn't defaulted, but that's far from proving that you can manage your credit/money and make payments on time. A hobo who lived in the woods would also have never missed a payment.
I can relate, as I came in US from Europe. I arrived, opened a bank account in a big bank, I could only get a debit card, because I had not credit history. After few months I could get a credit card, but with a $500.00 limit! I needed a car, so I bought one cash.
When came the time to buy a home, I was asked to open more credit cards (one was not sufficient) and come back in a year or so later, to see how my score would improve.
Doing the same thing but this time with interest proves nothing the others don't. Borrowing history makes sense for businesses or people who with complicated cash-flows. But if you're stably gainfully employed the only things that matter is how you manage your external financial risks (which banks don't check for) and your ability to not over spend (which banks also don't check for).
Combine this with the your typical mortgage is overcollateralized means the magnitude of the loan is essentially meaningless outside of "is the monthly payment something you can afford."
Credit score is a moralizing system that hates the poor, so it's unsurprisingly embedded itself into American culture by three corporations that will never be held accountable (see: Equifax leak).
It's as American as the bald eagle. I'll stop now, my cynicism is showing. I just don't see a way to get to a place where we don't have the current trifecta of credit scoring corporations running our lives without a giant pile of money to start a competing credit bureau that makes and underwrites loans based on different computation of a person's score. Because a credit score was initially for rating people on their ability to pay back borrowed money. It's just been perverted since its inception into what we have now.
I agree. And slowly credit scores are starting to take rent into account.
> There's no difference at all for someone who works a dayjob.
But there is a difference. If you put your living expenses on a $500/mo credit card, you can have a $120k job and be eating ramen, living in a flophouse and spending the rest on drugfs or supporting people who cannot work. You cannot afford to service a mortgage. If you commonly service larger debts, then they don't have to worry about hidden things sapping all your funds.
Now they want to borrow $5k all of a sudden. Do you give it to them, just based on the above history?
That seems like such an obvious answer to me I want to ask if you intended to ask that of me or the person I was responding to.
As part of your loan application I can see your savings, income, employment history, and credit history. The payment on a 30-year fixed $5000 loan is $35/mo with current interest rates so that's the bar I need to hit.
* I see that your monthly cash flow is $200 which puts your loan payment at 17.5% of that.
* You're putting 20% down or $1250 which demonstrates to me that you're capable of saving 35x the loan payment.
* Your borrowing history is sparse but you pay of your $5 Spivak CC every month which is 20% of the loan payment right there.
* The loan is collateralized by an appreciating asset whose market value is $6000.
Yes. Obviously I'm giving the loan. To second order no one has a six figure credit history. Their first mortgage is likely to be the first and last loan of that magnitude in their lives.
It's also very easy to qualify for a $500k mortgage if you are clearing $250k a year. It makes me wonder how old you are, as "house prices are 2.6x a household income" is something that last existed in most places in the mid-1990s.
> To second order no one has a six figure credit history.
It is remarkably incorrect to treat it as a flat "no six-figure history means they are all are equivalent to a $500 history". Almost everyone has four-figure credit history based on credit cards, most people have five-figure credit history based on car loans and many people have six-figure student debts.
So, if I have been making $100K for 6 years at the same company, with no credit card (I only used debit in Europe because there was very little incentive for me to use credit card that I pay at the end of the month), even though I have never had a debt before, they would be willing to give me loan. While in US, with no credit card before, they could not.
The myth of US-style 'credit score' requiring a history of card use does persist here though, and I've known several people who have had to close one or more credit cards in order to get their mortgage approved.
Why exactly is this the conclusion, as opposed to suggesting the big banks need better evaluation of borrowers (whether thats with better metrics or humans in the loop)?
All the problems being brought up seem like they could happen to banks of any sizes...
It's nice to believe throwing more greedy people at a problem will fix it, and hey, sometimes it works.
First, centralization and consolidation increase the risk of fraud and corruption, and malign influence with regards to antitrust.
Second, almost no new banks are being chartered. What do you think typically happens when you go from Many -> Few (single digits) -> 1.
If something happens because they play the bailout game, the only real option is for nationalization.
Third, their sector mandate is to loan money to businesses that can use that money to turn a profit and feed the economy. They've stopped doing that outside a few corrupt friends(entities).
What you often don't hear about is what happens when they are the only game in town, they know your business is stressed, and they refuse to loan to you on arbitrary grounds (behind closed doors) knowing they can buy it up in bankruptcy for pennies on the dollar for a larger profit.
Like what Amazon did to the baby diaper companies.
https://arstechnica.com/tech-policy/2020/07/emails-detail-am...
These two are not the same thing.
Who would you rather lend a mortgage to?
- Group A, consisting of people who prudently pay debts early
- Group B, consisting of people who pay debts on their due date, and sometimes after
Let's say you lend $100B to each group A and group B. Historical data might show that in aggregate, group A has a default rate of 1% and group B 5% (there's 5% chance that a person from group B defaults on the loan).
Because of defaults (risk), you expect to lose $1B of principal on group A and $5B principal on group B. To break even, you need to charge group A interest that would at least offset their $1B loss, and charge group B interest to offset their $5B loss, hence group B's higher interest rate. One group is not automatically more profitable than the other.
Group B might incur more costs such as late fees, but this only works against their ability to make future payments.
I imagine that late fees increase the cost of repayments while debt interest increases the number of payments thus not hindering the ability to make future payments.
If it sounds ridiculous… imagine that every month, all the mutual funds you are invested in shut down and gave you your money back (with interest), and you had to choose from a whole new set. Some of you probably do this anyways, but most people prefer to make the choice once and then just let it grow.
Once you have established credit you will then be offer 0 APR credit cards for 12 to 48 months. With a zero APR credit card that has a balance say of 10,000 your monthly minimum payment is 1% of that so $100. $20,000 $200 a month ... once the APR promo ends transfer it to another card with zero APR.
Closing credits has hurt my credit so i keep them open and locked, as well establish email alerts on all of them for different scenarios to monitor them.
My credit today is good, but not perfect. I have trouble getting any new credit card. All for the same stated reason - too much available unused credit.
I'm sure my score would dive if I closed a bunch, just pointing out that having a bunch isn't always a good thing.
I can also see my credit scores as much as I want and ensure that I am using no more then 30% of my total accumulated credit limit. For example say I have 10 credit cards equally $100,000 combined then as long as don't have credit debt higher then $30,000 my credit remains good to very good to excellent. Your score will be negatively affected if your debt went to 31K and higher.
Another good thing is both apps alert me immediately when theres a change to my credit.
I pay about $50 a month for both, expensive yet well worth it especially if your looking to buy a house(s) and you overall really care about your financial health/score for present day or the future.
How many know they can rack up $10,000 in credit card debt and only pay $100 a month with a zero APR card? Im not sure many know this especially those in their 20s and maybe early 30s.
So whose your lender.. love to get a 2 percent interest rate on my next house. Moving into one soon and its much higher then that.
loan/credit application is mostly based on your income (you can maybe borrow up to 4.5-5x your gross income for a mortgage), how certain your income is, for example whether you have a temporary or permanent contract, and if there are no red flags in the last few years.
It also sounds to me that the difference between how we live here and the American system (I feel most people have loans for stuff in the 1–10k €/$ range in the US?) is a couple of months of living a bit more frugal, and the result is a lifetime of profit because you avoid all this interest everywhere.
Here it is common (and recommended by the government and banks) to have a 5k buffer. It could be my bubble but most people I know maintain that buffer. It pays for a new washing machine or even a new (crappy) car if needed.
