Re:The Sam Bankman-Fried empire crumbled. What happened? (pa...
by duvenaud on Friday November 11, 2022 @11:05AM
(#33562512)
Thanks for the explanation, but I'm not sure how it relates to my comment. It sounds like you're saying regulations help because they force banks to keep reserves. I think this helps in the short term, but in the long run creates incentives to deceptively package assets into AAA ratings (as in 2008), and that things like FDIC also just create incentives to get too big to fail. So I stand by my statement.
Re:The Sam Bankman-Fried empire crumbled. What happened? (pa...
by imtringued on Saturday November 12, 2022 @05:06AM
(#33571739)
The problem is that once rates hit zero people will just hoard cash like Keynes suggested with his liquidity trap. The only "funds" available are short term deposits. Nobody is buying certificates of deposits. When the bank issues a loan without a CD it has to create new liquid money, that is the only way.
The answer is quite simple, just keep going down with interest rates even if they are negative. That is fully consistent with the loanable funds model.
These can be reduced but not entirely eliminated by setting reserve requirements, LTV ratios, etc., which is what https://www.bis.org/bcbs/basel3.htm is all about.
You can't really eliminate the duration mismatch without eliminating anything recognisable as a "bank", and it becomes much more expensive to get credit and to do basic financial operations.