I'm not sure what the best solution is here, but making the big banks even bigger is not it. This is just going to make the banking system more concentrated and no concentrated market is good for anyone. Least of all because the past decade+ has set the precedent that the banks will be bailed out... If they're big enough
It would be perfectly possible for a business to provide zero risk demand deposits—-but the business would have to charge customers for its custodial operations rather than making money by writing loans.
Of course because we live in times where no one can tell the people that what they want is impossible and ridiculous, we instead have a house of cards with various parts of the government (including parts we pretend aren’t the government) eating the risks.
> It would be perfectly possible for a business to provide zero risk demand deposits—-but the business would have to charge customers for its custodial operations rather than making money by writing loans
That was true when we lived with 0% interest rates. Now, there’s no reason why a narrow bank couldn’t take deposits, stick them in with the fed providing 4% interest, and keep 25% of that for itself to cover its costs, passing 3% onto the customer.
Except they wont get a banking license issued if they state thats what they intend to do, because the system depends on people depositing money with banks that make risky loans, so that the risk is spread across lots of people.
The problem with this business model is that this 4% interest either (A) requires a certain hold period or (B) allows on-demand withdrawal.
(A) is exactly the model used today. It did not stop the collapse SVB and FRC. Assets that require a certain hold, such as Treasuries held by SVB and mortgages held by FRC, fluctuate in price. If those assets drop in price (as recently) and bank's customers withdraw money, the bank is in a pickle.
(B) moves banking into one real bank -- the government. This can be done (e.g. in the Soviet Union), but comes with a lot of limitations and challenges. It is also not something you can morph the current system into; this is a "break, then rebuild" path and is very painful. I would personally move money away if I see a whiff of this in the air. My 2c.
Because at some point the market interest rate is 0% and the cash rate is 0%. There is no reason to lend money via longer term deposits. The amount of deposits available to banks dries up. The circulation of money stagnates and ultimately causes a recession with high unemployment.
The demurrage fee doesn't change the market interest rate, it just moves the guaranteed interest rate into the negative range so that the market interest rate can be negative, if it has to be, instead of being stuck at 0%.
What happens to the value of 4% bonds if interest rates go to 6%? What about if people want their money back before the bond duration is up, so you have to sell the 4% bonds in a 6% environment?
Separate nerd note: I think you mean maturity not duration.
The maturity of a bond is the point in the future when holders get back the principal.
The duration of a bond is pretty much the first derivative of price with respect to rates expressed in years. Intuitively it's the number of years (on average) an investor in that bond would need to remain invested for the future value of cashflows from the bond to be equal to their investment in the bond.
The reason why we have such consolidation is that merely existing in the Byzantine world of banking regulations is nearly impossible, and only the largest entities can afford the legal, IT, trading/financial mojo, capital, etc. resources necessary for it to occur.
The big 5 have not only such resources, but enough economic impact if they fail that they can force regulators to stop doing a regulation that would kill them.
Which is ultimately where this is all going. Either nationalization (unlikely) or the big banks writing their own regs (in practice).
Of course, they can have counterparty risks. The counterparty is usually unprepared to actually pay up and expects to rollover its debt.
Sometimes that melts down and doesn’t happen:
https://globalnews.ca/news/160176/coventree-executives-faile...
(Scroll down to Canada in 08-09 here):
https://en.m.wikipedia.org/wiki/Asset-backed_commercial_pape...
Banks have always been able to fail, then you lose the deposits. What people are now asking for is unlimited insurance, which encourages risk takings amongst banks
Except that when a bank is liquidated, the shareholders get zeroed out, and the executives get their money clawed back, which encourages banks to not risk-take.
As a depositor, this sounds fine to me. I don't benefit from banks doing stupid, risky things, and I shouldn't suffer from it either. Raise the capital requirements. Zero out the shareholders when things go pear-shaped.
So we have the worst of both worlds: no depositor guarantee de jure (so depositors bailed and brought SVB down), but a de facto bailout which has significant actual costs and encourages risky depositor behavior. My 2c.
Where is this risk free return coming from? You are just saying in more words that the government should give the people what they want.
https://www.newyorkfed.org/markets/reference-rates/obfr and things like that.