Is it my view of the US based on Netflix that everyone has loans for the smallest of thing (like TVs) or is it really true?
There is much more access to credit in the US, most Americans use that credit a moderate amount to smooth cash flow for bumpy purchasing.
It is certainly the case that there are outliers who overuse credit, and many people who abhor credit like it sounds like you do.
One of the biggest differences between US borrowing and the rest of the world is that bankruptcy is very very easy to access, has very little stigma, and clears out most debts.
This makes the perceived costs of carrying a large debt load quite different.
Are there other reasons that small banks have seemed to thrive in the United States but no where else?
SMITH: So states looked for ways to support and protect local banks.
SQUIRE: A lot of states passed what were called branch banking laws, which made it illegal to operate a bank out of more than one building. It's hard to imagine it now. And so every little town in America had its own local bank.
https://www.npr.org/2023/04/30/1172957377/small-banks-are-de...
That is 3.6 microbanks per person
The US has 9 microbanks per person, but based on the prediction of 1000 banks would be similar to Australia.
[1] https://www.ausbanking.org.au/insight/banking-by-numbers
It’s something even most Americans don’t even understand anymore, let alone foreigners or immigrants; that the USA is technically by design 50 countries, in an economic and organizational block for limited purposes.
The core, supreme law of the land, the Constitution is explicit that anything not explicitly delegated to the Federal government is the right of the state and the people. The vast majority of what the federal government claims rights over is not mentioned at all, let alone explicitly delegates to the federal government. Included in that, banks and regulation of banks.
Unfortunately, the founders of America were not positively explicit enough about the sovereignty of the states, probably because they had no understanding of the consolidating forces that would be introduced through things like automobiles, planes, roads, electricity, telecommunications, and computers and the internet.
The small banks thrived and why America’s banking sector was so “fragmented”, was by design, in hopes of preventing the very consolidation of power and control that the founders were so concerned about and threatens everything now. American banks were community scale, community oriented, community based, and had community accountability; all factors that restrain psychopathic tendencies of banks and bankers.
If these forces of evil that are trying to consolidate everything are not able to be stopped, by all measures things will only get worse for all of humanity from here. Just as banking has become stale and uniform and conformist without any real diversity, so will those pressures continue destroying real diversity in the world by trying to force everyone and everything into templated, repeatable objects for global uniformity.
There has been no time in human history where consolidation of power was a good thing. Monolithic things fail spectacularly. I would argue that the degree of global consolidation of power lusted after by globalists even represents an existential threat to humanity, if not all life on this planet. It creates a single point of failure and also snuffs out what makes us human, actual, real diversity of people doing different things in different places and environments, under the guise of fraudulent diversity and diversification.
What you are stating isn't that black and white. The US constitution is only worth as much as governments and judges are willing to enforce. And where it isn't very explicit, that's mostly a very political thing. In the case of banks means that a lot of power has actually been granted to federal authorities over time. All without changing a line of text in the constitution. There's been a bit of a cycle of de-regulation followed by crisis induced new regulations happening of course historically. And you might argue things are currently leaning towards more regulation rather than less given the apparent failure of the sector to self regulate and sort things out themselves.
But, IIRC, you can set up a bank absent checking services, wires, FDIC protection, etc. and operate entirely within one state. Good luck attracting customers.
The sovereignty of the states drastically changed after the civil war and the reconstruction amendments.
I won't get into debates about the Interstate Commerce Clause or anything like that. It's more fundamental. We're not the same country we were just out of the Articles of Confederation. If you lined up the 39 people who signed the document, or the 56 people who signed the Declaration of Independence and told them that after 250-odd years we were trying to live exactly to the standard they set without any progress or changes, they would consider the experiment failed.
AFAIK we are also an outlier, but Germany has quite a few banks:
> As of December 2022, there were 1,389 credit institutions in [Germany]
-- https://www.statista.com/statistics/350502/eurozone-germany-...
edit:
US (FDIC insured only) 1 bank per 78,680 people, Germany 1 bank per 60,670 people (afaik every bank is essentially FDIC insured here), rough numbers from 2020-2023 wikipedia and statista.
There are another 737 Volksbanken & Raiffeisenbanken [1], which I think you would call credit unions in the US, and are owned by their members.
Both Sparkassen and Volksbanken have a complicated associated with bigger banks and service providers like asset managers (Landesbanken, DZ-Bank, LBS, Deutsche Leasing, Union Investment, etc.). It is just, that the number inflates, because of their upside-down ownership structure. The branches own the parents.
[0]: https://www.dsgv.de/sparkassen-finanzgruppe/organisation/ver...
And a few will be so large that they can make insane bets, betting on risky and novel new investment vehicles that will (maybe initially) pay off handsomely before ultimately failing dramatically. This will make "too big to fail" look quaint by comparison and the banks will end up owning everything.
Use a local credit union instead of a bank.
They'd need the tacit permission of the other industries their owners are invested in.
And, they'd need tremendous amounts of capital. Plus a history of grand collusion and unethical behavior. And leverage against anyone that might call them out.
So... I've got nothing. I will say that failing to investigate this possibility seems naive; as would expecting a genuine investigation.
its an easy cycle - find a bank you want for nothing, feed bad press through the usual outlets, watch it fall, then watch depositors get spooked, then buy it for nothing
First Republic is probably just one of many banks intended to be undermined, trashed, and then sold for nothing
and remember all the times First Republic's CEO came out and defended his business as it was collapsing? me neither...makes you wonder...
The whole being able to trigger aggregate indebtedness violations through synthetic shares (options), seems like a systemic risk that no ones paying attention to.
Also, its hard to say we still have a fractional reserve system when required deposits have been set at 0% since the pandemic. There's no fraction, its 0 unless you change the definition (i.e. Basel III which uses capitalization as deposits).
With a properly timed news drop, shorting, and forcing the market maker to exit delta-hedging (due to volatility) you end up having them create synthetic shares that in addition to the loaned shorted shares push the price downwards (because there will always be more shares since they were created via the contracts and are not constrained by short limits/availability and float). The market maker may even participate to offset losses.
Once the capitalization rate falls below a certain threshold you get aggregate indebtedness violations. At which point any loans they might have had create a liquidity event (i.e. frozen), which must be paid back and price levels returned to normal within 30 days (Basel 3), or 2 months (Nasdaq).
It creates a spiral which can't be recovered from, they will bleed deposits, and then the regulator will seize them, and sell their assets to one of the survivor banks for pennies on the dollar (with guarantees). Another form of bailout.
This is what largely happened with FRC, and now its starting to a lesser degree (a/o last night) other regional banks.
* Basel 3 counts capitalization as capital reserves instead of the normal deposit reserves we expect in fractional banking, this was adopted just recently (which is why the Fed site shows 0% deposit requirements).
If your reserves dip under the requirements you have 1-2 months to correct (from what I've read, although I'm not an expert and its very legalese, and dense so don't take that as advice). Basel is very opaque compared to Federal Reserve reporting in my opinion.
* Aggregate Indebtedness violations have to do with the SEC and market's net capital rules. In the case of SBLOCs or Securities backed loans, sudden drops in capitalization from price action can trigger illiquidity as any existing revolving credit can be frozen, and interest on utilization can balloon in addition to any further ballooning that might occur as a result of rating downgrades (S&P/Moodies).
Either are directly impacted by the company capitalization which is based on current ticker price and the shares outstanding.
(For example, you can look at PACW's Q1 press release, and see its Tier 1 capital ratio not getting cut by 2/3 by the precipitous drop in share price they endured: https://www.pacwestbancorp.com/news-market-data/news/news-de... )
Doesn't that mean unless they are specialised banks, that they necessarily must lose?
