Continuing the theme of the article the current banking crisis has exposed two conflicting functions of money i.e., store of value and a vehicle of investment both of which are facilitated by banks.
Keeping money safe, whether physically or digitally, comes at a cost. Banks absorb this cost because they make money through credit creation, maturity transformation, and interchange fees. They even pass on some of that profit to depositors. However, each of these banking activities create risk, which is passed onto the deposit holders and is offset, to an extent, by deposit insurance. In low to zero-interest-rate scenarios, banks act as pure custodians as their revenues decline, which is why we saw EU banks charging negative interest rates, i.e., a fee, to maintain customer deposits.
There's a delicate balance and an inherent conflict between keeping money safe and earning yields, the two functions performed by a commercial bank. Customers don't perceive this conflict unless a bank breaks down as SVB did.
I think this crisis is the strongest yet reason to push for CBDCs as only a central bank can fully guarantee a deposit. In terms of systems design, this is a clear delineation of responsibilities.
CBDC: If you want safe custody of your money.
Bank: If you want to lend your money in return for a yield. And as with any lending, you take the risk of a borrower defaulting.
> I think this crisis is the strongest yet reason to push for CBDCs as only a central bank can fully guarantee a deposit
This makes zero sense. A CBDC doesn't have a stronger "guarantee" than normal central bank money, yet it has all kinds of negatives like total surveillance and control.
> only a central bank can fully guarantee a deposit
The buck stops at the government, as we are seeing with changing laws to allow Credit Suisse acquisition or by Biden and European representatives statements abou "doing whatever is needed" or similar.
Just to be clear, those are two different things. The Biden administration's response is using powers granted to the executive branch explicitly to save banks. The Swiss government seems to be modifying their laws to save CS (by getting it acquired).
On the other hand, imagine what level of services we could have if it wasn't for the tax dodgers and cash in hand payments. I reckon we could fund universal basic income just from whitening the economy, in any given country.
Depends on the country. For countries with a lot of "black money" and corruption there is an obvious benefit. Taxes yield less because they don't capture the whole economy, as a result taxes are increased and get paid by the "idiots/ethical" which creates a vicious cycle. Now if tomorrow you had everyone paying taxes then 2 things would happen which would result in a new equilibrium. 1. The tax revenues would massively increase 2. People would push for lower taxes because suddenly they care more as their real marginal tax rate is the nominal one.
Would this result in more efficient spending of taxes in a corrupt economy? Not immediately. A lot of shitty people would get reach fast in the meantime, but the system would balance because people would no longer participate in the corruption directly as they used to.
Yes, you remove some freedom, but I am convinced that for societies that have a trust disconnection between the government and the people would be a net benefit (assuming democracy).
Additionally, comercial banks have been pretty shitty on providing liquidity to the real economy throughout the QE (at least in some parts of the west). They had their chance to not be a bottleneck, they missed it. Good riddance.
I don't think the answer is that simple. Sure, cash users are an easy target here, but upon closer inspection things just don't add up. Targeting cash users would have some deeply negative side effects for everyone.
To quote patio11: "The optimal amount of fraud is non-zero". The financial system needs slack, otherwise it destroys itself.
Imagine if we just had a land value tax to replace all other taxes. Can't dodge that particular tax, unless someone is able to hide a piece of land from being seen.
> I reckon we could fund universal basic income just from whitening the economy, in any given country.
I reckon that no economy, no matter how advanced, is so productive that you can provide a systemic incentive for everyone to not produce anything yet still be guaranteed to be supported. Will some work even when they don't have to? Sure. Will more people not work than before? Almost definitely. Will this effect compound over time and topple the system sooner rather than later? Guaranteed.
There's an ample body of research on basic income now that indicates that almost everyone still works under it. The people who don't are people we shouldn't be requiring to work, like the disabled, new parents (still usually only one), and full-time students.
It is much more likely that the effect will fade over time, as people who are traumatized and exhausted from being forced to work terrible jobs for inhumane hours recover and once against find themselves ready to do something more active and productive.
Where is the evidence that isn't temporary, non-universal, or other clear confounders like that? Are you virtue signaling that you have inherent work ethics or things like that or do you _actually_ think people would still work if they didn't have to. Comments like this on HN make me think nobody here ever speaks to a real human
If you want evidence that is permanent and universal, guess what you have to do?
You have to actually implement Universal Basic Income on a large scale, and keep it going for decades.
If you aren't willing to support doing that because "there isn't permanent, universal evidence", then you're creating a catch-22.
There is evidence that is robust and scientifically rigorous. That should be enough, at the very least, to say that we should be doing larger, more extended trials, and to at least plant a seed of doubt about this idea that humans are inherently lazy selfish slobs.
As for "real humans", I've talked to plenty. I know multiple who are constantly frustrated that they are not allowed to work productively, because of disabilities they have that make them inconvenient to employ (as with many disabilities and chronic illnesses, they have good days and bad days: they can work very well some of the time, but can't commit to a schedule that the company controls, because they can't even commit to a schedule that they consciously control).