[1] https://www.federalreserve.gov/monetarypolicy/reserve-balanc...
Edit: sorry, you said the Fed, which MMMFs don't put money in. But they buy short-term Treasurys at comparable or better yields, which is ultimately what you want, modulo the risk of US government default, which is minimal.
If retail banks switched en mass to backing deposits 1-to-1 with Fed reserves then the Fed would quickly take strong action to disincentivise this strongly contractionary effect.
They have plenty of legal tools to do this (e.g. IORB rate). They don’t need to resort to not giving out licenses.
The Fed pays interest on those reserves to keep them from being lent. A narrow bank wouldn’t be able to lend its reserves. As such, it makes no sense for the Fed to pay interest on them.
The whole thing resembles an ever more intricate Rube Goldberg machine.
This is incorrect. In 2022, the largest increases were in credit cards (+17.4%), commercial and industrial loans (+14.5%), consumer loans (+11.6%), commercial real estate loans (+11.3%) and real estate loans (+10.1%) [1]. Treasury and agency security holdings across American banks were majorly added between 2019 and 2021, and then spent down as balance sheets swapped. (They remain, of course, a commanding fraction of bank assets for obvious reasons.)
So Apparently the big banks are starting to feel the account drain.
Also brokered cds from the likes of Wells Fargo and similar can be 5%.
Big banks definitely are starting to feel it
1: At least in savings. The larger companies have insane credit card deals.
Chase collected $1.25 billion in overdraft fees alone last year. My “Chase College” account currently gets charged $6/month for some reason I haven’t bothered figuring out, maybe a newly instated minimum balance or direct deposit requirement that wasn’t there years ago.
The problem with SVB &other is not that they fundamentally were losing money. They just weren't making _enough_ money so they took on additional risk. If SVB hedged the IRR they wouldn't have gone bankrupt; they just would've had less profit.
The banks people want are technically feasible.
However, in practical terms banks have done a great job of making loans that get repaid more often than not. People are ok with having a bank that pays 0% interest and uses the difference between loan's rate and the real rate to operate successfully; bankers are not ok with leaving money on the table.
Given that many people bank at gigantic banks that pay 0.00001% interest...I don't think that's true.
Personally I judge banks on their app and IT reliability.
"I don't want the interest. It's your vault. I should be paying YOU rent!"
They used to. So.. what changed?
Under such a regime all banks will put customer funds at the Fed, which will be the sole entity to allocate credit, with banks as mere customer service frontends. It will use that power to allocate credit to advance nakedly political goals, with much less attention paid to minutae like risk, ability to repay, and other pesky economic concerns the free market would elevate. We’re already forgiving student loans; watch the People’s Ledger forgive mortgages!!
And when that bank fails it will just fall back on moneyprinting.
Student Loan forgiveness is another thing entirely because those loans are held in public corporations, and if congress wants to use tax money to forgive them they can. You can already get some or all of your loans forgiven in very limited circumstances such as paying them for 20 years without paying them off, or if you teach at a public school for more than 5 years.
20 years of repayment at 300-600 a month is pretty crippling. That's like buying a new car on a loan every 3-5 years. Even income-based repayment has limits on how small your payments can be.
Student loans are also statutorily impossible to discharge in bankruptcy, unlike every other form of debt.
So I think we need to do something, and it seems like the simplest thing to do is make them the same as other loans. We should allow you to declare bankruptcy and discharge your student loans. This won't fix a lot of the knock-on effects but it will get people out from under the loans.
If this weren't the case, student loans would just not be offered to anyone not deemed creditworthy. (Or they would only be offered by the government, who would offer them expecting to lose their money.)
I think this would probably be a good thing, since easy access to student loans is probably related to why college has gotten so expensive, but the first-order implications of changing this policy are pretty detrimental to poor people.
Forget stimulus/inflation political goals, can you imagine how horribly this would get weaponised against "people the current administration doesn't like"? I don't have faith that this exceptionally powerful tool would not go unused.
Putting that aside, what risk controls are and aren't appropriate? An advantage of having a variety banks is that there's much less of a 'one size fits all' approach to banking services. I also don't have faith that a federally-run bank would be very flexible to anybody outside of the box. I've been in a situation where some bulge-brackets institutions wouldn't provide certain products since I didn't fit exactly in some pre-ordained image of what a customer would look like (and it wasn't even something you'd think a bank would have issue with.....)