Maybe an economist can correct or confirm my instinct here?
Only if you play fair. If you can be bailed out it's no longer zero sum.
Democrats can't do it, because Republicans will never cooperate with a Democratic Party president.
Republicans can't do it, because they will continue to nominate a culture warrior whose only job is to fight wokeness, so they aren't even interested in it.
This thing will keep escalating, relatively slowly, until it finally crosses the line and even the Republicans will figure out that maybe they ought to have some accountability.
My guess it will take minimum of two generations.
For the longest time I used to think that the two party system is like a law in America or something. Like China has a one party system. When I learned that it isn't, i spent a considerable amount of time confused as to why then in all political discourse is the two party system so... enshrined. Some say if you listen to me closely, I'm still confused about this. I come from a country which routinely has 20 parties in different levels of government each with significantly different agendas (or at least we used to, sigh...). Why is this not the case in America? It seems to me that everyone is dissatisfied with their party, yet they don't want to support anything else. For a country which prides itself in its entrepreneurship and startup culture, the reluctance in supporting innovation in politics is so surprising.
Edit: btw, i disagree with you that Republicans will "start" to hold their leaders accountable. From an outsider perspective, the Republican party seems to be achieving their targets and GoP members are more active than Democratic party members. I may disagree with most of their social and financial goals, but I will acknowledge they are effective and there are severe consequences on failure.
Your country could gradually he heading towards a two party system.
You could be right, but how do we know the polarizing effect of FPTP isn't contributing to this change?
https://en.wikipedia.org/wiki/Duverger%27s_law
And in some cases, at least, FPTP itself is deliberately introduced by large parties to reduce the viability of their competitors. Northern Ireland was one particularly nasty case of that.
Not a law of the state, but a law nonetheless: https://en.m.wikipedia.org/wiki/Duverger%27s_law
America's love of a good show made even politics like a big sport, team red and team blue against each other, fighting tooth and nail for turf (aka districts, electoral votes by States, etc.) and the team that is better funded usually will have a leg up. Just like sports.
The cultural change required to move politics away from this culture of spectacle and entertainment is way harder than what can be achieved in two generations.
That’s not to say that there aren’t issues with race in America but they pale in comparison to the socioeconomic ones. A nation obsessed over race and culture has little time to confront other issues.
"Victim hood as privilege" is a right-wing strawman of the idea of intersectionality. You're suggesting throwing a punch at an obvious feint.
Intersectionality is simply the idea that certain groups experience unique configurations of more general problems, and that counteracting those configurations contributes to resolving the general case.
Do you think a coal miner with black lung who organizes for compensation on that basis is claiming "victim hood as privilege"? I hope not. It should also be clear that coal miners organizing for their own workplace safety helps ALL workers. That's why OSHA exists after all.
The same applies to racial issues.
[0]: https://www.theguardian.com/commentisfree/2012/dec/29/fbi-co...
Peter Schiff did a man on the street with some folks of the Occupy movement, and basically proves your point - the desired goals were so scattered and sometimes even contradictory.
1: https://images2.dailykos.com/i/user/2722/TMW2011-10-12colorl...
It wouldn't have done any good. Those that benefitted would have started flipping houses anyway.
(it seems an insane state of things to me, with incredible overhead and inefficiency but again, I'm an outsider. I've lived in USA for a while in late 90s and state of banking from consumer perspective in USA seemed a decade behind Canada and Europe, but that was a long long time ago)
There are two ways to have a functioning society. One is to have very few very powerful people, and only choose the right leaders. The other is to have very many people with very little power. That's less efficient, but it's also much less risky.
We currently run on the first. It's not going well. I'm not aware of a time when we ran on the second. In my mind that's the only way.
What’s the right number of banks per capita?
Canada secretly bailed out their banks to the tune of $114 billion CAD in 2008. If you compare Canada's secret bank bailout to the US equivalent on a per capita basis it looks even worse. [0]
The reason we didn't hear about it at the time is that the big 5 Canadian Banks have so much power over the government and the media that they were better able to control the narrative.
Concentrating power in the hands of a few banks is a bad idea.
[0] https://www.cbc.ca/news/business/banks-got-114b-from-governm...
https://banks.data.fdic.gov/explore/historical?displayFields...
1974: ~14,000 banks
2008: ~7,000 banks
2023: ~4,000 banks
This has been a steady decline since 1974 (not 2008) in the US.
https://banks.data.fdic.gov/explore/historical?displayFields...
As a comparison, Canada only has 34 banks.
https://en.m.wikipedia.org/wiki/List_of_banks_and_credit_uni....
EDIT:
In case anyone is curious, these are the credit union numbers.
1981: ~7,000 credit unions
2010: ~7,000 credit unions
2023: ~5,000 credit unions
It's interesting that in the US, even small banking service provides are banks. But in Canada, small ones tend to be provincially regulated entities such as credit unions. It's not that small entities don't exist. They just belong to a different list.
https://www.fdic.gov/about/history/timeline/1900-1919.html https://www.bis.org/publ/work137.pdf
- Number of banks in the US: 4,844 (69,500 people / bank)
- Number of banks in the UK: 365 (184,000 people / bank)
- Number of banks in Australia: 95 (272,000 people / bank)
- Number of banks in Japan: 199 (628,000 people / bank)
Let's cool it with the doomsday talk. Every major economy (except maybe China, but they're weird so not counting them) has 2.5x+ the number of people per bank than the US. The US is the weird one.
If you want to look at this from a "return to fundamentals" perspective: the US is only a few hundred years old, and was built on some of the most virgin, rich, plentiful, resourceful land on the entire planet. That fueled 300 years of economic development the likes of which the world has never seen; and the nice thing about growth is that it really helps cover-up bets that were far too risky for any reasonable risk-taker.
We're not going to see big banks take on increasingly higher risk over the next decade. In fact, we'll see the opposite. Fewer banks, more regulation, and less risk taking, as the US begins to regress more to the worldwide economic growth rate.
That would have prevented these runs, which counterintuitively means fewer FDIC payouts, not more. Then couple that with stricter rules to prevent risky gambles funded by deposits.
If you told the banks that you will protect their business regardless of what corrupt, stupid or greedy behavior's they practice... what do you think they'll do?
this is so very screwed up.
That's not what the FED is doing though. They are protecting the depositors not the business. The equity holders are getting completely wiped out and most of the employees at First Republic Bank are probably going to lose their jobs so the business is definitely getting screwed.
I agree that in both of the above cases, First Republic shareholders and staffing suffer. But the latter introduces the conspiratorial angle and the unjust-ness.
> The banks and their stock is free to go to zero,
Sure, but what about the dividends and bonuses already paid out from the times it worked out in the risky banks' favor? You're suggesting a government/central bank subsidized casino.
Absolutely. I just can't think of a good mechanism to implement it in the current framework. Maybe bonus payouts should be held in escrow/be otherwise claw-back-able for some time?
The only instance of clawing back dividends that I'm aware of is, ironically, Wirecard – I believe there is an ongoing lawsuit to claw back dividend payments from investors. (The irony is that the German government/regulator were actively prosecuting journalists and short sellers back when the line was trending up, yet now German courts are effectively holding long investors liable for Wirecard's fraud.)
We don't: The average person does not have $250k sitting in a checking or savings account at a single bank.
SVB collapsed because they have highly correlated (due to being startups under effective, if not actual, corporate control of a few VCs), jumpy depositors. This is something regulatory rules have not incorporated into their risk frameworks (at least not sufficiently to allow for a margin of safety in times of raising interest rates).
