That's basically what happened here.
This is like if you put $100 in Chase's security deposit box, and they opened it up, took the cash, and lent it out, and then when you come to get it, they say, woops, we lost it all. That would be just straight up theft or fraud.
https://nypost.com/2021/06/12/fbi-aims-to-keep-valuables-86m...
https://www.businessinsider.com/fbi-raid-1400-boxes-us-priva...
I'd love to hear a steelmanned argument in favor of it, maybe I'm missing something obvious?
If it were a big shipment of plutonium laced heroin, it seems fair game.
I think the biggest issue with civil asset forfeiture is the conflict of interest where police departments are keeping/using the seized assets. From the outside it looks a lot like the government acting like a gang.
The other big problem is it seems like it is up to the owner to prove the assets "innocence", rather than police proving the assets were the result of illegal activity.
If assets are seized, they need to go to a third party that can store them safely, return the assets to their owners. If found "guilty", the assets should go to some victims of crime fund, or destroyed.
Looking at Wikipedia's definition of civil asset I see my "in head definition is slightly wrong:
> Civil forfeiture in the United States, also called civil asset forfeiture or civil judicial forfeiture, is a process in which law enforcement officers take assets from people who are suspected of involvement with crime or illegal activity without necessarily charging the owners with wrongdoing. While civil procedure, as opposed to criminal procedure, generally involves a dispute between two private citizens, civil forfeiture involves a dispute between law enforcement and property such as a pile of cash or a house or a boat, such that the thing is suspected of being involved in a crime...
So my use of clearly illegal assets being seized means it wouldn't actually be civil asset forfeiture. Mea culpa!
If you want to think of laws as an ecosystem, then think of civil asset forfeiture as a highly evolved species with all sorts of specialized defenses.
It seems to be slowly being ground away. The modern version of civil asset forfeiture was as a tool to take away the profits of drug kingpins in the 1980s and bootleggers during prohibition. Seems like the modern drug kingpins are companies like Johnson & Johnson, though.
There are some nuances to work out to ensure cops can't accuse say Vladimir Putin of a crime involving the $8000 they found in your house, and then since Putin doesn't show up they keep your money, but the general idea seems more sound than civil forfeiture.
With civil asset forfeiture: cop pulls a drug dealer over, the drug dealer offers to bribe the cop, the cop laughs and takes all his stuff anyway, books him, and the police department buys a martini machine.
Kind of a weak case, but that was the best steelman I could think of.
https://www.nytimes.com/2019/07/19/business/safe-deposit-box...
> Every year, a few hundred customers report to the authorities that valuable items — art, memorabilia, diamonds, jewelry, rare coins, stacks of cash — have disappeared from their safe deposit boxes.
https://en.wikipedia.org/wiki/Civil_forfeiture_in_the_United...
> In 2010, there were 11,000 noncriminal forfeiture cases.
If I'm reading it correctly, that's just the Federal cases alone.
[0]:https://www.federalreserve.gov/monetarypolicy/reservereq.htm
I think they've got enough to cover any consumer issues.
[0]: https://www.fdic.gov/about/strategic-plans/strategic/insuran...
[1]: https://en.wikipedia.org/wiki/Federal_Deposit_Insurance_Corp...
And $119 billion where exactly? In US treasuries? If so it's about as safe as the social security "fund". What if the "customer issue" includes a govt default?
All you're saying here is that we can treat an FDIC guarantee like a govt guarantee, which is probably true, but still not the same as a case where the guarantor has actual assets which the prior poster was suggesting. The FDIC is making promises and backing those promises with other promises. There's not cash laying around anywhere to back it up. I'm not saying the only response is run for the hills like the other poster, but I find these defenses rather naive. The likelihood of any insurance scheme failing is not zero. Same for a government's finances.
Did you not read the part where they have $119.4 Billion dollars? And that was a year-and-a-half ago, it's probably closer to $130B now. It seems like you didn't read any of the source material, let alone my comment, before replying.
"DIF fund" being the $119B. In my post I presumed that 119 billion is in US Treasuries. I'm also presuming US treasuries are not the same thing as cash. Whatever the case, generally people don't refer to "cash laying around" as an investment.
EDIT: Try this much more readable doc: https://www.fdic.gov/about/financial-reports/reports/2020ann....
The $119B in assets includes only $3B in cash, with $110B in treasuries.
[0]: https://www.cnbc.com/2022/01/19/56percent-of-americans-cant-...
If they aren’t providing safety or liquidity, why should you use them?
The safety is personal — no one can rob your home when you're gone and steal the money under your mattress because it's not under there, it's in a bank.