That’s fairly misleading. It’s only a relatively small sub-set of public school teachers who are eligible.
The TCLI Directory can be found here: https://studentaid.gov/tcli/directory-search
Additionally, the idea that is also present in the paper is expanding low risk (demonstrably historically "safe" loans such as SBA Loans, FHA loans, traditional mortgages etc) through the Fed directly, but explicitly bans things like margin loans, PE bridges and other risky behavior.
Which, as anyone who has gotten these kinds of loans, knows the government already does this, just with extra steps. The People's Ledger paper (proposal?) simply outlines removing extra steps and barriers for the citizenry to have a better banking baseline, all told.
In essence, it makes the Central Bank, more....bank like. With some privileges, being a whole arm of the Government, its less focused on collecting fees and more interested in streamlining banking for the average citizen.
It has nothing in the paper about forgiving mortgages (or student loans, for that matter)
The paper is here, for anyone interested in this: https://scholarship.law.vanderbilt.edu/cgi/viewcontent.cgi?a...
“Most objections to allowing significant quantitative growth of central bank balance sheets, in fact, reflect the underlying concerns about the qualitative, compositional aspects of such growth. Ultimately, however, these concerns are rarely substantiated by reference to anything more specific than deeply internalized skepticism toward the government as an economic actor. By contrast, this Article views the proposed change in the Fed’s liabilities as an opportunity to augment both (1) its ability to modulate credit-money supply more effectively, and (2) its potential to facilitate the more efficient allocation of that supply to productive enterprise.”
“the NIA would transact directly in private financial markets, proactively channeling public and private financial resources into large-scale, transformative public infrastructure projects. Importantly, however, it would reverse the familiar pattern of “public capital, private management” typical of most modern “public-private partnerships” in favor of the “public management, mixed public-and-private capital” model.”
Transformative infrastructure projects!! Are there any of those we’ve embarked on recently where the government’s proven more skilled at identifying investment opportunities than the market? Like, say, California high speed rail? What kind of returns is that investment earning? … oh.
It’s true they didn’t get all the way to mortgage forgiveness in the paper, but, well, it doesn’t seem much of a stretch, particularly when Housing Is A Human Right (tm). We could call it infrastructure, in the same sense that “elder care is infrastructure” — I seem to recall recent legislative campaigns about that and other social spending.
These aren't bad things, and they already exist. There is nothing new here, other than streamlining operations to make them more auditable, transparent, and efficient. It cuts out the "extra steps" part, which more often than not, is where most of the waste is.
Yes, I can imagine such a huge bank to cause deep troubles in financial markets and real economy and this impacting the livelihood of people all around the globe.
But saying that "western world" will essentially end when it didn't in face of world wars, grave epidemics and plagues, etc seems definitely too dramatic.
Already had one in 2008. Thankfully, our currency’s value is notional and the fed can print more until such time as the bank run ends.
It's value is not notional. If you make more currency then all currency in circulation now has less value. "Quantitative Easing" is simply a way of taxing you after the fact.
Worse still if bonds are involved. Now it's a way of taxing your children before they're even born.
That's not how pricing works. It's easy to see. Consider the following. Treasury could mint a 10^33 dollar platinum coin[1], stick it in a vault at Fort Knox, and forget about it. At that point the money supply would nominally be almost all in that vault. Yet prices not only wouldn't go asymptotic, they wouldn't even budge. But wait, you say, that's not in circulation. Treasury could easily swap that coin with the Fed for an equal number of reserves. Now Treasury's reserve account is flush, which is surely circulating money. And yet prices still wouldn't budge. Not until Congress appropriated that money to be spent would we start seeing it moving prices, and even then only if Congress designed their spending to do so[2]. It's pretty easy to imagine ways that could be done, so I won't belabor the obvious unless asked to.
The point of all this is that price inflation is everywhere and always caused by an increase of the ratio of money-being-spent:things-being-bought. This is why hyperinflation is always kicked off not by money printing, but rather by a productivity collapse. The money printing only comes afterwards, because it's an effect not a cause. This is also true for wage inflation, which is why US wages have remained flat in real terms since the mid 60s immigration reforms: the labor supply has been grown as fast as the demand for labor.