No one should wake up one day and find out most of their life savings or inheritance is gone because of banking shenanigans. This is not like a hurricane or catastrophic expensive surgery. This is entirely preventable and fixable by the government.
Gov’t sells low yield bonds to banks during pandemic => gov’t jacks up interest rates to fight inflation => value of bonds previously sold to banks plummet => bank marks bond values to market and is now technically insolvent causing a bank run => grandma loses majority of her life savings => government refuses to reimburse depositors above FDIC limit even though it created the problem to begin with.
That is not a chain of events I am ok with. Bank management and equity holders should get wiped out but not depositors.
I'm not sure we can even get a vote on the floor that would have detrimental effects on the former class. The legislation is preordained.
You are proposing that bank management and equity holders get wiped out, not the general public checking account-holder; how would that even be possible, since they write the rules, pull the strings, lobby, etc. magnitudes more than you? They are the rulebook. They do so to such an extent that the entire system is predicated on everybody agreeing to do the same thing lest the system collapse.
Thus far, only bank investors have been impacted, and that seems likely to continue.
Nationalize it. We've already established that the shareholders are getting zilch, so there's no argument where we're "destroying value."
From a consumer/operations level, pulling the bank under the state umbrella instantly dissipates any need for a run. They're backed by the full financial might of the government, so you don't have to worry that the ATM will be taped over and you can't get your $35.19 out of the account.
From a contagion perspective, the state backstop and elimination of investor-centric motivations allows for stabilization and avoids fire sales. If the institution was asset-sound but not liquid, as people claimed for SVB, the state could afford to cut margins and pull funds from other sources while they waited for the maturity-mismatch problems to unwind as they mature.
From a social perspective, suddenly you have a new toy in your box of social engineering tricks. The branches that used to cater to crypto-bros can reopen offering basic checking for the unbanked, small-business loans, and mortgages in historically red-lined areas.
A conceptual equivalent might be the story of Conrail: in 1976, the Federal government took over a handful of basket-case Northeastern railroads; without investor meddling, they were able to take the long game-- rehabilitate and rationalize the system, eventually re-privatizing it in 1987. I'd argue banks are less difficult than railroads in that regard-- you're not as tied to physical place and literally rusting assets.
Anything where a large amount of its assets aren't marked to market should be seen as a risk. For things like VC, this isn't such a big deal because it's the nature of the game. For banks, it leaves a lot of room for shenanigans,
GPT-4 answered quite well, but Google is a good supplement. This comment thread appears to be software engineers saying things about stuff they don't understand.
1. There is not a bank in existence in the US that could survive a bank run where 25% or more of the deposits leave. Not even JP Morgan Chase; and
2. There's a lot of evidence to suggest that the bank run on SVB was created by the direct actions of relatively few people, most notably Peter Thiel; and
3. The FDIC usually solves such bank runs by seizing the bank and selling the bank for parts. The banks all actually have more assets than depositor funds. So far at least, all depositor funds have been protected through assets and the FDIC (side note: the FDIC is funded by banks and receives no appropriations from Congress). It's expected that these asset sales are at a significant discount (eg CSFB acquiring UBS for a song although that's Switzerland not hte US obviously).
So perhaps we should be asking if these bank runs are being deliberately created to profit from the collapse of smaller banks. In an ideal world, if true, people would end up in prison.
> the FDIC is funded by banks and receives no appropriations from Congress
So banks going down can certainly cause other banks money, too.
That being said, the "significant discount" is usually because, when you acquire the assets, you also acquire the bank's liabilities, and AIUI roughly speaking you're paying the difference between what you gain and what you lose in the process. More specifically, the FDIC helped fund JP Morgan's acquisition of First Republic because, if JP Morgan simply acquired the assets & liabilities directly, they would not be enough liquidity for it to be safe.
I.e. acquiring a smaller bank has some advantages but also some downsides, and it also destroys trust in the system which hurts the big banks too...so it's not really something that's exclusively beneficial and definitely not worth trying to trigger intentionally.
this is a sick and twisted collapse of multiple economies. It has only one direction. down.
its not too late to stop it, but nobody will, because the cost to those in power will be too great.
Bailing out depositors isn't going to increase inflation - you're just giving people the same amount of money they already have. The big problem with it is that it prevents the natural process of wealth destruction from occurring, so it may just drag out inflation for longer.
That’s not how it works. The original funds do not evaporate out of thin air. They transferred to the opposite side of the trades that the banks are making, meaning customers’ funds are melting into the pockets of hedge funds, etc.
So, in effect, it is the opposite of what you’re stating. The money is not replaced; it is duplicated, thus causing inflation.
The original problem behind these regional bank failures is that there is not enough diversity in those having extra cash in accounts and so when a FED rate change comes along that is big enough, those excess funds seek higher rates of interest thus leaving said bank with a problem of legacy assets tied to the old FED rate. We see the same pattern with Apple getting $! Billion in new savings account, yes that is Billion with a b due to their interest rate offering.
In short words a product problem with on one side products tied to the old FED rate and not being nimble enough to offer a product for the excess cash customers have that offers the higher interest rate. Or in short a virtual replay of the S&L crisis in the 1980s without all the corruption behind it.
And one should note that MMA products were suppose to fix this issue.
Don't know where I read this but it changed my view of economics and capitalism.
Theyre just skimming middle man between the government and end consumer.
Sure, the government would know your bank balance and spendings, but that could be worked around
If youre in trouble with the irs or the law, the government will have all the insight they request.
Sounds crazy? We the people had to bail them out and never get anything of their profits.
Too big to fail? As in systemic risk?
Well, only the state should be too big to fail.
And if they fail, the fdic needs to cover, also tax payer funded.
Any input is appreciated. I know the interest rate should be set by banks and not the politicians, but yeah, is that really it?
Addendum, this post has triggered an interesting discussion, it appears I am not alone with my thoughts.
So far, I do not see any ovewhelmingly convincing argument on why the banks shouldnt be run by the government. It doesnt have to be senate, it can be something relatively neutral like the irs.
At some point some people have to spend off their money.
If the government kept all of my banking records, they wouldn't be able to legally access them. Currently, they can just use taxpayer money to purchase these records from the corporations who gather them.
I'm pretty sure that's actually a more ambitious endeavor than insisting on a government-run solution. I otherwise still see the same issue in OP's comment: there is no reason for the private bank to exist.
The US government is wholesale spying on the entirety of electronic communications and working with social media sites to make some voices less prominent. Private business should be able to tell the government to pound sand when banking data is requested without a warrant or subpoena. Banks are not able to do that. Banks exist as long as they are in the good graces of regulators.
Laws prohibiting the sale of personal information (location, purchases, banking) closes the loophole.
The solution is less government, not more.
> Government ownership of data means they don't have to respect privacy because they already own the data.
> Banks exist as long as they are in the good graces of regulators.
So we have this problem that the government doesn't want to respect our privacy and the problem that the government doesn't need to respect our privacy and somehow removing the bank in the middle will mean that the government isn't respecting our privacy.
If the government is in control of the banks it will make it more obvious to the average citizen that the government has the ability to snoop on transaction information and it might be that such citizens decide to demand stricter privacy measures.
Back to this statement:
> Banks exist as long as they are in the good graces of regulators.
That's kinda my point. The governments run the banks in practice, just not in theory. Changing that "not in theory" part brings the understanding to the citizenry that they can demand certain things from their bank.