I don't personally know a single person who, if given the chance, would choose to abandon work of all kinds forever.
"I don't personally know a single person who, if given the chance, would choose to abandon work of all kinds forever. " this is what i mean. You're in some kind of insane bubble and need to wake up. Does everyone around you have a "career"? you're glorifying work way beyond regular person life experience
No, they definitely don't. Did you see where I said I knew disabled people who were unemployed because, in our current system, they are unemployable, but actually want to be doing stuff?
The point isn't "glorifying work". It's that people don't actually want to be couch potatoes. They want enrichment. They want activity. They want meaningful stimulation.
Look at us more like zoo animals and maybe it'll make more sense: we know that giving tigers a pumpkin full of meat is more beneficial for their mental health than just dropping the same meat in front of them to eat with no effort. Humans aren't that different.
Even beyond that, though, humans want purpose. We want our lives to have some meaning, and it's pretty hard for most people to find that in sitting around doing nothing all day every day unless they have no other choice.
Perhaps it would also help to note that "work" isn't synonymous with "go to an office and file insurance claims for 8 hours" or anything like that. Writing is work. Acting is work. Making video games is work. Helping old people get around is work.
But the other thing is...if you would, if given the chance, just sit back and relax all day every day...then I hope that you get that chance! I believe that every person should have the opportunity to do what feels most fulfilling to them, and not just be required to work at specific kinds of jobs for specific types of schedules simply to be allowed to continue existing on this planet.
> They want enrichment. They want activity. They want meaningful stimulation.
> Writing is work. Acting is work. Making video games is work. Helping old people get around is work.
All true, but keep in mind that value is created when work produces something that someone else wants to consume. Enrichment and meaningful stimulation to one may not produce anything useful to another, and in fact can often come from consumption. The alternative to being paid to be at a job you don't want to be at isn't sitting around doing nothing all day; it's being out there, enjoying themselves, living life, consuming products and services that others produced.
Would you rather clean toilets (providing what is desired by others, i.e. having a clean bathroom) for five hours or go do your favorite leisure activity, be it playing basketball, hiking, or spending time at a museum (consuming to fulfill your desire), for the same five hours, if you got the same universal basic income payment regardless of your choice?
Work is often hard and stressful. People have to deal with irate customers. People have to sweat and lift heavy things and have their bodies ache afterwards. People have to struggle and wrack their brains to solve a technical problem under a deadline. People have to do all sorts of things that they may not want to do in the immediate moment. Currently, the incentive for that is remuneration for time and labor performed. When you take that incentive away, who remains to do the work that is hard, isn't enjoyable, and may not be fulfilling?
What's that you say -- humans want their lives to having meaning, and this will somehow result in all of that stuff being done, anyway? All against the backdrop of a culture that is steadily moving away from one that values hard work in a moral sense? I'm skeptical.
Most EU banks have always charged a fee for maintaining deposits (at least for private individuals).
In the UK, banking is normally free, but on the continent, you normally pay for the account itself and any cards you may hold. Some banks may offer fee waivers for those whose salaries get paid into the account, or if you have a cardless account etc, but it is fairly common practice to charge a small fee for the bank account itself.
In addition to the fee they are leveraging your deposits - and European banks are no less risky for the depositor than the US ones (just look at the 2008 era). Having a 'true bank' that does not leverage your money and has no investment risk would probably be useful to a certain segment of people but the assets would still have counterparty risk and everything else so in the end a very niche market since the best way to handle risk is to distribute to multiple counterparties, currencies, etc... and then you might as well get the interest from the money at that point since you've de-risked so much already.
Since 2008 EU banks have gotten more stringent requirements per regulations compared to the US, the degree of additional risk is hard to know for sure without a large scale collapse.
What are you basing this on? What are some of the ways EU banks (does it not vary by country?) have gotten more stringent requirements per regulations compared to the US?
A hybrid solution could be a grade of bank accounts whose deposits are backed 1:1 by short dated government debt.
You get most of the safe custody benefits of CBDC whilst minimising the costs of restructuring the banking system. Customers could still use all the same banking apps and branches.
Such a program could even be eased in over time by steadily increasing the proportion of bank balance sheets allocated to short dated government debt.
That's deeply frustrating. The FED's potential opposition about balance sheet control and reverse repo have clear weaknesses pointed out by the author you cite.
To the best of my understanding you can’t initiate payments with a money market fund using, say direct debits or visa/Mastercard. So they can’t replace an ordinary bank account.
Can't replace it. But with some trivial API glue and a cron job, you can get away with storing next to nothing in the bank account on most days as long as all of your credits and debits are scheduled and upper-bounded. E.g., if the debit side of your entire financial life is payroll + rent + credit card bills.
But this shifts risk from your FDIC insurance to your SIPC insurance.
In the US there used to be the Glass-Steagall Act "effectively separating commercial banking from investment banking"; established in 1933 but it was partly repealed in 1999.