[1] This authority exists under current law.
[2] For a counter-example, if Congress passed a law appropriating 10^33 dollars for the Social Security Administration to buy gold from citizens in any amount they desired at a price of $20 per ounce, the price of gold wouldn't budge a cent on account of it, despite an absurd amount of money on the buy side of the gold order book.
Yes.. and if you increase the amount of money in circulation this impacts the amount of money being spent. You can imagine all sorts of ways that money can be minted without being circulated, but as soon as you do, this becomes a factor in this ratio, does it not?
> This is why hyperinflation is always kicked off not by money printing, but rather by a productivity collapse.
Has this occured in the US before? Are the examples you are using to draw this inference something that applies to the US?
> This is also true for wage inflation, which is why US wages have remained flat in real terms since the mid 60s immigration reforms: the labor supply has been grown as fast as the demand for labor.
The labor market has changed _drastically_ in this time. You're really willing to assume such a simplistic explanation for these facts?
Yes, I think you're starting to get the point. It's not the money stock that causes inflation, but rather the money flow. Back to the original point that started this thread, increasing the money stock alone, that is to say growing the notional money supply, doesn't move prices. What moves prices is changes in the money flow, for which growing the money stock is neither necessary nor sufficient.
> Has this occured in the US before?
No, the USA has never experienced hyperinflation. Thankfully the principles involved are not specific to the USA. They apply generally. The operational particulars do change depending on whether or not the foreign exchange rate is floating or not. That's not really relevant here though. It all adds up to a collapse in the value of a currency being caused by a collapse in the goods and services that can be bought in that currency. That's why back when the world was more or less on the gold standard a single economy's collapse couldn't cause hyperinflation. However if, somehow, there were a collapse in global productivity then even gold would see hyperinflation, because you can't eat it and there'd be too much gold chasing too little food, fuel, and other essentials.
> The labor market has changed _drastically_ in this time. You're really willing to assume such a simplistic explanation for these facts?
At the aggregate level? Yes absolutely the law of supply and demand holds. It's the same as how I'm willing to apply the laws of thermodynamics to monstrously complex systems that I don't fully understand. I might not know how the parts all add up, but I do know that the equations will hold.
The government is bankrupt for whatever reason. It has to create new money. Then inflationgets worse and the government introduces price controls. Businesses quit (or are shut down by the government for violating price controls) because they have to pay inflated prices but sell at regulated prices, ending up with a loss, inflation gets worse because of a lack of supply, more businesses quit as they start making losses.
I've done some research on the subject and I've never found an historical counterexample, so if you have one I'd be very interested.
…see, the one big bank cannot fail.
Remember that? Apparently, no one remembers. Or it was simply more political / leadership theatre of tell the proles one thing while doing the opposite. Perhaps both.
People complain about "the democracy" and they often falsely name names. It easy to blame a symptom when you don't understand the problem. And yet those same people are silent about the banks, power, cronie capitalism, etc.
Many are in denial. Others are able to control the narrative. In either case you can't solve root problems when you're not even willing to address them.
Europe doesn't have 5000 banks they all merged decades ago.
More concentrated.
More highly regulated.
Closer to being absorbed by the state.
I'm not saying that's necessarily going to happen someday. But that is the direction it is (and has been) moving.
I'm not a tin foil hat person, but corporations growing larger than nation states just doesn't seem remotely far fetched. Which corporation will be first to sit at the UN table?
The answer to that is funny. It is literally the state, which is to my point, but it is also shaped by the banks, which is to your point.
You know who writes our laws? Lobbyists. Politicians are not the ones drafting the bill. They merely take the drafts produced by lobbyists and then pass them.
Do you also know who runs various government agencies tasked with regulating different sectors? Again, it is a revolving door for private sector execs.
> It is literally the state
True, but the state is, to a large extent, influenced by corporations.
I did, in a old RTS game called Metal Fatigue. Was pretty fun for a while.
Or the opposite.
Was SVB too big to fail? Signature? Apparently!
