Comment by patio11 | Hacker News Reader

Comment by patio11 | Hacker News Reader

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As described it is an inferior product on both sides of the transaction to ones which are extremely available in the status quo, unless you propose simultaneously making the interest rate the best one in the country, and so you wouldn’t be able to get it off the ground.

If you did make the interest rate attractive enough to get folks whose job is shopping for the best interest rate, you’re in for serious bad news any time the bank falls behind competitively risked interest rates. It will see massive outflow of deposits, be unable to pay them, and have to liquidate its mortgages, potentially at a severe discount (they’re illiquid by nature, right, and may have declined in fundamental value due to e.g. interest rate changes in the interim).

Now your bank is failing and, as soon as you do the responsible think and report insolvency or inability to satisfy withdraws, instant bank run.

Well, you could change how banks fail too.

When a bank fails, the owners would lose their investment. But the assets of the bank, its loans, could be put into a public corporation and shares distributed to the depositors in proportion to their deposit.

Then depositors could sell and get 80 cents on the dollar or whatever. Or the depositors can wait awhile and sell when the markets recover. They might even make more than the interest they were promised.

Such mortgages are fundamentally sound, so for most people the sensible thing is to wait. They can also sell some and keep most to get through their own short term cash flow needs.

If the deposits are insured I don’t see why they should get any upside. If the creditors are uninsured, this is effectively how bail in works. You are either written down or converted into equity, and existing shareholders are wiped out.

1929 wants its total disaster back.

Depositors would earn a lower rate than a riskier bank would pay. If people faced a loss of their principal, this could be a more popular option.

Of course, this is not a product for today's environment, as all depositors face zero risk of losing their principal.

People pay more for safer cars. Why wouldn't they give up some interest for a safer account?

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