We don't know. Glass Steagall Act doesn't really deal with the fundamental problem with 2008, which was at its core an error in measuring potential risk of new finantial products. It could have prevented some of the worst impacts of that error, but we're not sure.
Here's quote from former Federal Reserve Vice Chairman Alan Blinder: "What bad practices would have been prevented if Glass-Steagall was still on the books? I've yet to hear a good answer."[1]
You know that saying: generals always prepare to fight the last war.
Finantial Regulations are like that too. We don't know where the next crisis will come from, and so we don't know if we're ready for it.
The difference between war and financial regulations is that there is no reason that the conditions that caused a previous financial crisis can't reoccur if you don't regulate against them. It's less like war that way, and more like health: you don't say "well, I got salmonella poisoning last year, so that's the last war; there's no reason to be careful about cooking chicken all the way through now!"
If letting retail banks take depositors' money and gamble with it was a bad idea then, it's almost certainly still a bad idea now.
Not safe from the moralizing pricks (of which there is a surplus in our midst) who the executive or legislature will inevitably try to cozy up to by stealing my money on the basis of some attribute or box that I check.
The biggest challenge facing CBDCs (Central Bank control of Digital Currencies) is that any laws or regulations concerning them can be changed at anytime, without the consent of the governed.
I don't think you're actually proposing anything with that CBDC statement - CBDC doesn't imply any particular policies or mechanisms. It is a non-phrase without a concrete proposal. What exactly is the central bank supposed to do here?
That's cash. CBDC is if you want no control over your money. At the flip of the switch you can be put on a denial of service list. Except unlike when PayPal does it, you can't just switch providers.
Thinking CBDCs are “safe” is extremely naive. They’re a dystopian nightmare. They’re every dictators wet dream. This is why Bitcoin matters. Bitcoin = freedom.
An economy run on Bitcoin is an absolute dystopia. You reluinquish monetary control to a deflationary coin, being in the whim of Bitcoin whales. People who advocate for it, either are whales or they are stupid.
Ask south europe how well it worked for them having no power over their monetary policy.
The USD and Euro are managed by central banks much better at monetary policy than random rich people trying to manipulate an asset market (like those for cryptocurrencies) because they have an untreated gambling addiction. The idea that US Dollars are less stable and reliable in terms of price trends over the long term than cryptocurrencies is just ridiculous. Small amounts of inflation is good for the economy. It incentivizes people to put their money stashes back into productive use, instead of just keeping it sealed in a box.
Bitcoin != cryptocurrencies. You might as well be comparing dollars and beanie babies. Define "much better" and for who because they're very clearly, very bad at monetary policy.
If we define "theft" this broadly then employment is theft, taxes are theft, interest on loans is theft, etc. Meanwhile deflation favours early adopters forever, and while you could chide me for "missing the boat" that doesn't really work, morally, for people not yet born.
> Meanwhile deflation favours early adopters forever, and while you could chide me for "missing the boat" that doesn't really work, morally, for people not yet born.
The deflationary model favors savers over consumers, giving benefit back to people who are willing be patient by forgoing immediate consumption.
You seem concerned that early adopters stand to gain disproportionately from mass adoption. Well, what outcome would you prefer and how would we get there?
This is myopic beyond reason. Inflation is now a thing so you care about it. The real problem lies in things that most western countries never had to deal with. What do you do when your country is not good at creating high-value products and services that you can sell to a premium to the rest of the world? What China did, you make cheap stuff. How do you make cheap stuff? You print more money and you devalue your currency. Inflation will make sure you make what you can in-house cheap enough. Now you can export it cheap as well.
This can't work with bitcoin. If your country can't export things in a premium you are F'ed. You can't print money to stimulate demand for local goods, your only option is to violently reduce the average quality of life enough that you will be wiling to work for less. Printing money creates inflation but it can also kick a positive spiral of demand/supply. While "austerity" has been shown to just make the problem worse by gutting demand in general
If Bitcoin had a history of stability your point would have more weight, but as it stands I don’t know how people can present it as a viable alternative with a straight face. Banks are having a crisis—-Bitcoin seems to have at least one every year.
If Bitcoin were the default currency, the value would not fluctuate, it would just slowly rise. Responsible savers would be rewarded. Irresponsible risk takers would generally be punished.
Undeniably, in the beginning, yes. Eventually it would be distributed more evenly as those people spend or die. We already have billionaires and the difference is that, with the current system, their money will not become distributed. They fail and then the government prints more to rescue them or they just print it and give it to them directly to "prime the economy". i.e. The Cantillion effect.
The people should control the money and that's only possible with Bitcoin.
> Undeniably, in the beginning, yes. Eventually it would be distributed more evenly as those people spend or die. We already have billionaires and the difference is that, with the current system, their money will not become distributed.
Why would a bitcoin billionaire's money be distributed more than a traditional billionaire's? At least a traditional billionaire will invest his fortune in assets like stocks and thus help fund some innovative companies to protect his fortune from inflation. The bitcoin billionaire can just hold his fortune in bitcoin forever since it's deflationary.