Do they actually tell the government to pound sand, though? In the end, if I can only rely on the moral codes of for-profit companies who are weighing the value of a good relationship with me versus one with the US government, then I can't rely on much. But the government can and regularly does tell itself to go pound sand. Like the IRS, Census, or any agency with confidential medical records.
Also, your examples are of private companies selling data. The government is the buyer in those scenarios, not the guardian.
IMO, data is less likely to be shared between government agencies because rarely do both parties benefit. For a company, the database team wins when sales wins, as long as they get to present their success together. Government workers follow strict pay scales, get no bonuses, and have nearly guaranteed job security. They also have notoriously few ambitious ladder-climbers. It's hard enough to get them to share data with each other when it's legal and ethical. If there's any possibility sharing data would break rules, government will refuse to risk it.
> for-profit companies who are weighing the value of a good relationship with me versus one with the US government
For-profit companies shouldn't need or care about a relationship with the US government beyond selling the same product they do to everybody else. That is my ideal. How to get there is the contention. You would like to give the for-profit company to the US government and thus removing the relationship. I would like to see the power the US government has over for-profit businesses reduced and preferably eliminated. Giving banks to the US government results in less private sector and a larger government. A larger government makes more people dependent on the success and benevolence of the government. History has proven unequivocally that governments cannot be trusted to remain neither benevolent nor successful. Concentrating power makes the temptation for government malevolence too great. Power will be abused by someone eventually. That is human nature. Concentrating power is just creating a ticking bomb. The way for more people to succeed is to reduce dependence on government and distribute power among businesses that serve only their customers. Business that are reliant on the trust of their customers will think twice about betraying that trust. If their customers ever learn of their betrayal it means the death of their business in competitive markets.
All the commenters here that think the federal government should directly provide their banking services are going to be in for a rude awakening if it ever actually happens.
Maybe it all goes south and people are worse off with their privacy than now but I can't even imagine what "worse off" would be. The particular example you gave ("spooks in three letter agencies") currently happens and I can't exactly expect it to stop. How could it be worse?
To your concern that these three-letter spooks will spy on you: what would they do that they're not already doing? That isn't to excuse the spying; I'm just pointing out that these are separate issues. Tackle the fact that the NSA compiles all unencrypted HTTP traffic separately from the fact that JP Morgan Chase knows my financial history and doesn't have to care about keeping it private per my idea of private.
(Unless you're asking whether the protections are useless against corporations. Then yes, they're useless.)
It is already hard enough for the GNU Taler Team to get their technology adopted. When you see comments on HN you get the impression that it is very unpopular hence it won't be implemented and the expectation is that any CBDC won't be privacy friendly.
The better question would be, why would anyone use violence to force his opinion on other people.
That's a weird view.
We could also just, you know, vote away banks. I'm not sure why a centralized bank would result in violence.
That's not quite true. Take a look a the various narrow banks which have been founded and people want to use their services, but the government won't approve them to operate.
Just one entity without any other consumer options?
What happens if the government makes a ton of bad loans that never get paid?
Take a look at student loans, how have they been intending to collect on those lately?
with votes
Democrats dangled loan forgiveness at the midterms, bought enough votes to blunt a Republican trouncing...never followed through to reward the voters but no worries, the promise can be re-made for the Presidential election
all Biden has to do is offer full loan forgiveness and the election is his
DeSantis will counter with auto loan forgiveness (just as big of a problem now), and it will be a battle to see who can buy more votes
For a nation state with it's own currency, money is the sum of the production capacity / natural resources of that nation state.
You don't need Joe and Sue to pay you back.
Either Beth now has to borrow for her house or business at a higher rate of interest OR we deflate the value of the currency (by increasing the money supply) to make up for the loss on the balance sheet.
Congratulations your civilization just discovered run away inflation.
The bank cannot lose money because money is a representation of all production and resources in the economy. (Edit: balance sheet is always zero)
There is no deflation because you are the bank and you can print money.
There isnt inflation because you can tax assets or reduce velocity of money (i.e. inflation) through transaction tax.
Price discovery is critical to any system, and money is the shared store of value of those that hold it so long as it retains that store of value.
Producers set prices to make a profit, if they can't do that they stop producing. Factor markets, same things happen, as an employee you don't do $1000 of work in exchange for $1 in purchasing power by the time you get paid.
When government debases currency, unproductive efforts unwind into losses at the individual level, and inflation at the macro level. You can't print money out of air and use it to pay for things without issues that result in cascade collapses over time. The more you do it, the bigger the bubble, deflation, and crash/collapse from a combination of interest rates (that need to raise to fight inflation) and bubble pressure.
If it continues, eventually credibility is lost, and the currency is abandoned. This usually happens sometime after a 3:1 debt to GDP ratio, though it can be much higher, anything after 3:1 is where the smaller effects become noticeable.
I'd suggest you educate yourself a bit more on this. I'd recommend Debt, the first 5,000 years by David Graeber as a starting point, and then Big Debt Crises by Bridgewater/Ray Dalio for case studies of how these things actually play out.
If pricing becomes irrational, you run into economic calculation problem, breakdown, shortages ensue, then death (its been tried in non-market socialist systems).
There's a good reason central banks were not allowed during our countries early years. Quite simply, its well known in a historic context that money printing can end civilizations.
Besides people aren't stupid. If small banks are not too big to fail everyone will switch to a bank that is too big to fail.
The FDIC is funded by the banks. It's backed by the US government in case it fails.
You're thinking of the "federal reserve" as "the government." This is a tempting but extremely flawed point of view.
> If youre in trouble with the irs or the law, the government will have all the insight they request.
These institutions make mistakes. They're also not immune to corruption or politics themselves. Government agents have qualified immunity. Do you really want to bank with someone you essentially cannot sue?
> I know the interest rate should be set by banks and not the politicians, but yeah, is that really it?
Rates should be set by the _market_. Which would be easier if currency were backed by anything other than _fiat_. You are in a tarpit, going further down is not the secret way out.
> neutral like the irs
What makes you think the IRS is "neutral?" Or presuming that's true, given this new responsibility, how are they capable of maintaining it?
Finally.. wouldn't something simpler, like just reimplementing Glass Steagall be the better idea? Let's make "consumer banks" and "investment banks" different and separately regulated again.
I do not think the government would be good at doing this at all. Assessing risk is very hard, and the competition is necessary for it to benefit consumers. Politicians could pass extremely harmful or stupid policies for populist purposes.
That said, because banks have an oligopoly on “give me a place to digitally hold money” and in practice more money than they could ever really productively lend (why do you think interest rates have been trending down so low historically?), they’re not doing a great job at either side.
That’s why I think the government should implement only narrow banking where they don’t lend, just manage the table of accounts and amounts, and let banks compete against that for deposits. You would still move money to a bank for yield, provided it’s good enough, and banks would still be able to lend and stimulate the economy. Yes they’d have less capital and be able to lend less, which may require structurally higher rates (which may actually be a good thing in the long run- a lot of lending and low rates are just going towards bidding up fixed assets like land or leveraged stocks, and not actual economic activity) but that would balance out with higher yields on deposits.
It's a government trust. The only use of banks is to realistically evaluate loans, but priced-in bailouts take away all of the risk, and with it all of the signal. People get loans because they're insiders who have relationships with bankers, or because they're objectively overpaying for them.
If banks will always be bailed out, the proper amount of interest that should be paid on a loan is 0%.
I'm not sure what the best solution is here, but making the big banks even bigger is not it. This is just going to make the banking system more concentrated and no concentrated market is good for anyone. Least of all because the past decade+ has set the precedent that the banks will be bailed out... If they're big enough
More concentrated.
