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Comment by bubbleRefuge | Hacker News Reader

Pretty Simple fix. Have the fed backstop all depositors to infinity. Today there are no limits on the number of 250k FDIC insured deposits. Logically the same thing as insuring a single account to infinity.

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> Pretty Simple fix.

Backstops have a cost, and infinite backstop subsidizes risk taking activity of deposit taking institutions.

I'm not even saying that what was done in the wake of SVB and Signature was wrong, per se, but making it formal policy that all deposits in a bank are insured is a fundamental change to the foundation of banking in the US. It may be "right" or it may be "wrong", but the one thing it is not is "simple", because the consequences could be far reaching, unintended, and unpredictable, both short term and long term.

I think that's not necessarily true. They can do what was done for SVB and backstop deposits, but take over the bank if the insurance kicks in, firing the managers and wiping out many of the investors. That's probably enough to prevent moral hazard.

The bigger issue is the concentration of deposits and potential suppression of investment.

Managers might have been fired and equity wiped out but they still have all the rent and bonuses that were extracted during the high risk high reward activities.

That’s why it’s a morale hazard and the fed taking over it doesn’t solve it.

I don't see how letting the depositors get hosed while the bank gets taken over is any better than bailing out the depositors. Either way, the rents have been extracted. Why does the $250k limit make a difference to bank management behavior?

It makes difference in where people put money into. Despite VCs and startups not using it, you can buy insurance over $250k limit and spread accounts into multiple banks. It is actually standard product.

Basically, VCs did not wanted to pay for that and were rewarded. They advised or forced their startups to not insure money too. Also, before someone makes that point, these are supposed to be highly sophisticated operators. They are supposed to have know how. The people being bailed out are not Johny-the-cleaner working on his small busines.

They don't stand to lose much if their risky behavior fails, but they stand to make a lot if it succeeds.

You've just coined a new term, "morale hazard". Perhaps this is when there is a moral hazard problem that affects morale?

Haha that is hilarious, I can't edit my comment but thanks for pointing it out

agree with all except your last sentence . whats the issue ?

Concentration of deposits leads to less competition in the banking sector and more concentrated risk in global systemically important banks, i.e. the ones that are too big to fail. But maybe that's no the end of the world, and maybe the deposit limit isn't the best way to create competition.

And if banks aren't allowed to make risky investments with deposits (good policy, IMO), then I believe we want people and businesses using banks for their most liquid needs, but otherwise, putting their money to work through investment.

banks don not lend deposits per say. this is an anachronism. banks make loans and loans create deposits. there is not a dependency on deposit funding loans. banks create loans on demand so long as they meet capital requirements. deposits are not capital. they are liabilities. (there as a thread last week about all this which you can read that is probably helpfull)

> Backstops have a cost, and infinite backstop subsidizes risk taking activity of deposit taking institutions.

To me this makes intuitive sense, but are the only options 250k or infinity?

What's the "magic" behind that $250k number? Is there some reason to expect that this is an optimal number? I feel like maybe it's cargo-culting - it isn't even re-adjusted for inflation is it?

At the time it's probably the level that covers most people's deposits. It's pretty rare for a person to have >250k in pure savings deposits so setting it at that level protects most people lessening the pressure causing bank runs. It doesn't work so well for banks like SVB where a few huge businesses make up a majority of their deposits.

250k probably still covers 90+% of people in the US.

Hmm.

Would it be easy nowadays to just have a software service that split up an account into n accounts of less than $250k, and then presented a single interface to all of them?

I guess individual purchases over $250k would be a problem, but I guess a short-term gather operation could be ok, as long as you aren’t too worried about a bank run while that transaction was occurring.

This exists, many times over. It's called a cash sweep. See one example here: https://www.wellsfargo.com/investing/cash-sweep/

And just as a warning, it is still not clear how sweep accounts are handled in the case where the primary bank fails. SVB offered sweep accounts. But due to the intervention, the recovery process of those accounts was never tested in a real life scenario. If recovering your sweep accounts takes months, that could be really bad for a business trying to make payroll. And from what I read, there is some "operational risk" as well, i.e. if a bunch of money hits your account the same day a bank fails, that money will be in your primary banks account and if it is over the FDIC limit that amount will be uninsured.