Every time I see a bitcoin backer talk about finance, the things said fly in the face of Econ 101 and basic common sense. I guess I "just don't get it".
Econ 101 seems to have a failing end game. Bitcoin gets distributed because, since you can't make more, you don't get anything for free. You spend it and it goes somewhere else. Maybe you get it back if you add value, but you don't get it back just because you're part of a ruling class that gets free money printed by the government and handed to you because "you will add value to the world". That last assertion is demonstrably untrue in many cases. They fail, we bail them out. Again.
Edit: Modern economics seems to require more mental gymnastics than a Bitcoin standard. We invent things no one really understands until the rug gets pulled one day and the scam become clear. Then we move on to the next scam. Financial instruments seem to be designed to fool the common man into believing we need these complications while what's really happening is that someone is simply stealing money until something breaks and we bail them out.
Couldn't you sub cash for Bitcoin here and have it make just as much sense? Also, isn't bitcoin highly traceable, especially for a sophisticated state actor?
Not to disparage the poster, but these type of comments always come across to me as astro-turfing.
At no point has anyone been advocating for a Central Bank Digital Currency (CBDC) and furthermore the only people who stand to gain from this are the powers that be. I'm vehemently against a CBDC purely because I like to play a thought experiment if I were from the 18th century and landed in the present day, how hard would it be for me to engage with society. A CBDC is 100% the anti-thesis to creating and supporting people.
I'm so confused by what role a CBDC is even supposed to play... why would the government establish a new currency pegged 1:1 to its existing currency? Why not just... allow normal Americans to keep deposits at federal reserve banks?
Well they could, but actual implementation would be via an intermediary commercial bank that held it's deposits with the Fed. Central banks don't want to have to deal with retail customers. But the result is the same.
From what I understand, when someone takes out a loan, a bank doesn't lend out depositors' money. Instead money is "created" by the bank (on behalf of the fed), and the bank needs to pay the fed interest. The bank also needs to pay the loan back by an agreed uppn time (which destroys the money).
Why can we not have a similar system for deposits? A bank takes a deposit, the fed "destroys" the money, but pays interest to the bank. When the depositor wants to withdraw their money, the fed/bank recreates the money.
I guess this is sort of what happens with banks buying bonds from various government bodies, but the banks are managing a mix of bond maturity durations.
If bank runs are a worry, why not do away with this flexibility for the banks?
And this cannot be "controlled" for because money is fungible, and if you do try to "prevent" it Bob just puts his 80 cents in another bank which does the same thing, and it all loops around.
Certificates of Deposit are supposed to be the thing that "helps" a bank balance the "short duration" deposits with "long duration" loans - but when interest rates are so low the CDs are not worth bothering with.
I wonder if we'll see a maximum interest rate on "cash accounts" or something in the near future to try to balance it.
Reserve requirements (unless they go to 100%, but then you can't loan at all off deposit accounts) don't prevent the bank from "loaning out money already loaned" but they do help reduce the chance of a run.
Basically it’s a bank that puts all its deposits directly with the Fed. There have been attempts to start such a bank in the past and they have been denied a banking charter.
Cochrane's speculates a bit about the Fed's motives near the end. He doesn't think they're outright evil, in cahoots with the incumbent commercial banks, etc. He thinks it's a misguided attempt to cross-subsidize the lending activities at the current commercial banks. If the super safe narrow bank draws away a lot of the common depositors, the commercial bank will need to get more other (more expensive) funding sources (bonds and other loans) which can make mortgages, business loans etc more expensive.
You're in good company if you find that outrageous. But the (speculative) reasoning is not so much to keep them competitive, but to keep borrowing cheap. In the real world, lots of people want to borrow money for 3, 5 or 10 years for their business or 10, 20, 30 years for their mortgage (and preferably at fixed rates), while very few people want to lend out money for such long terms at fixed rates. So the way banks handle this is pool together lots of small short terms loans like deposits and count on the observed regularity that they usually don't withdraw their money simultaneously (SVB notwithstanding). If the relatively stable and cheap small deposits are all going to narrow banks, how are the lending banks going to fund the longer term loans?
My understanding so far is that these deposits are often overburdened. In part due to speculative investments.
From a perspective of someone who understands very little of these matters, it seems like responsibilities are shuffled around and the whole structure is unclear.
There are other ways to solve the problem you describe right? For example credit unions come to mind.
The narrow bank restricts the Fed's ability to hawkishly raise the interest rate. It won't be able to get away with gross market Vs policy mismatches anymore. I mean think about it, the Fed makes an unintended policy error and raises the interest rate far above what banks can pay, everyone goes to the narrow banks. If the interest rate is too low nobody goes to the narrow bank. So the Fed essentially would have to perfectly choose the optimal interest rate which it probably can't do. It always overshoots or undershoots.