More highly regulated.
Closer to being absorbed by the state.
I'm not saying that's necessarily going to happen someday. But that is the direction it is (and has been) moving.
I'm not a tin foil hat person, but corporations growing larger than nation states just doesn't seem remotely far fetched. Which corporation will be first to sit at the UN table?
The answer to that is funny. It is literally the state, which is to my point, but it is also shaped by the banks, which is to your point.
You know who writes our laws? Lobbyists. Politicians are not the ones drafting the bill. They merely take the drafts produced by lobbyists and then pass them.
Do you also know who runs various government agencies tasked with regulating different sectors? Again, it is a revolving door for private sector execs.
> It is literally the state
True, but the state is, to a large extent, influenced by corporations.
I did, in a old RTS game called Metal Fatigue. Was pretty fun for a while.
Or the opposite.
Remember that? Apparently, no one remembers. Or it was simply more political / leadership theatre of tell the proles one thing while doing the opposite. Perhaps both.
People complain about "the democracy" and they often falsely name names. It easy to blame a symptom when you don't understand the problem. And yet those same people are silent about the banks, power, cronie capitalism, etc.
Many are in denial. Others are able to control the narrative. In either case you can't solve root problems when you're not even willing to address them.
Under such a regime all banks will put customer funds at the Fed, which will be the sole entity to allocate credit, with banks as mere customer service frontends. It will use that power to allocate credit to advance nakedly political goals, with much less attention paid to minutae like risk, ability to repay, and other pesky economic concerns the free market would elevate. We’re already forgiving student loans; watch the People’s Ledger forgive mortgages!!
And when that bank fails it will just fall back on moneyprinting.
Student Loan forgiveness is another thing entirely because those loans are held in public corporations, and if congress wants to use tax money to forgive them they can. You can already get some or all of your loans forgiven in very limited circumstances such as paying them for 20 years without paying them off, or if you teach at a public school for more than 5 years.
20 years of repayment at 300-600 a month is pretty crippling. That's like buying a new car on a loan every 3-5 years. Even income-based repayment has limits on how small your payments can be.
Student loans are also statutorily impossible to discharge in bankruptcy, unlike every other form of debt.
So I think we need to do something, and it seems like the simplest thing to do is make them the same as other loans. We should allow you to declare bankruptcy and discharge your student loans. This won't fix a lot of the knock-on effects but it will get people out from under the loans.
Forget stimulus/inflation political goals, can you imagine how horribly this would get weaponised against "people the current administration doesn't like"? I don't have faith that this exceptionally powerful tool would not go unused.
Putting that aside, what risk controls are and aren't appropriate? An advantage of having a variety banks is that there's much less of a 'one size fits all' approach to banking services. I also don't have faith that a federally-run bank would be very flexible to anybody outside of the box. I've been in a situation where some bulge-brackets institutions wouldn't provide certain products since I didn't fit exactly in some pre-ordained image of what a customer would look like (and it wasn't even something you'd think a bank would have issue with.....)
That’s fairly misleading. It’s only a relatively small sub-set of public school teachers who are eligible.
The TCLI Directory can be found here: https://studentaid.gov/tcli/directory-search
If this weren't the case, student loans would just not be offered to anyone not deemed creditworthy. (Or they would only be offered by the government, who would offer them expecting to lose their money.)
I think this would probably be a good thing, since easy access to student loans is probably related to why college has gotten so expensive, but the first-order implications of changing this policy are pretty detrimental to poor people.
Additionally, the idea that is also present in the paper is expanding low risk (demonstrably historically "safe" loans such as SBA Loans, FHA loans, traditional mortgages etc) through the Fed directly, but explicitly bans things like margin loans, PE bridges and other risky behavior.
Which, as anyone who has gotten these kinds of loans, knows the government already does this, just with extra steps. The People's Ledger paper (proposal?) simply outlines removing extra steps and barriers for the citizenry to have a better banking baseline, all told.
In essence, it makes the Central Bank, more....bank like. With some privileges, being a whole arm of the Government, its less focused on collecting fees and more interested in streamlining banking for the average citizen.
It has nothing in the paper about forgiving mortgages (or student loans, for that matter)
The paper is here, for anyone interested in this: https://scholarship.law.vanderbilt.edu/cgi/viewcontent.cgi?a...
“Most objections to allowing significant quantitative growth of central bank balance sheets, in fact, reflect the underlying concerns about the qualitative, compositional aspects of such growth. Ultimately, however, these concerns are rarely substantiated by reference to anything more specific than deeply internalized skepticism toward the government as an economic actor. By contrast, this Article views the proposed change in the Fed’s liabilities as an opportunity to augment both (1) its ability to modulate credit-money supply more effectively, and (2) its potential to facilitate the more efficient allocation of that supply to productive enterprise.”
“the NIA would transact directly in private financial markets, proactively channeling public and private financial resources into large-scale, transformative public infrastructure projects. Importantly, however, it would reverse the familiar pattern of “public capital, private management” typical of most modern “public-private partnerships” in favor of the “public management, mixed public-and-private capital” model.”
Transformative infrastructure projects!! Are there any of those we’ve embarked on recently where the government’s proven more skilled at identifying investment opportunities than the market? Like, say, California high speed rail? What kind of returns is that investment earning? … oh.
It’s true they didn’t get all the way to mortgage forgiveness in the paper, but, well, it doesn’t seem much of a stretch, particularly when Housing Is A Human Right (tm). We could call it infrastructure, in the same sense that “elder care is infrastructure” — I seem to recall recent legislative campaigns about that and other social spending.
These aren't bad things, and they already exist. There is nothing new here, other than streamlining operations to make them more auditable, transparent, and efficient. It cuts out the "extra steps" part, which more often than not, is where most of the waste is.
…see, the one big bank cannot fail.
The government and those who work for them are not your friends. The power you give them can and will be abused and will never be returned to the people without great difficulty and probably bloodshed.
The problem is concentrated power. Whether it's government or private, concentrated power in anything is bad
I can switch banks in less than an hour, it takes months to years to switch countries.
Oligopolies are arranged monopolies with the further disadvantage of not being subject to the freedoms and rights set out by the constitution. Unless they are broken up, we'll eventually be in a place where things are worse than under government control
Could you give an example of them not competing?
A government run bank seems particularly scary in this highly polarized political climate. What if this administration decided not to give out loans to buy ICE cars, but the next administration swings to the right and decides to not give out loans to buy EVs?
The federal government having direct access to your checking account is scary as well. What if they had the ability to freeze the bank accounts of those who refused to get the COVID vaccine or asked the wrong questions on social media?
The government running our entire banking system directly is one of the most dystopian things I can imagine.
Particularly when even with healthy competition, the only thing that incentivizes a given bank to do is be slightly better than their nearest competitor in some way—whereas while your specific vote may be one among many to the government, it must follow the will of the people when enough of them agree that something needs to change.
I can switch banks until my face turns blue, but if they've all decided that the thing I want isn't worth their money, and are happy to ignore the option to compete by offering it because they've achieved a local maximum of profit-to-effort, it's not going to do me any good.
Neither are corporations. Both will abuse you. The difference between the two is that you have at least a chance of altering how government works, but you have no chance with a corporation.
I think that they both have approximately equal power to do that.
Europe doesn't have 5000 banks they all merged decades ago.
It would be perfectly possible for a business to provide zero risk demand deposits—-but the business would have to charge customers for its custodial operations rather than making money by writing loans.