Great points. Maybe protection can be written into the rules to remove that uncertainty?

See, for example, Fidelity's FDIC-Insured Deposit Sweep Program.

https://accountopening.fidelity.com/ftgw/aong/aongapp/fdicBa...

>To provide you with the benefit of FDIC insurance eligibility, the cash balance in your account will be automatically swept into an interest-bearing FDIC-Insured Deposit Sweep position. Since FDIC insurance coverage is currently limited to $250,000 per qualified customer account per banking institution, Fidelity may use several banks, rather than just one, to maximize your FDIC coverage.

Mercury has a been taking this idea to a pretty logical extreme lately. At first it was just $1M, but it’s now $5M

https://mercury.com/blog/company-news/understanding-bank-swe...

Interesting. So is the coverage cap actually accomplishing much?

It spreads risk throughout the system. In a maximally-resilient scenario, everyone would have a small deposit at every possible bank -- then when any bank fails, it's "no big deal", and you won't panic and withdraw your money from the rest. This is similar -- any particular failure is going to be for half (or less!) of your money, instead of all of it, reducing the urgency and spreading out the risk.

Ah, that’s interesting. So spreading the accounts across multiple banks is essentially accomplishing the goal of the program.

Seems silly to make people jump through these hoops when all the want is a safe, low-yield investment.

There is no safe investment of any kind. Even bonds or cash have risks.

This stuff is immensely complicated once you peer behind the curtains.

Putting money at the central bank (deposit facility) is safe

That's not an investment, though, there's no return on investment. It's just storage.

No you get the overnight rate. Currently 4.65% for USD and 3% for EUR

Oh, interesting, thank you!

AFAIK, the current normal is for banking systems to ensure all of the deposits, the US is an exception. And this policy hasn't caused any disaster anywhere yet.

But yes, the US has more singular things that can interact badly with no limits on insurance. As a start, the insuring entity has much shallower pockets than most places I know about.

Your knowledge is wrong. Most European DGSs cover up to 100k, for example.

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

One prediction : no more bank runs.

While it may be difficult to see things this way, when you put money into a bank, you’re choosing to not invest that money into something else that might generate a better return for you and for society. The small but real risk of losing your deposits in a bank encourages companies and people with money to invest it into other things.

If there is no default risk, then money will be increasingly stored away inside banks, removing much of the healthy risk-taking activity that generates long term growth and improvements in the standard of living.

Rich people know there is a tiny chance of losing their cash if they stick it in a bank. So they buy other things instead. Those things generate real growth in the economy and improve productivity. Banks have to invest very conservatively because of regulations. Without the tiny risk of default, banks would get all the cash and the economy would stagnate.

Another word for this kind of stagnating economy is “the 1970s.”

Most people aren't thinking they're losing their money because the bank sets itself on fire; they're thinking they're losing their money because a savings account interest rate is well below inflation.

"The small but real risk of losing your deposits in a bank encourages companies and people with money to invest it into other things."

I'm surprised that belief still persists.

The counter to that, of course, is that the silly instability in the banking system we're now seeing worldwide will destroy risk taking as people scramble to protect their positions.

Look at the damage to stock market valuations. How many banks are thinking about creating loans at the moment?

Banks provide liquidity against real things by creating money. They don't invest, and they don't take in money. All they do is shuffle their balance sheet to try and improve their net interest margin.

This idea that banks will suck up all the money is yet another consequence of thinking about banks backwards. There isn't, and never has been, a fixed amount of money.

Just as you get fancier trapeze moves if you have a safety net installed, you get far more risk taking when the basics operate correctly, safely and without having to think about them.

Low levels of inflation already do what you think insolvency risk does. 2% loss of value per year hurts way more than a 0.001% chance of being completely wiped out.

That’s a ridiculous just-so. What happened when the FDIC raised insured deposit amount to 250k?

That make no sense. I don't spend money on things because I'm afraid of loosing my deposit in the bank. My point is if I have 1M I want to deposit safely, then I have to make 5 FDIC accounts instead of just 1.

That's an argument for no insurance. And it isn't true. People put money in a bank because it is safe. They leave cash cash because it is safe.

This is a monumentally bad idea.