The narrow bank would be safer than US Treasury Bonds. In a financial crisis similar to 2008 this would amplify chaos as money drained from all other investment classes into the narrow bank at a time when the government probably needs low interest rates on their debt to solve things.
I don’t know how long this will last, but I started doing this recently with Vanguard’s VUSXX (short-term Treasury) fund when I realized it had significantly higher after-tax yield than high-interest savings accounts without the hassle of manually rolling over T-bills, and it looks like many other people have been moving in this direction.
I’m curious about this as well, because the top comment (TNB takes over an existing bank that already has this account) seems like a perfectly viable alternative. Given that they had the resources to get to this point in the first place, was there a reason why this wasn’t an option?
It's not quite right that banks don't loan out their depositors money. They need depositors to be able to make loans. Stashing depositors money at the Fed keeps the bank from making loans.
Stashing money at the Fed is possible by the way, and effectively does destroy the money (or rather, takes it out of the economy).
Banks can deposit money at the Fed earning exactly the interest rate that the Fed controls. This effectively takes that money out of the economy. That is generally rather bad, because it stifles growth. But in case of inflation, it can sort of help. That is part of why the Fed interest rate helps regulate inflation.
But generally speaking, you want loans to be made! It helps good and productive ideas get of the ground. It is core to Western economies. Hence the Fed is quite scared of narrow banking. They want to be the 'borrower of last resort'.
I've never asked my loans to be paid out in cash or transferred to another bank. When people say commercial banks create/issue money they mean that cash/central bank reserves have become irrelevant other than as a rudimentary payment method or network to transmit between banks.
If you wanted to make the point that banks lends existing deposits you would have to basically argue that people never wire money and always pay with cash and deposit their cash paychecks manually and pay taxes in cash. Curiously, my government points me at major banks and their ATMs when I want to pay my taxes in cash.
Presumably you didn't just keep that money sitting in your own bank account though - you used it to buy something or pay someone, and their account was often at another bank. If a bank issues too many loans where the money ends up at other banks without counterbalancing transfers of money in, it eats away at the reserves they have available to settle those transfers with and that's how deposits actually limit banks' ability to make loans. The Bank of England article that someone linked further down explains this in more detail (page 18 in the PDF): https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
>when someone takes out a loan, a bank doesn't lend out depositors' money. Instead money is "created" by the bank (on behalf of the fed), and the bank needs to pay the fed interest.
Commercial banks can not create loans out of thin air during normal operation. They either have to use depositors' money or share holders' capital. In other words, bank's liabilities (e.g. user deposits) should not exceed its assets (loans to users, securities, reserves at Fed, etc.). There are games which can played with how assets worth is measured (e.g. mark-to-market vs. mark-to-maturity), but otherwise the rule must be followed by banks.
>Why can we not have a similar system for deposits? A bank takes a deposit, the fed "destroys" the money, but pays interest to the bank. When the depositor wants to withdraw their money, the fed/bank recreates the money.
When a bank receives a deposit, it has to decide what to do with it. It can either loan it to someone (either directly or by buying bonds), invest (e.g. by buying stocks), pay it as a dividend to share holders (assuming it has far more assets than liabilities), or keep it in bank's reserve account at Fed. In the later case it gets payed roughly the key interest rate. This is why rate hikes suppress inflation (at least in the near term), banks instead of deploying their capital into the economy deposit it at Fed, thus temporarily removing it from circulation. It also means that cost of loans in the wider economy rises accordingly, since banks will not loan without a sufficient premium to the Fed's rate.
> Commercial banks can not create loans out of thin air during normal operation.
Commercial banks create money, in the form of bank deposits,
by making new loans. When a bank makes a loan, for example
to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage.
At that moment, new money is created. For this reason, some economists have
referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.
What exactly is incorrect in my explanation? Are you saying that bank's liabilities can exceed its assets for a prolonged time? Or that reserves at a central bank do not pay interest? The second order effects (such as loan at one banks creates deposit at another, meaning M2 gets essentially "printed"), which are important for monetary policy and regulation, are not relevant when we view operation of a bank in isolation.
Banks operate by discount. You take a thing to the bank, the bank values it and then a financial asset is created which the bank buys by creating an advance of its own liabilities against it. The bank then books the assets (the mortgage) against the advance. The bank's balance sheet is expanded.
The individual then 'pays' people with the advance - which does nothing other than change the ownership on that advance. When the payment process is complete we stop calling it an advance and start calling it a deposit.
You don't even need somebody else's money to start a bank. The Bank of England was started by issuing shares to subscribers and booking them on the asset side as nil paid.
A deposit 'moving' to another bank is really the destination bank taking over the deposit in the source bank, or delegating that to the central bank via a centralised clearance process.
Bank capital, either equity or notes, is convincing somebody with a deposit to swap it for another liability that has less security.
Much of the problems we have with banking and the view against it is because of the persistence of the Monetarist view that they pick up bag of coins from somebody and pass them on to somebody else. There are no bags of coins, and there is no passing them on. Never has been, never will be.