TBTF is now a popular concept more than a legal one. We need explicit universal deposit insurance along with the rules that make that guarantee tenable. I also think experiments in narrow banking, e.g. permitting each state to charter a narrow bank open to its residents and guaranteed against losses (e.g. due to fraud) by its own treasury to access a special type of reserve account, need to commence.
The FDIC insurance fund is predicated on any one bank (and their customers) being small enough that if you wipe out the uninsured deposits, the system as a whole will be ok. That was arguably not the case, or at least regulators didn't want to take that risk for SVB or Signature.
Are there any regulations that could provide economic incentives to small businesses and make it increasingly difficult for large companies to grow larger? Wealth going in one direction is not a very stable system.
But regulators stopped enforcing those regulations in the 1980s because of "efficiency" and each administration after Reagan doubled down. Luckily some politicians are starting to see the error of their ways and listening to thinkers like Matt Stoller:
a) what constitutes anticompetitive activity or otherwise warrants antitrust action is likely to always be at least somewhat subjective, and require human judgement, meaning that motivated humans can choose not to do it in many cases, and
b) depending on the degree to which the government is captured by a party that actively works against antitrust laws and believes that bigger[0] is always better, and on how long said capture lasts, it doesn't matter what laws we put in place now. Laws can be changed by the government.
We're not going to be able to make a foolproof system just by making better laws on this one issue. If we believe strongly in antitrust with teeth, we also need to be committed to supporting politicians who favor it, and political and governmental systems that prevent a vocal minority from seizing control of the engines of power, consistently for the rest of our lives.
[0] Bigger payouts for their friends, that is, which means bigger kickbacks now and bigger paychecks later when they go to work for said friends
It should really be: You can only do A, B, and C and in the ways we tell you.
Stop letting banks write the regulations?
The government and those who work for them are not your friends. The power you give them can and will be abused and will never be returned to the people without great difficulty and probably bloodshed.
The problem is concentrated power. Whether it's government or private, concentrated power in anything is bad
I can switch banks in less than an hour, it takes months to years to switch countries.
Oligopolies are arranged monopolies with the further disadvantage of not being subject to the freedoms and rights set out by the constitution. Unless they are broken up, we'll eventually be in a place where things are worse than under government control
Could you give an example of them not competing?
A government run bank seems particularly scary in this highly polarized political climate. What if this administration decided not to give out loans to buy ICE cars, but the next administration swings to the right and decides to not give out loans to buy EVs?
The federal government having direct access to your checking account is scary as well. What if they had the ability to freeze the bank accounts of those who refused to get the COVID vaccine or asked the wrong questions on social media?
The government running our entire banking system directly is one of the most dystopian things I can imagine.
Particularly when even with healthy competition, the only thing that incentivizes a given bank to do is be slightly better than their nearest competitor in some way—whereas while your specific vote may be one among many to the government, it must follow the will of the people when enough of them agree that something needs to change.
I can switch banks until my face turns blue, but if they've all decided that the thing I want isn't worth their money, and are happy to ignore the option to compete by offering it because they've achieved a local maximum of profit-to-effort, it's not going to do me any good.
Neither are corporations. Both will abuse you. The difference between the two is that you have at least a chance of altering how government works, but you have no chance with a corporation.
I think that they both have approximately equal power to do that.
Welcome to reality where "competition" and "free market" are just buzz words meant to fool the naive populace.
Eliminate the Fed.
Banks eliminate inherent risk by being backstopped by the fed. A simple example of how this works is FDIC insurance. If a bank had all of its depositors holding $250k or less, it could essentially lend out all of that money with very little risk of getting sued by their depositors.
Do incumbents in such a system leverage their status, leading to new kinds of abuses? Arguably yes. That said, SVB was a member bank of the Federal Reserve and it didn't help their shareholders when the market decided that they were over-exposed.
Looking at your assertion from the opposite direction, if you don't trust the Federal Reserve, why would you trust a smaller bank to do a better job? Sure, it's in their long-term interest to self-regulate and operate prudently, but history is full of people acting irrationally because of greed, myopia, confirmation bias etc. The fed at least exhibits moderate transparency of structure and operation - risk is distributed across a set of reserve banks, and the membership and balance sheets of the regional reserve banks are open to scrutiny.
And that's what it basically boils down to. You don't want big banks? Eliminate the Fed.