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Comment by Jensson | Hacker News Reader

But why would you need a private corporation to put peoples money in T-Bonds? Why not just make the government do that directly? I don't see how these corporate profits benefited society. They didn't fill some hard to do function, they just risked others money and planned to skim the gains for profit, why should society encourage that? And they didn't even risk the money in growth areas, they just gave it to the government, I could see their value if they actually took some valuable risks, I don't see the value of a private corporation that skims profits by investing into the government.

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The UK government owns several banks, one of these banks is for exactly this purpose.

National Savings & Investment Bank (NS&I) does not offer loans, but money you save with this bank is in practice just part of the country's general fund, they're paying you interest on your savings because if they borrowed that money commercially they'd have to pay interest too.

This has one obvious big advantage for the saver - it's inherently safe, you aren't saving with a bank, who might gamble your money away and then go bankrupt, if the whole country fails then it doesn't mean anything to lose the Pounds in the savings account, Pounds are now worthless anyway. Also if you live there you have more immediate problems.

Since the government owns it, it's also allowed to do things which would otherwise be illegal, at least potentially e.g. NS&I Premium Bonds are basically savings except with gambling, or scratch-offs except you get your money back if you don't win. Your deposit is safe, but instead of say 1% interest on £10 000 you might have 0.1% chance to win another £90 000 for a total of £100 000.

This is technically worse than the 1% interest but it's exciting and people buy lottery tickets so who am I to argue?

Edited to add: Somehow the word not was missed in my second paragraph during editing. Fixed now.

Three modest notes about premium bonds. Firstly, you can cash in bonds at any time, so it's effectively an instant access account. Secondly, the current rate is 3.30%. Thirdly, the payouts are tax-free.

3.30% on an instant access account is actually pretty great (best i see elsewhere is 2.51%; i see a six month fixed term deposit at 3.28%), and getting it tax-free without having to have it in an ISA makes it even better.

I might be misunderstanding what you wrote, but in the US, Wealthfront Cash is offering 4% APY, which is a bit higher than 3.3.

4% APY on USD presumably? twic was talking about interest denominated in GBP.

Ah thanks

Just to note that interest percentage is a prize fund and most deposits get nothing.

>But why would you need a private corporation to put peoples money in T-Bonds? Why not just make the government do that directly

What you're describing is pretty close to a "narrow bank", minus the "owned by government" part. The Fed doesn't like it for several reasons:

>The Fed raises three main objections. 3 The first is macroeconomic: The Fed worries that narrow banks could mess with the implementation of monetary policy, because if they succeed they will keep a lot of money at the Fed, increasing the size of its balance sheet. 4 They might also make other short-term interest rates (like fed funds) more volatile, because people who would otherwise participate in those markets might park their money at narrow banks instead, making it harder for the Fed to target interest rates. 5

>Second, it worries that narrow banks will take funding away from regular banks, making it harder for those banks to trade stocks and bonds (a business largely funded by repo), and maybe even making it harder to make loans:

>Third, the Fed worries that having too safe a bank would be bad for financial stability: In times of stress, everyone will flee from the regular banks to the super-safe narrow banks, which will have the effect of bringing down the regular banks.

https://www.bloomberg.com/opinion/articles/2019-03-08/the-fe...

I have a hard time seeing his 3 and especially 2 are even that bad

The Fed has shareholders, pays dividends, and are partially owned by the biggest banks.

Interests are not perfectly aligned.

> The Fed has shareholders, pays dividends, and are partially owned by the biggest banks.

Those statements might technically be true, but the implied conclusion (ie. that the fed is beholden to banks because of its ownership structure) is not. The federal government essentially controls the fed because the president appoints all the board members, and nearly all of its profits are paid to the treasury.

>The federal government sets the salaries of the board's seven governors, and it receives all the system's annual profits, after dividends on member banks' capital investments are paid, and an account surplus is maintained. In 2015, the Federal Reserve earned a net income of $100.2 billion and transferred $97.7 billion to the U.S. Treasury,[22] and 2020 earnings were approximately $88.6 billion with remittances to the U.S. Treasury of $86.9 billion.[23]

https://en.wikipedia.org/wiki/Federal_Reserve

They are actually a recipe for slaughtering a capitalist economy.

Well now you're questioning the necessity of banks in general. Additionally, the government regulates them into these securities.

>Why not just make the government do that directly?

If I understand, do you mean why not cut out the middle-man and have people buy the T-Bills/Bonds themselves? If so I completely agree, to some degree, that banks nowadays are nearly complete scams as far as warehousing your money, while providing near 0% interest, with the backdrop of 4 to 5+% risk free short term rates from the government as alternative.

I myself have taken out a bunch of cash and deposited into various tenors of treasuries at TreasuryDirect.gov

And many others have as well, which is why depending on which data you look at there has been a massive withdrawal of cash from commercial banks in recent months, with people either buying treasuries or putting the cash with their brokers (who are buying treasuries etc).

I don't know the answer to how this is resolved, or banks place in the economy... they are supposed to provide credit and money creation for business investment. Since the 2008 crisis, lending has been subdued... there are probably many causes for this. Banks have terrible apps, user interfaces, user experience moving money quickly (in the US) and terrible returns provided to you for lending them money (most people don't realize this is what you're doing when you deposit). So yea, they are a legacy, protected industry that scams their customers out of the spread between the treasury yields they are getting.

:shrug:

The alternative to banks is a credit union where you are a shareholder and their rates aren't necessary exciting either. There's a cost to maintaining infrastructure both digital and physical. Not to mention providing various financial services to shareholders.

The moving money problem is a bigger issue with the American financial system as a whole and basically the business mentally of underinvestment and "don't break what works". FedNow will hopefully reduce alot of the time delay related friction in the coming year or two that comes with ACH.

T-Bonds tie up money for a long time, bank deposit are largely retrievable on demand. Banks take a fee for bundling lots of deposits together to invest and depositors trade upside for convenience.

If you know you have a 10-year horizon, by all means buy treasuries instead of depositing at a bank.

But that doesn't work if the bank is allowed to put your money into T-Bonds, then your money is locked there just without the upsides.

And you can sell T-Bonds, they are as liquid as any other assets, the bank just lost money on it. If the T-bonds hadn't lost value they wouldn't have collapsed, they would have just sold the bonds.

It works usually. The bank can spread out the maturity dates of money such that they'd generally have enough cash on hand to be able to meet withdrawals. The higher yields mean they can still have some cash on hand and still pay some interest to their depositors.

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