>You don't even need somebody else's money to start a bank. The Bank of England was started by issuing shares to subscribers and booking them on the asset side as nil paid.
We discuss commercial banks. The Bank of England is quite far from your run of the mill commercial bank, to say the least. Try to start a commercial bank without any capital, it will be a fun exercise.
As I've said in the post, there are various make-believe games which can be played with assets. My favorite example is the irredeemable gold certificates owned by the Fed.
Your systematic view is certainly valid, but it does not matter much for day-to-day operations of most banks. They do not care about how the system was kick started. For them reserves at a central bank play role of bag of coins, even though, as you said, there are no real coins, just pairs of assets and liabilities spread out between different balance sheets.
>Much of the problems we have with banking and the view against it is because of the persistence of the Monetarist view
Oh, so the current debacle is mostly fault of monetarists? Got it. And here I thought that the "temporary" make believe games introduced after GFC, lax regulation, irresponsible fiscal and monetary policy had something to do with it... /s
"Try to start a commercial bank without any capital, it will be a fun exercise."
It's precisely the same. You issue shares to subscribers and mark them as nil paid.
That is capital - because you have a call on their resources - much as the names of Lloyds of London capitalise the insurance market.
Reserves are irrelevant to banking. Here in the UK we didn't even have reserves until 2005 yet we'd been operating a central banking system for 300 years at that point.
This obsession with central bank reserves is a peculiarly American concept.
Loans create deposits, and the central bank simply accommodates the simulation of money moving around the payment system.
There is no control function from central bank reserves. It's a complete myth. If the central bank tries, monetarist style, then the payment system breaks, fires break out and they have to back off. Hence the Bank Term Funding Program.
There comes a point when the belief in bags of coins and fixed amounts of money has to die.
Perhaps the statement 'banks cannot create loans out of thin air'?
A bank can, with some capital buffer, borrow money from the fed, loan it out to someone else, and earn an interest spread.
Deposits help here because you pay a depositor less money than you pay the Fed, but they aren't crucial. And the Fed does have the advantage of not demanding it's money back at random.
Though perhaps I am wrong about how easy it is to carry a negative balance with a central bank? I imagine it is fine as long as the balance sheet looks good.
Creating loans and the money associated with them out of thin air doesn't cause the bank's liabilities to exceeed its assets though: they're simultaneously creating an asset (the loan) and a liability (the money deposited from the loan) which exactly cancel out.
If I'm a bank why would I want to get X% interest from the Fed when I can instead get X+Y% interest from some other investment option[0]? Yes the risk is higher, but typically only marginally so. Obviously you have big failures like SVB & others, but the reality is that those aren't common.
It also lets the bank pass on the increased rates to customers. The current fed interest rate is ~4.5%, but there are banks out there right now where you can get >5% in a savings account[1]. Your system would remove that option for consumers.
[0] Other option being some regulatorily approved option, not throw it all in the latest crypto ICO
>The bank also needs to pay the loan back by an agreed uppn time (which destroys the money).
Perhaps you can clarify by what you mean by 'destroyed'.
To my knowledge once the bank has 'created' the money it will always exist in the system. However it has devalued all other money by a small amount which we understand today as 'inflation'. So it's not clear to me what you mean by destroyed.
“High-powered money” is that which is created when the central bank lends to commercial banks. As it is a claim on the central bank’s assets, when it is returned to them it ceases to exist (as the central bank doesn’t need extra paper to dispose of its own assets).
> when someone takes out a loan, a bank doesn't lend out depositors' money. Instead money is "created" by the bank (on behalf of the fed), and the bank needs to pay the fed interest. The bank also needs to pay the loan back by an agreed uppn time (which destroys the money).
Why can't I do that with the central bank directly? Why the rent-seeking middleman?
Creating money out of nothing is a mechanism to get large projects off the ground. Without it, it would be difficult to fun infrastructure, R&D, etc. like most mechanisms, it can be used in good and bad ways.
Yes, that's how it works. There's this amazing animated movie from 2011 that explains how banking works and the history of banks: "The Collapse of The American Dream Explained in Animation" [1] It has almost 10 million views.
When fed started raising interest rates to curb inflation, the prevalent wisdom was that the average consumer has too much money because of low rates and is spending way too much. The thought was raising rates would curb their spending and bring prices down slowly. However, it turns out the average consumer is very principled with money and is handling it very well. The rich/corporations like banks, VCs, companies felt super rich with the raising stock and began taking on abnormal risk. This was not expected by many. It may eventually lead to the average consumer getting hurt as a repercussion of the failure at the top though. Of course even the crisis of 2008 was caused by exuberant bankers. You need to have access to lots of money to cause lots of damage.
Here's the data on M2 money supply in billions of dollars, for those curious, in billions of dollars:
Feb 2020: 15,457.9
Feb 2022: 21,699.2
This is a 40.3% increase.
To be charitable, this money isn't all on printed physical cash dollar bills, but nowadays there is no need for it to be. (I'm tempted not to be charitable though.)
