Comment by emn13 | Hacker News Reader

Comment by emn13 | Hacker News Reader

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There are all kinds of differences between 2008 and now, but setting those aside - I think the genie was out of the bottle well before 2008 - it's just in 2008 everyone noticed. After all, it doesn't sound like many experts find it plausible that non intervention in 2008 was a realistic option assuming you want to avoid much worse consequences. At best, earlier intervention might have reduced the visibility and impact of symptoms.

The underlying issue is that even uninsured risks in banks must de-facto be largely covered by some central authority (whether FDIC or otherwise) otherwise the whole system is at serious risk of pretty catastrophic failure. The interaction of the lack of (formal) insurance for large deposits and the fluidity of those deposits make bank runs at the first sign of serious risk inevitable.

How important that problem is - I'm not informed enough to have an opinion on. But that problem didn't start in 2008, that's for sure. I am curious as to what actual subject matter experts think ideal solutions would be, and what haphazard lobbyist inspired patch-job we'll actually get.

> are all kinds of differences between 2008 and now

One huge, positive difference between 2008 and now: owners aren’t being bailed out. Stock and bondholders in 2008 got rescued. Not this time.

In February, First Republic had a $40bn enterprise value [1]. That is largely, if not entirely, gone. (JPMorgan acquired “substantially all of the assets of First Republic Bank,” so there will still be scraps to fight over.)

[1] https://ycharts.com/companies/FRC/enterprise_value

IIRC, in 2008 shareholders got wiped out at least at some institutions.

It's 15 years later, and I don't recall the details, but I'm pretty sure that at least one of the big players went down in a way that the stockholders got zero.

> IIRC, in 2008 shareholders got wiped out at least at some institutions

Yes, the banks that outright failed. But e.g. Bear Stearns got a bit of a sweetheart deal.

That's mostly just a consequence of those banks being "too big to fail". In 2008, allowing the largest banks to fail and shareholders lose everything could have seriously crippled our currency itself.

Shares of those banks play a much larger role in index funds, retirement accounts, etc than First Republic or SVB. The major banks are so tightly coupled that if one fell most of the others would have, and the very debt that created our currency in the first place would have disappeared.

Whether bailing out the banks in 2008 was a net positive won't be known for a while. We're still dealing with the blowback from 2008 and we can't know whether the bailouts saved us from further pain or pushed it under the rug and made the pain worse later.

The risk of contagion is a systemic flaw that can and should should be fixed with a change to the system. Depositors do not have any real visibility, notice, consent, etc. to what happens with their money. Rational consumers would not put their money in a back that was A) lending it out, and B) Lending it out in a risky manner.

Just like cookies on a website, banks should be required to give depositors a clear and easy way to choose whether their money will be lent out.

Will that mean less lending overall? Yes. Will that be good for the economy? Yes, because it’ll couple inputs and outputs more closely.

Moreover, depositors who do use banks to lend should be given a prospectus and information comparable to stocks.

Deposit insurance is a moral hazard. It encourages people to be reckless with where they put their money.

Backing up a little, the primary role of banks in a fractional reserve system is to increase the amount of money in circulation by lending. The “opt-out” is “just hold your own money”. Signing up for a bank account while being in opposition to them lending your money is like getting a job and being upset that they expect you to work; it’s not just part of the deal, it’s the primary part of the deal.

I like the idea of banks giving consumers a prospectus, but I should point out that publicly traded banks do, every three months, in the form of a quarterly earnings statement. How many people use it as such, I’m not sure.

The primary role of a bank for me is to make my money available via a debit card virtually vs. carrying physical bills which can be more easily lost or stolen.

I understand what you're saying. It's worth noting that the needs of the depositor are below the needs of the system itself.

This is one of the selling points for crypto. As a consumer, digitization of the money is about the only service most consumers care about (or accruing interest). Banking seems to me a very outdated and nearly obsoleted technology.

I think you'll find that consumers care a lot about the lending side of the business. A lot of people have mortgages, lines of credit, personal loans and credit cards!

This comment made me think. Is the presence of lending an example of supply leading demand, rather than the other way around? I’ll have to read more on the history of the situation, but I don’t think anyone wants, e.g., a mortgage. They want a house and can’t afford it any other way.

In a system where mortgages didn’t exist, maybe houses would be more affordable for people.

I don't see why fractional reserve banking is the only way to lend.

It isn't but it's cheaper. People may not care very much about the 2% interest rates they get on their savings account, but I think they do care about having access to cheap credit.

To back up a little further, the purpose of a bank before fractional reserve banking was to store gold and other valuables safe from theft…

Fractional reserve banking began when the banks started converting the deposits to issue loans without the depositor’s knowledge or consent… and that’s largely the way it remains.

Deposit insurance is a moral hazard. It encourages people to be reckless with where they put their money.

The vast majority of the population would not have the time or ability to digest and perform a comparative analysis between countless pages of bank prospectuses. We put that effort into stocks now. Most use some variety of funds, often suggested by general guidance from 401k plans based on a vague risk tolerance and retirement goals.

Yes, but what’s the problem? Ignorance is not a better solution. People could digest a few basic statistics like the reserve ratio of the bank. We do this with Energy Star appliances.

Ultimately I don’t care if people change their behavior, but I’m offended by the fact that I’ve opened several accounts in my life and none have clearly indicated that they don’t keep most of my money. I’ve even read a couple sets of the papers that come with an account and they didn’t seem to say anything about it.

As far as I’m concerned banking is fraud / conversion.

I'm curious - would you be willing to check that box if it meant a $15 fee each month? Banking services are currently largely paid for out of the interest rate differential on your account, and need to be paid for somehow. I personally would much rather have my FDIC-insured deposits get lent out than having to pay even a nominal fee.

Your deposits never get lent out. This myth seems particularly sticky.

It's a question of terminology - if you deposit a dollar in a bank, that adds to its reserves (the dollar), and its liabilites (the future dollar and potential interest). The bank wants to make a profit, and legal requirements mean it can invest in risky bets (such as loans) only to a certain degree - but that's still well in excess of 1-1.

In effect, your deposit is directly, causally linked to the ability of the bank to keep more interest _earning_ loans on the books; i.e. your deposit helps back those loans, and were it not for deposit insurance (assuming your account is below the limit) you would be on the hook for risks the bank took.

Your deposits are thus both necessary, and (barring FDIC) risk-carrying when it comes to the loans the bank makes. Isn't that in essence "your" deposit being lent out? If not in a literal sense; then at least what's the value in emphasizing the distinction?

But banks are not in practice limited by reserve availability. A central plank of modern central bank dogma is control of interest rates which is significantly exercised through liquidity loans to banks in order to satisfy their Basel III obligations. That policy goal necessitates free provision of such loans. The reason deposits are desirable is because it's cheaper for the banks to borrow their liquidity from punters than from the inter bank market or from the CB. I guess in some very roundabout way what you say holds some water, but deposits certainly do not limit the ability of the bank to make loans, which is in truth limited by the availability of credit worthy borrowers.

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