Of course because we live in times where no one can tell the people that what they want is impossible and ridiculous, we instead have a house of cards with various parts of the government (including parts we pretend aren’t the government) eating the risks.
1: At least in savings. The larger companies have insane credit card deals.
So Apparently the big banks are starting to feel the account drain.
Also brokered cds from the likes of Wells Fargo and similar can be 5%.
Big banks definitely are starting to feel it
Chase collected $1.25 billion in overdraft fees alone last year. My “Chase College” account currently gets charged $6/month for some reason I haven’t bothered figuring out, maybe a newly instated minimum balance or direct deposit requirement that wasn’t there years ago.
The problem with SVB &other is not that they fundamentally were losing money. They just weren't making _enough_ money so they took on additional risk. If SVB hedged the IRR they wouldn't have gone bankrupt; they just would've had less profit.
The banks people want are technically feasible.
However, in practical terms banks have done a great job of making loans that get repaid more often than not. People are ok with having a bank that pays 0% interest and uses the difference between loan's rate and the real rate to operate successfully; bankers are not ok with leaving money on the table.
> It would be perfectly possible for a business to provide zero risk demand deposits—-but the business would have to charge customers for its custodial operations rather than making money by writing loans
That was true when we lived with 0% interest rates. Now, there’s no reason why a narrow bank couldn’t take deposits, stick them in with the fed providing 4% interest, and keep 25% of that for itself to cover its costs, passing 3% onto the customer.
Except they wont get a banking license issued if they state thats what they intend to do, because the system depends on people depositing money with banks that make risky loans, so that the risk is spread across lots of people.
Where is this risk free return coming from? You are just saying in more words that the government should give the people what they want.
Banks have always been able to fail, then you lose the deposits. What people are now asking for is unlimited insurance, which encourages risk takings amongst banks
Except that when a bank is liquidated, the shareholders get zeroed out, and the executives get their money clawed back, which encourages banks to not risk-take.
As a depositor, this sounds fine to me. I don't benefit from banks doing stupid, risky things, and I shouldn't suffer from it either. Raise the capital requirements. Zero out the shareholders when things go pear-shaped.
So we have the worst of both worlds: no depositor guarantee de jure (so depositors bailed and brought SVB down), but a de facto bailout which has significant actual costs and encourages risky depositor behavior. My 2c.
Edit: sorry, you said the Fed, which MMMFs don't put money in. But they buy short-term Treasurys at comparable or better yields, which is ultimately what you want, modulo the risk of US government default, which is minimal.
The problem with this business model is that this 4% interest either (A) requires a certain hold period or (B) allows on-demand withdrawal.
(A) is exactly the model used today. It did not stop the collapse SVB and FRC. Assets that require a certain hold, such as Treasuries held by SVB and mortgages held by FRC, fluctuate in price. If those assets drop in price (as recently) and bank's customers withdraw money, the bank is in a pickle.
(B) moves banking into one real bank -- the government. This can be done (e.g. in the Soviet Union), but comes with a lot of limitations and challenges. It is also not something you can morph the current system into; this is a "break, then rebuild" path and is very painful. I would personally move money away if I see a whiff of this in the air. My 2c.
Because at some point the market interest rate is 0% and the cash rate is 0%. There is no reason to lend money via longer term deposits. The amount of deposits available to banks dries up. The circulation of money stagnates and ultimately causes a recession with high unemployment.
The demurrage fee doesn't change the market interest rate, it just moves the guaranteed interest rate into the negative range so that the market interest rate can be negative, if it has to be, instead of being stuck at 0%.
Of course, they can have counterparty risks. The counterparty is usually unprepared to actually pay up and expects to rollover its debt.
Sometimes that melts down and doesn’t happen:
https://globalnews.ca/news/160176/coventree-executives-faile...
(Scroll down to Canada in 08-09 here):
https://en.m.wikipedia.org/wiki/Asset-backed_commercial_pape...
What happens to the value of 4% bonds if interest rates go to 6%? What about if people want their money back before the bond duration is up, so you have to sell the 4% bonds in a 6% environment?
The reason why we have such consolidation is that merely existing in the Byzantine world of banking regulations is nearly impossible, and only the largest entities can afford the legal, IT, trading/financial mojo, capital, etc. resources necessary for it to occur.
The big 5 have not only such resources, but enough economic impact if they fail that they can force regulators to stop doing a regulation that would kill them.
Which is ultimately where this is all going. Either nationalization (unlikely) or the big banks writing their own regs (in practice).
Separate nerd note: I think you mean maturity not duration.
The maturity of a bond is the point in the future when holders get back the principal.
The duration of a bond is pretty much the first derivative of price with respect to rates expressed in years. Intuitively it's the number of years (on average) an investor in that bond would need to remain invested for the future value of cashflows from the bond to be equal to their investment in the bond.
https://www.newyorkfed.org/markets/reference-rates/obfr and things like that.
[1] https://www.federalreserve.gov/monetarypolicy/reserve-balanc...
The Fed pays interest on those reserves to keep them from being lent. A narrow bank wouldn’t be able to lend its reserves. As such, it makes no sense for the Fed to pay interest on them.
The whole thing resembles an ever more intricate Rube Goldberg machine.
This is incorrect. In 2022, the largest increases were in credit cards (+17.4%), commercial and industrial loans (+14.5%), consumer loans (+11.6%), commercial real estate loans (+11.3%) and real estate loans (+10.1%) [1]. Treasury and agency security holdings across American banks were majorly added between 2019 and 2021, and then spent down as balance sheets swapped. (They remain, of course, a commanding fraction of bank assets for obvious reasons.)
If retail banks switched en mass to backing deposits 1-to-1 with Fed reserves then the Fed would quickly take strong action to disincentivise this strongly contractionary effect.
They have plenty of legal tools to do this (e.g. IORB rate). They don’t need to resort to not giving out licenses.
"I don't want the interest. It's your vault. I should be paying YOU rent!"
Given that many people bank at gigantic banks that pay 0.00001% interest...I don't think that's true.
Personally I judge banks on their app and IT reliability.
They used to. So.. what changed?
Stop letting banks write the regulations?
Yes, I can imagine such a huge bank to cause deep troubles in financial markets and real economy and this impacting the livelihood of people all around the globe.
But saying that "western world" will essentially end when it didn't in face of world wars, grave epidemics and plagues, etc seems definitely too dramatic.
Already had one in 2008. Thankfully, our currency’s value is notional and the fed can print more until such time as the bank run ends.
It's value is not notional. If you make more currency then all currency in circulation now has less value. "Quantitative Easing" is simply a way of taxing you after the fact.
Worse still if bonds are involved. Now it's a way of taxing your children before they're even born.
That's not how pricing works. It's easy to see. Consider the following. Treasury could mint a 10^33 dollar platinum coin[1], stick it in a vault at Fort Knox, and forget about it. At that point the money supply would nominally be almost all in that vault. Yet prices not only wouldn't go asymptotic, they wouldn't even budge. But wait, you say, that's not in circulation. Treasury could easily swap that coin with the Fed for an equal number of reserves. Now Treasury's reserve account is flush, which is surely circulating money. And yet prices still wouldn't budge. Not until Congress appropriated that money to be spent would we start seeing it moving prices, and even then only if Congress designed their spending to do so[2]. It's pretty easy to imagine ways that could be done, so I won't belabor the obvious unless asked to.
The point of all this is that price inflation is everywhere and always caused by an increase of the ratio of money-being-spent:things-being-bought. This is why hyperinflation is always kicked off not by money printing, but rather by a productivity collapse. The money printing only comes afterwards, because it's an effect not a cause. This is also true for wage inflation, which is why US wages have remained flat in real terms since the mid 60s immigration reforms: the labor supply has been grown as fast as the demand for labor.