A 40.3% increase is different than the percentage of the total money supply that was printed in the last two years, which for your numbers works out to about 29%. I would argue that most people would interpret “we created X% of the Y supply” in this way and not as a percentage increase.
That is a fair point- although when the increases are large enough in such a small time that the prior/posterior calculations are that different, I don't feel like it inspires confidence.
the point your making is completely useless. If someone has billions of dollars in storage somewhere (like Iran literally does) it doesn't affect the supply of money until they start moving it or using it in some way.
Like if someone found a trillion long tons of pure gold somewhere, but decided not to sell it or even use it. The price of gold isn't just going to collapse overnight. Sure the markets will panic sell for a few days, but it's still a real commodity with real uses & demands.
Putting a ton more _active_ money in the system does change the value of money.
I see this repeated a lot. Are you trying to be technical and say the money wasn't physically printed? If you are doing that, you are being ridiculous. But if you are not trying to be technical could you please provide some proof? Another responder was nice enough to give you the M2 money supply numbers which 100% support what you are saying didn't happen.
It requires great political training to believe the best person to spend your money isn't you — e.g. some people believe the poor can't be trusted with money, and so on (socialism etc)
Interestingly enough, the graph of bank failures looks like the ones Mandelbrot shows in his works about transmission errors if I recall correctly (can't check right now). My conjecture is that markets encode information rather than other things like value etc. Failures are just transmission errors.
This makes sense. Prices are literally encoding information - first the demand for the item being priced and then the cost of supplying the item. The price of beef is signaling a lot of phenomena including consumer tastes, weather, costs for feed, slaughter, and transportation, etc.
You could argue that central banks putting non-market pricing on the money supply distorts the information that a market-priced money supply would transmit effectively - and that's why all these crises seem to originate in the finance sector.
just found out this paper by Kelly (which may be widely known as the Kelly criterion), stating that one should maximize the expected value of the logarithm of its capital, independent from one's utility function of money, in which Kelly starts by mere information theory considerations.
Why do we even need banks? If they make money by lending money that mostly belong the people (state/feds) anyways, I guess we all would be better if banking was just a state monopol.
I guess I'm just missing some points here so maybe someone can help and explain me why this is a bad idea?!
We need banks because they make it possible for the rich to gamble with the income of the poor.
If your deposits are backed by mortgages or other secured loans you and the bank expect an added return for the "risk" - which is really just making a bet that enough people can pay something extra to compensate for those who default.
This is presented as "how things are" but it actually makes no sense - not least in failing to explain why most of the population is so starved of cash, in spite of long working hours, that it has to borrow at all.
That aside - there's a feedback loop which pushes investors to riskier and riskier lending, sometimes supported by more and more extreme kinds of fraud. Eventually, but somewhat predictably, the system suffers logistic collapse. Because that's what happens to recursive systems with permissive parameters.
In my understanding, the role of banking is to take on the intrinsic risk when doing money allocation.
1. The central banks control supply (by controlling their interest rates)
2. The banks allocate resources (lending out with a risk premium)
3. Consumers and entrepreneurs use the money for value creation.
To me it seems like banks ought to be able to fail. The problem is that banks have gotten the responsibility of the money infrastructure (the cash to e-money transition) which we can not afford to fail.
We should lift the money infrastructure responsibility of banks.
The old distinction between investment and savings banks seems like one of the many regulations we should bring back. Let businesses choose between the two and if their investment bank goes belly up well that's tough. Could even keep FDIC insurance low for both but like so many things legislatures keep falling to pressure to undo the regulations learned from past collapses.
> If they make money by lending money that mostly belong the people (state/feds) anyways,
Naa most of the loans are not using other people's money, banks just create money out of thin air (aka put a record in some database table) and that entry is your loan money.
There are things called Government Savings Banks. The UK has National Savings and Investments (NS&I [1]), which allows individuals to save money with unlimited protection (though I think their accounts typically allow maximum amounts of a few million pounds). The UK government uses this as a form of raising money. I believe other countries have similar schemes.
The government doesn't want to be responsible for making all the loans banks do. It's not easy to do and if the government makes bad ones and loses money people will complain.
The point being that there is a peak, that is to say bank failures are positively correlated. If they were negatively correlated or independent you wouldn't see peaks so much.
Nothing to see here, just garbage collection time. Everyone's successful when interest are low or near zero. Degens feel naked now with the higher cost of capital from interest rates.
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.
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.
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.
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.
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.
>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.
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.
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.
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 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.
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.
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.
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.
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?)
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.
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.
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.
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.
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'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.
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
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.
Banking failiure is very simply a failiure of regulation because of its conflict with capital. The customers of banks give banks money as loans that have a small % of risk and have a small yield, but banks are able to take on more risk than that % and have the profit imperative to do so, so they will do it if they can.
It's awfully easy to say this and make your analysis after the fact. But past results aren't indicative of the future. See also: Taleb's The Black Swan
What was the black swan event here, exactly? sounds like simply a bunch of slopiness? Also, why are you so sure we are after the fact and not in the middle/beginning of it?