If there is infinity backstop, I will simply create a bank and lend millions to my friends and promptly go bust. They get paid out by the government and I walk away. They do the same for me. We laugh at the poor taxpayer who foots the bill.

This won't happen for the same reason people most don't just burn their house/business down for the insurance payout. People lose insurance all the time this way even if they're just unlucky. Like any insurance company, the FDIC can and will drop a bank and isn't obligated to insure a new one if it's run by unreliable people.

Insurance fraud is illegal. Running a bank on the edge can be done legally.

What you described would be insurance fraud. FDIC is insurance. It's the I in FDIC.

You are mistaken.

The money behind the $250k isn’t magic and can’t just be multiplied like that. each FDIC-insured bank pays a premium for each qualified account. 10x the accounts means 10x the money into the pool. So it scales logically.

This is a separate issue from the recent trend of the US federal government helping ensure that all deposits, even those beyond the limit, get assumed/recovered.

what ? explain.

FDIC - Federal Deposit Insurance Corporation

It is not the Fed itself, but a separate entity that doesn't receive any federal funding. The $250k insurance you hear about is not free, it has a cost associated with it: https://www.fdic.gov/deposit/insurance/assessments/proposed....

Just like your $25k car has an insurance premium, these bank accounts are also insured because they pay a premium. Now if your car's value is $250k, wouldn't you expect the insurance premium to be higher? What if your car's value is infinity dollars?

I love when people on HN start their comment with "Pretty Simple" or a variant of it, because it almost always means they're wrong.

It comes from the idea that there are no real rules in economics and that we are oppressed by some malevolent force.

The Fed government as an issuer of currency can fund anything to infinity so long as Congress authorizes it. They change numbers in a spread sheet to create money. Rules like FDIC insurance are vestiges of a gold standard era when money was not fungible.

What? Money was always fungible. In the case of crisis, sure fed can step in, but you can't except basic economics to go away when you except to be insured to infinity dollars (and for what cost, btw?)

no money was a receipt for a gold bar amount which is not very fungible. How does basic econonmics go away ?

Well not exactly, the limit encourages diversification which always reduces risk.

risk = 0 with unlimited deposit insurance. what am I missing.

"incentives matter" - you're missing Econ 101

matter how in this context? deposits should be 100% sound in order to have a payments system. this is for public good.

Maybe we should stop paying taxes since the FED can just print new money when we need it.

Your comment seems pretty unserious, but modern monetary theory (https://en.wikipedia.org/wiki/Modern_Monetary_Theory) adherents assert that the point of taxes is not to "fund" anything, but to engineer incentives, redistribute wealth, and remove excess money. And that, yes, we should simply print money, to the extent that we need to, subject to the constraint that excess money causes inflation in specific circumstances.

In all circumstances. It’s a nonsense theory that is entirely based on the idea that everybody in the world will accept the value of our currency is maintained while no other country on earth gets this benefit.

The sarcasm was warranted.

I don't remember adding a sarcasm tag. :)

I do agree that only the US (or whichever country controls the reserve currency) could really get away with this. But it already gets away with quite a lot, including "exporting inflation," so why not squeeze the dollar for all its worth as long as it's printed by the world's only superpower?

I'm not an expert on MMT, but I've never heard anyone say that. MMTers say that a government cannot be forced to default on debts denominated in its own currency, but that doesn't mean it can control exchange rates if it chooses to prints money to pay them. MMT encourages a broader range of thinking about what's possible, but those possibilities aren't free of consequences.

You've never heard anyone say the main - and very popular - counter argument? (which is correct IMO)

Seems disingenuous.

Re-reading the comment, I misunderstood what they were saying the counterargument to MMT was. But I still think they're wrong. The rest of the world accepts all sorts of things that we might not expect, such as a debt to GDP ratio over 100. A lot of conventional economic arguments are rigorously weak, and while I think policy recommendations from the MMT camp are very debatable, I find their model to be thoroughly thought through.

Those consequences are a soft form of default. They played some word games and turned hard defaults into soft defaults. Great?

upvote! MMT founders think we can eliminate income taxes and get by with state taxes. One has said a national real estate tax would be fair in leu of income taxes. But they all agree taxing is necessary to maitain demand/need for the currency and to slow down the economy if needed.

