Comment by strawhatguy | Hacker News Reader

Comment by strawhatguy | Hacker News Reader

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Large banks do better with more rules, but that's not necessarily the outcome actually desired, or at least I'm tired of the Goldman Sachs running the sector with little to no risk of any challengers.

The main problem is that the government is too involved; namely that banks can get Congress/Federal Reserve to bail them out, as we see yet again. It really doesn't matter what rules gov sets, if it's always going to panic and dole out printed money at the slightest hint of hardship (and thus potential incumbent demise), you will get bad behavior, and those involved will do something like this again (plus inflation to boot).

If the costs are instead borne by the bank, and depositors of that bank, yes it will suck for many, but also risky investments like the kind SVB engaged in will be shown not to pay off. Depositors will ask many questions on the status of their deposits at other banks, forcing banks to be more transparent/less frivolous with client money.

None of which will happen now; the Fed took care of it after all! Maybe we'll get more emotional banking rules implemented, maybe not. Can definitely kicked down the road though, I'll be expecting another such failure in ~15 years time, if that. It's really getting old, and seemingly happening with more frequency regardless of the number of rules implemented.

> If the costs are instead borne by the ... depositors of that bank, yes it will suck for many

You should have finished your post here. Nobody with any exposure to the real world should be suggesting if a bank's highly skilled risk management professionals working full time on assessing the bank's financial position with access to the confidential data can't assess the risk factors of the bank's bond portfolio adequately enough to keep the bank alive to continue paying them massive salaries and nor can any of the bank's wiped-out equity investors, the real problem is that Joe Sixpack just isn't motivated to spot it in the few minutes of his spare time he gets to ponder changing his bank account.

I mean, you're in a minority of people so confident in your knowledge of the banking system you're willing to offer a diagnosis of its "main problem", but I bet you still couldn't tell me what's unusually risky about the composition of SVB's bond portfolio and what implications that has for your own banking arrangements now it's been in the news for a week, never mind last month when people would have needed to know if they wanted to still have a startup.

I mean, I'm not saying people shouldn't learn lessons from bank failures. It's just that the lesson most of us learned is banks failed a lot more when they weren't regulated and insured.

You seem to have forgotten that all the shareholders of SVB were wiped out. The government only took care of depositors.

I know, but no action is better, in the long term. As it is, more inflation at least is likely

For who? Maybe SVB has little ordinary banking customers, but what about other banks? Putting ordinary people out on the streets is better for the economy in the long-run? Oh, and now everybody knows when a bank fails they lose their deposits? Better run and get my money out now.

Only the little people, with no connections to the decisions, get hurt when a bank fails. All the leadership gets out, no punishment, and maybe even makes a profit.

Certainly the FDIC-insured accounts to that level ($250k) should be guarded, as that is part of the calculus. That does cover most ordinary individual accounts, and most certainly all of the 'little people'.

If we want to talk about changing rules for FDIC on what's covered, then fine.

What I have a hard time with is this panicked rule change to create a temporary (at least for now, as devs we all know how temporary fixes often go...) system for banks to sell treasuries at par instead of at market. Do the 'little people' get such a deal with what treasuries they may have?

And remember that this is happening because interest rates were hiked very quickly recently, causing treasury market prices to dip, and that happened because of the need to combat high inflation, and that happened due to the excessive bailout spending in the pandemic (more money chasing same/fewer goods), and that happened because of gov heavy-handily shutting down a LOT of the economy (it's okay, it was just the non-essential 'little people' work though...).

I could go on, but it's clearly one blunder fix after another. Maybe this recent FDIC action and halting interest rate hikes will be enough to soften the blow, and won't cause enough side effects to notice much. Who knows? I'm just skeptical.

I guess we'll see in 15 years or so...

> What I have a hard time with is this panicked rule change to create a temporary (at least for now, as devs we all know how temporary fixes often go...) system for banks to sell treasuries at par instead of at market. Do the 'little people' get such a deal with what treasuries they may have?

It's very temporary - it has a date baked into the law - they must have bought the treasury before the start date of the law to use it as collateral. And they can't "sell" the treasuries, they can borrow against them at the Fed interest rate plus 1%. It's not exactly the great deal you think it is.

It's just to give banks some liquidity, that's all. They certainly won't profit from it - the US government will actually make money from this.

> Do the 'little people' get such a deal with what treasuries they may have?

Yes actually, you too can borrow under this plan if you bought the right treasury type before the start date. It's a really bad deal for you though, the interest payments will cause you to lose money. It's only worth it for you if you absolutely must have cash right now, and you don't care what it costs.

> I guess we'll see in 15 years or so...

It's a 1 year plan, and the effects will be completely minimal.

The effect of bailing out SVB depositors on inflation is pretty much zero...

I would actually agree with you.

Although this is almost trivially true: any single gov spend inflation effect is 'pretty much zero'. That's not the same as 'free' though. All spend together adds up to at least 2-3% in good times.

... and it just went up by 0.4% last month: https://reason.com/2023/03/14/inflation-isnt-going-away/

yikes

I mean, yeah sure, it's trivially true that all spending by anyone in the economy adds some tiny portion of inflationary pressure.

That doesn't mean that the Fed making depositors' bank balances that already existed continue to exist (and mostly continue to stay in the bank) most of which is simply a payout from an insurance fund doesn't add less inflationary pressure per dollar than most other types of spending, that the number of dollars involved isn't an exceptionally tiny fraction of the economy or that a 0.25% rise in the interest rate wouldn't have several orders of magnitude more impact in the opposite direction.

> The effect of bailing out SVB depositors on inflation is pretty much zero...

Its probably strongly positive, in that the knock-on effects of letting them burn would be an economic meltdown that would rapidly reduce inflation.

The monetary effects of the additional net spending before considering that os probably minimal, though.

Not sure either that an economic meltdown is the sort of inflation reduction the Fed is looking for, or that SV startups getting a few percentage points haircut on their unspent investment capital would do that much damage to the wider economy. Even tech companies actually laying off staff hasn't had much effect on inflation

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