The black swan event was the fed driving up treasury rates which made the bank's bonds worthless. Of course, it was dumb of them to assume they would never go up, but clearly many many banks thought it was ok.
I always think of that saying "If you owe someone a thousand dollars, you're in trouble. If you owe someone a million dollars, they're in trouble."
As much as I'd like to see greedy banks burn, the main people who will feel the most pain are the regular joes.
Alright. What do you mean by a wave? How did any of the 3 previous bank failures collapse "in waves"? Based on your graphic why did the S&L failure have more financial institutions fail towards the end of thr wave, but the 2008 crysis had more fail at the start?
The graph is beautiful but really, none of the analysis done even discusses waves, or how a bank failure can progress.
Finally, you make a point towards the end that SVB made a mistake and we don't know how widespread it is... Can we look at the pretty graph to other scenarios when a bank made a mistake and was isolated?
I somehow felt cheated at the end of the article, as if I expected some analysis but only found surface level news. This feels like a piece that should have been 2-3x long, and could have explored how each of the previous failures evolved over time.
perhaps....it's because they are not independently operating.....wow!! physics has analogy for quantum particles....banks....they act independent...but they arent
Is there another bad assumption today?
The recent failure of Silicon Valley Bank has raised fears
of a new banking crisis. One way to look at SVB's failure
is: SVB assumed that interest rates won't rise.
what i don't understand: how did they handle the banking crisis of the eighties? Somehow that one didn't manage to kill the economy, how?
My guess is less concentration, debt and leverage in total. We seem to have progressed to a point where the entire system is very unstable and always at risk, and the only tool we seem to have left is creating more debt/money. Our modern fiat money is one of the greatest experiments in human history, and we have no evidence yet that such a system can be stable long term.
For one we hadn't gutted Glass-Steagall yet so banks were still separated into investment and savings/commercial so banks weren't as leveraged. We keep undoing and rapidly relearning why these things were put in place and the cycle from repeal to collapse is only getting tighter.
A healthy economy has ups and downs, and if you have a bigger up there needs to be a corresponding down. In 2008 we made major decisions to prevent a needed correction down, it turns out all that did was kick the can down the road, and if we kick it down the road again we're just in for another problem.
You're applying proverbial thinking to an extremely complex, emergent system. The reality is that many aspects of the economy can be manipulated, but the consequences of doing (or not doing) anything never completely clear. People are constantly pointing to indicators that they feel are signs of the apocalypse, the excess of central bank activism, or the ineptitude of politicians to enact fiscal policy. Out of a million different assertions, some of them are going to eventually be right.
Overly simplistic and just not true. There is nothing in observed or theoretical economics that says every “up” has to be exactly balanced by a same sized “down”. We would never get anywhere in aggregate if that was the case - net zero is clearly not what has happened over the last 100+ years.
The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 repealed part of the Dodd–Frank Wall Street Reform and Consumer Protection Act passed in 2010:
Articles that only look at the numbers miss the elephant in the room, which is that policy controls economics. That's why academics generally don't subscribe to ideas like deregulation, at least they didn't before the Reagan administration began chipping away at public funding for universities to rein in the rabble of hippies opposed to war/monopoly/neoliberalism:
At nearly every turn for 40+ years, our elected officials have made unpragmatic decisions. They push revisionist history and constrain debates to 2 ends of an approved axis of narratives so that people who think outside the box are demonized as fringe. Which is very not meta, and for me one of the great disappointments of the modern era, especially in how it's bamboozled the minds of so many thought leaders in tech.
Is that political? These policies affect our money and work and the trajectories of our lives. Are we supposed to just not seek working solutions anymore because they don't please the status quo? Every win for concentrated wealth is another pressure convincing people to vote against their own self-interest. Which creates the negative feedback loop we're trapped in, where every loss is compounded by further loss, enabling polarizing candidates who sell their vote to the highest bidder to consistently win at the highest levels of government.
Keeping money safe, whether physically or digitally, comes at a cost. Banks absorb this cost because they make money through credit creation, maturity transformation, and interchange fees. They even pass on some of that profit to depositors. However, each of these banking activities create risk, which is passed onto the deposit holders and is offset, to an extent, by deposit insurance. In low to zero-interest-rate scenarios, banks act as pure custodians as their revenues decline, which is why we saw EU banks charging negative interest rates, i.e., a fee, to maintain customer deposits.
There's a delicate balance and an inherent conflict between keeping money safe and earning yields, the two functions performed by a commercial bank. Customers don't perceive this conflict unless a bank breaks down as SVB did.
I think this crisis is the strongest yet reason to push for CBDCs as only a central bank can fully guarantee a deposit. In terms of systems design, this is a clear delineation of responsibilities.
CBDC: If you want safe custody of your money.
Bank: If you want to lend your money in return for a yield. And as with any lending, you take the risk of a borrower defaulting.