Many non MMTers think we can get rid of income tax too.

but those others believe taxes fund federal government which MMT has shown to be not exactly true.

Hum... I only disagree that people keeping calling it "modern".

The actually modern theory has a much more complex lifecycle for money. Yep, government spending creates it, and taxing destroys it, but between all the kinds of money and the entities that can create them, it's not automatic that the government numbers are the important ones.

As far as I know, MMT accepts all of the theory of money supply. The main break with mainstream economics is in asserting that government spending beyond taxes collected need not be financed with borrowing. The borrowing is an option, which may be desirable, but a government could also choose to print the money instead, and doing so wouldn't automatically be inflationary. In many ways, this is a recognition of the fact that it's not just an unbalanced budget that creates money.

Well yeah and I think the main difference is that MMT ( and it has been called chartalism as well) recognizes that money derives it value from the state via the imposition of taxes at the barrel of a gun ( you goto jail if you don't pay). So money, at the federal level, ( and there is broad money which is money at the bank level) is essentially a tax liability. Therefore in order to provision itself, the state (feds), must first spend money into existence before collecting taxes as a point of logic. Therefore federal deficits are a necessity . The only question is how big ? And , given the imposition of taxes, the private sector is unemployed in the currency in which the tax is levied, so it must make itself available for employment in order to pay taxes. Thats how the government provisions itself. And you can say the government causes unemployment when it taxes and should therefore as a social goal, guarantee work to anyone at a living wake. So called Job guarantee, which MMT thinks is better than an income guarantee. There rest of the economy you build up from there. Its gets more complicated when you factor in banking and bank money which is the form of money that makes up 90% + of the money supply.

I wish MMT adherents would lobby harder to tax capital gains at the same rate as labour.

I'd say get rid of all federal taxes except a real estate tax which I find to be fair. The bigger , the more valuable the more you pay. And then distribute money to the states on a per capita basis. States have funding problems. Especially during downturn and they provide much of the valuable services to live day to day. We need new sewers and state and county roads. Municipal infrastructure needs improvement.

This is essentially a tax on wealth stored in the form of dollars, right? Which some folks would generally be in favor of, if not for the fact that the super-wealthy tend not to store their wealth in the form of dollars sitting in a bank account (or mattress). Seems rough of retirees and other folks on fixed incomes.

I don’t know why you’re being downvoted - it’s the only thing that makes sense. If the fed doesn’t, then we’ll just see a huge boom in middlemen offering accounts that automatically spread across 250k chunks behind the scenes. They already exist as a niche product, but would become mainstream with more failures. Either way the fdic is insuring the same total amount of money, so may as well cut out that inefficiency and overhead of forcing everyone to have spreaders.

Or they just close that loophole? Why is that allowed in the first place?

Then they would immediately start a run toward Treasuries.

Except it's really not that easy. The fed has 250billion and there are 19 trillion of deposits.

The fed has already been using a lot of that 250. And this is likely not over. Not to mention this seems like it spread overseas

The fed has a spreadsheet for which it can enter infinite amounts.

No it can't. It's pretty near the end. The world is actively moving away from dollars if you paid attention.

In order for China to continue to export to America which they obviously want todo, they have to maintain exchange rates stable. The only way for them to do this is to accumulate dollars.

You got it backwards. People want to export to the US in exchange for dollars only if dollars are worth something. If the dollar won't hold its value well enough people will find other markets and hold other currencies.

No I don't think so. Dollars sitting in a bank have zero utility. At the end of the day what is worth more in real terms, an IPhone today or some 1000 dollar deposit for tomorrow ? So who winning in that trade off?

SVB had a ridiculously high uninsured deposits % of total liabilities, way above all of its peers: https://news.ycombinator.com/item?id=35241691

> SVB had a ridiculously high uninsured deposits % of total liabilities

They focused on businesses and HNW individuals and used exclusive banking agreements as preconditions for some deals, so, this is not surprising; had it been engineered to maximize uninsured deposits, it would have been hard to do better.

So the banks can take risks but the tax payer pays when things go wrong?

Maybe there needs to be regulation that forces banks to hold way more cash?

Moral Hazard?

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