And in regards to liquidity, if you can tell me the exact day, time, and amount you tried to pull out of a consumer bank (large household bank names) and instead of getting cash in hand the bank told you "sorry, we spent your money on loans, we don't have any to give you", I'd love to see it.
Bonus points if then the FDIC didn't cover it.
Banks provide both safety and liquidity at the consumer level. It would also be a really bad idea to continue to encourage everyone to pull money out of banks and hold it in cash — both economically and personally. People largely benefit from banks existing, that's, well, why they exist!
Right, you can’t ramp up the printing presses instantly — which is literally what they would do if they had to.
I think people are missing the point that if it ever got so bad the FDIC had to worry about covering everyone your biggest worry would be the roving gangs looking for the Mormon food caches.
There is a link prominently on the website: https://www.fdic.gov/consumers/assistance/protection/depacco...
No; we're not.
Bank reserves have obviously dropped year over year since the introduction of this policy, especially as a percentage of M1/M2.
For comparison there were rumors that Credit Suisse was in trouble when r their asset to liability mix got around 1.65. That is they marked their assets to 165% of their liabilities and it was a major issue.
No; again. The Fed moved from a 'scarce reserves' regime for monetary policy to an 'ample reserves' regime; that was announced in 2019. Since the 'ample reserves' approach doesn't depend on bank reserves to implement short-term rate management, there wasn't really a need for an ongoing Fed reserve requirement.
>Bank reserves have obviously dropped year over year since the introduction of this policy, especially as a percentage of M1/M2.
Bank reserves increased hugely from 2019 through the middle of 2021, as you can see from the chart I posted. Although they've dropped somewhat since then, they're still like 75x what they were in say 2007.
If you are married it is 500K, if you have a trust it is like 1.25M. 250K for each beneficiary up to 5 (or something like that).
A married couple each have 250k coverage for their personal accounts, and each have 250k for shared account(s), so they could in theory have 1M coverage at a single institution.
Other qualified relationships work similarly.
That's not right either. They promise you will get it back (the FDIC insurance), just that e.g. large amounts may have a delay. They are also scrutinized by regulators to ensure that the loans are sane enough not to all evaporate in value overnight, as a horse bet might.
So I think people don't like the comparison, since the true difference is FTX did horse betting, while Chase does something much more rational.
The amount of interaction between the two sides that's allowed has increased and decreased over the years, but it hasn't been unrestricted since the Glass-Steagall Act of 1933: https://en.wikipedia.org/wiki/Separation_of_investment_and_r...
1) Chase doesn't have to show you $0, you'll still see $100.
2) When you decide to spend the money, chances are the seller is also with Chase, then all Chase has to do is show you $0 and the seller +$100
3) If the seller happens to be with another bank, Chase will just go in credit with that other bank for $100. The total of such interbank accounts is around 0 as money flows both ways, and, with a decent margin, within the bank reserve amount.
Fractional-reserve banking works so well with so little "actual" reserve money that some consider it counterfeiting.
Pretty much every large exchange has a compliance team, btw, at least the ones with US operations.
FTX.com is some conglomeration of entities incorporated in Antigua, Bermuda, and the Bahamas[1]. FTX.com is the one that has blown up, and I won't pretend to know about the reporting requirements of such a complicated structure in multiple jurisdictions.
Also, Sam Bankman-Fried owned 90% of Alameda Research as of last year. So unless that changed(I can't find evidence it has), it looks to me like he tried to bail himself out with customers' money. Presumably he thought he could return the money eventually and no one would be the wiser. So much for that.
This is just my understanding and I am not an expert in these things.
[1] https://help.ftx.com/hc/en-us/articles/360056976411
[2] https://finance.yahoo.com/news/ftx-ceo-sam-bankman-fried-pro...
>"Mr. Bankman-Fried is also facing dissent from within the senior ranks of FTX. On Wednesday night, the general counsel for FTX’s U.S. arm wrote on an internal messaging system that he had “advised U.S. regulators of my instruction to founders to turn off functionality” of the websites for FTX and the U.S. arm, according to two people who saw the message and a screenshot that has circulated on Twitter.
“Sam has a different perspective than me on this,” wrote the lawyer, Ryne Miller. He added that “we should not be optimistic for an outcome that is positive.” The post was swiftly deleted."[1]
[1] https://www.nytimes.com/2022/11/10/technology/ftx-crypto-exc...
Think how much cheaper and faster cars could be, if we didn't have to spend resources on seatbelts and catalytic converters. The entrenched car hegemony are in bed with the government to keep the little guy down by requiring these things.
Not really, but again banks don't have compliance against this either, it's just that people are less likely to withdraw their money from the bank at the same time, and when they do the gov will tell the fed to print more, and with crypto you can't print more, so a bankrun has immediate effects.