[1] This authority exists under current law.
[2] For a counter-example, if Congress passed a law appropriating 10^33 dollars for the Social Security Administration to buy gold from citizens in any amount they desired at a price of $20 per ounce, the price of gold wouldn't budge a cent on account of it, despite an absurd amount of money on the buy side of the gold order book.
Yes.. and if you increase the amount of money in circulation this impacts the amount of money being spent. You can imagine all sorts of ways that money can be minted without being circulated, but as soon as you do, this becomes a factor in this ratio, does it not?
> This is why hyperinflation is always kicked off not by money printing, but rather by a productivity collapse.
Has this occured in the US before? Are the examples you are using to draw this inference something that applies to the US?
> This is also true for wage inflation, which is why US wages have remained flat in real terms since the mid 60s immigration reforms: the labor supply has been grown as fast as the demand for labor.
The labor market has changed _drastically_ in this time. You're really willing to assume such a simplistic explanation for these facts?
Yes, I think you're starting to get the point. It's not the money stock that causes inflation, but rather the money flow. Back to the original point that started this thread, increasing the money stock alone, that is to say growing the notional money supply, doesn't move prices. What moves prices is changes in the money flow, for which growing the money stock is neither necessary nor sufficient.
> Has this occured in the US before?
No, the USA has never experienced hyperinflation. Thankfully the principles involved are not specific to the USA. They apply generally. The operational particulars do change depending on whether or not the foreign exchange rate is floating or not. That's not really relevant here though. It all adds up to a collapse in the value of a currency being caused by a collapse in the goods and services that can be bought in that currency. That's why back when the world was more or less on the gold standard a single economy's collapse couldn't cause hyperinflation. However if, somehow, there were a collapse in global productivity then even gold would see hyperinflation, because you can't eat it and there'd be too much gold chasing too little food, fuel, and other essentials.
> The labor market has changed _drastically_ in this time. You're really willing to assume such a simplistic explanation for these facts?
At the aggregate level? Yes absolutely the law of supply and demand holds. It's the same as how I'm willing to apply the laws of thermodynamics to monstrously complex systems that I don't fully understand. I might not know how the parts all add up, but I do know that the equations will hold.
The government is bankrupt for whatever reason. It has to create new money. Then inflationgets worse and the government introduces price controls. Businesses quit (or are shut down by the government for violating price controls) because they have to pay inflated prices but sell at regulated prices, ending up with a loss, inflation gets worse because of a lack of supply, more businesses quit as they start making losses.
I've done some research on the subject and I've never found an historical counterexample, so if you have one I'd be very interested.
Are there any regulations that could provide economic incentives to small businesses and make it increasingly difficult for large companies to grow larger? Wealth going in one direction is not a very stable system.
But regulators stopped enforcing those regulations in the 1980s because of "efficiency" and each administration after Reagan doubled down. Luckily some politicians are starting to see the error of their ways and listening to thinkers like Matt Stoller:
a) what constitutes anticompetitive activity or otherwise warrants antitrust action is likely to always be at least somewhat subjective, and require human judgement, meaning that motivated humans can choose not to do it in many cases, and
b) depending on the degree to which the government is captured by a party that actively works against antitrust laws and believes that bigger[0] is always better, and on how long said capture lasts, it doesn't matter what laws we put in place now. Laws can be changed by the government.
We're not going to be able to make a foolproof system just by making better laws on this one issue. If we believe strongly in antitrust with teeth, we also need to be committed to supporting politicians who favor it, and political and governmental systems that prevent a vocal minority from seizing control of the engines of power, consistently for the rest of our lives.
[0] Bigger payouts for their friends, that is, which means bigger kickbacks now and bigger paychecks later when they go to work for said friends
Welcome to reality where "competition" and "free market" are just buzz words meant to fool the naive populace.
It should really be: You can only do A, B, and C and in the ways we tell you.
Was SVB too big to fail? Signature? Apparently!
TBTF is now a popular concept more than a legal one. We need explicit universal deposit insurance along with the rules that make that guarantee tenable. I also think experiments in narrow banking, e.g. permitting each state to charter a narrow bank open to its residents and guaranteed against losses (e.g. due to fraud) by its own treasury to access a special type of reserve account, need to commence.
The FDIC insurance fund is predicated on any one bank (and their customers) being small enough that if you wipe out the uninsured deposits, the system as a whole will be ok. That was arguably not the case, or at least regulators didn't want to take that risk for SVB or Signature.
Eliminate the Fed.
Banks eliminate inherent risk by being backstopped by the fed. A simple example of how this works is FDIC insurance. If a bank had all of its depositors holding $250k or less, it could essentially lend out all of that money with very little risk of getting sued by their depositors.
Do incumbents in such a system leverage their status, leading to new kinds of abuses? Arguably yes. That said, SVB was a member bank of the Federal Reserve and it didn't help their shareholders when the market decided that they were over-exposed.
Looking at your assertion from the opposite direction, if you don't trust the Federal Reserve, why would you trust a smaller bank to do a better job? Sure, it's in their long-term interest to self-regulate and operate prudently, but history is full of people acting irrationally because of greed, myopia, confirmation bias etc. The fed at least exhibits moderate transparency of structure and operation - risk is distributed across a set of reserve banks, and the membership and balance sheets of the regional reserve banks are open to scrutiny.
And that's what it basically boils down to. You don't want big banks? Eliminate the Fed.
Ally bank has been paying reasonable yields on deposits, being a digital bank with lower operating costs.
The bank model works, it’s the “too big to fail” model that is broke.
The one upside of TBTF banks is you forfeit any deposit earnings to get “insurance” on the full amount.
There's nothing wrong with being a low risk lender. Thats not the central problem with the banking system in the US. Its that bigger banks take riskier and riskier bets with money that they really shouldn't be, and when bad times hit they often don't have proper risk management in place to cover it, or its unpredictably catastrophic.
It used to be that these activities were separated, limiting risk to the average person significantly as a result. Simply forcing that separation again would be more than enough to get some stability back into the banking system.
Apple makes money selling phones, not mortgages
the funds deposited can be reinvested in Apple stock
as long as Apple is not loaning at interest, they could pull it off
I think people are underestimating the blast radius of these accounts...imagine an entity engaged in "fair" banking (and only banking) that is too big and powerful to be undermined by JPM, BofA etc
The trick is in modelling and mitigating risk, of which there are many:
1. Duration risk. With demand deposits, banks borrow short and lend long. Demand deposits come and go daily, but the banks use them to make mortgages and other loans. Some stay on the books, others sell and either make more loans or hold other assets. The risk is that depositors may all ask for their money back, but you cant recall the loans you made.
2. Interest rate risk. Interlinked with duration, rate risk is the risk that the rates you loan at now are less favorable than rates later. A loan earning 1 percent is less valuable than one earning 2 percent. The strength of this relationship is tied to duration; losing out on 1 percent for 1 year is less bad than losing out for the next 30 years. The rule of thumb is that for every 1 percent rate hike your asset loses 1 percent of its value times the years until it matures -- so that 1 percent underperformer with a 30 year duration loses 30 percent of its value!
3. Default risk. Loans may go into default, and then instead of getting your money back in 10 years you get less, maybe even nothing. You try to price that into your underwriting, but the error term here might be called "underwriting risk" -- the risk that your risk estimate is wrong.
Theres more ive likely forgotten as a layman, but I'm sure you get the idea.