But everyone seems to say that's not the case. So what broke down here? Why isn't the ledger ledgering?
Think of it like HTTPS. Nobody can sneak anything into the request, but the counterparty you're contacting could still be a fraud.
No it isn't, that's what limit orders are for. There's still the exact same counterparty risk there anyway, in the form of USDC. Circle is another big dodgy centralized provider. The major critical flaw with all this defi stuff is that it can only reliably trade cryptos for other cryptos. Once you actually try to get any of it out into real assets, the counterparty risk immediately comes back again. No crypto defi stuff can ever solve that. The idea is just bad, it's a scam from the very beginning.
In the world with a Recorder of Deeds, Atrium is screwed, and FX might be screwed, but John Doe is easily confirmed as the owner of 123 Main.
It sounds like people here gave their coins to FX, so that the "deed" shows FX "owns" the coin. In effect, they destroyed the 'trustless' part of the equation. And then SBF violated the trust.
So, the next innovation seems to be a blockchain that shows an owner and an agent?
> Remember Mt Gox? [...] It's viewed as a feature that everyone just loses their money sometimes [...] From speaking to them, they view any kind of fraud prevention as an affront to their definition of "economic freedom"
I found these observations to be helpful reminders how things are (and used to be!). A blockchain isn't designed to indemnify you if you hop on/off the blockchain.
If you are the only person in the world with the private key to your coins, you are the only person who can move them. Period.
FTX is a centralized entity that custodies funds. It has nothing to do with a blockchain, which could have completely prevented this.
There are many examples of decentralized exchanges (DEXs) for which it is mathematically impossible to loan out depositor's funds without their consent, because the only person capable of signing a transaction to move the funds is the depositor themself.
Right up to the moment you lose your laptop in a fire, forget the password to your wallet, accidentally run malware on your personal computer, etc. Or if you die and haven't gone through the complication of setting up a way for your heirs to gain control of your accounts.
Yes, you can take steps to mitigate these risks. Those steps are absolutely insane from the POV of everyday human beings.
But blaming blockchain for the failures of centralized finance, which we've seen time and time again throughout all of history, is literally intentional deception.
If a politician or lawmaker or business person blames blockchain for this, it is FRAUD. Full stop.
All the facts go against you. You are wrong about the fundamental ideas, the first principles and the big picture.
It's an immutable public ledger. We know exactly what happened when someone commits fraud on it, whereas we could know next to nothing about what happened to $10 billion when someone commits fraud in the fiat world — exactly what has just happened with Alameda and FTX.
It's as if you don't understand the basic, fundamental concepts of a blockchain.
No and no. Avoid asking these questions please, they're fallacious and kind of rude. I just see fraud and I call it out. I'm sick of seeing these crypto-Enrons keep happening. I hope the SEC finally cracks down and anyone still involved in crypto after any more of these tumbles goes straight to prison. The entire thing is a ponzi scheme and a fraud and the technology is useless beyond any kind of recovery. I'm dead serious. They should have cracked down on all of these crypto exchanges years ago when it became obvious they were a huge vehicle used to sell ICOs, aka illegal unregistered securities that were complete scams.
>It's an immutable public ledger. We know exactly what happened when someone commits fraud on it
No, you don't. You know almost nothing at all just from looking at one blockchain. If you see a bunch of blockchain transactions moving around, you have no idea what the transaction is actually for or whether that's a legitimate transfer or not. You don't know if a pizza was exchanged for those coins or if anything actually happened, or if the coins were actually stolen, or if some exchange was hacked, or if it was just a wash trade. It's extremely easy for people to commit fraud on blockchains this way so they just do. All you can know from this is that some tokens were transferred to some anonymous wallet address. Just from the blockchain you can never know what it's actually being spent on or who it's being sent to or if there's even any real assets anywhere in the system at all because that information only exists in the real world outside of the chain. There are places to get this information off chain and that's the only way to actually make any of this useful, it totally defeats the purpose of using that chain.
As an independent reporter the only way to figure any of this out is to take data from multiple chains, cross-reference it together, compare it to proprietary data coming from the exchanges, look at public data published by traders, and try to put it all together to paint a picture of where the real money and assets moved. You need a lot of other data sources besides that chain. And when you actually do that, you see things like how there's evidence that most bitcoin transactions are actually fake, fraudulent wash trades for the purpose of market manipulation, and nobody in bitcoin is doing anything about it because they either can't, or they're the ones profiting from it: https://www.forbes.com/sites/javierpaz/2022/08/26/more-than-...
The entire crypto market is awash with fraud. Nothing about blockchains can solve any of these problems. They're intentionally designed to create these problems. Blockchains can't prevent you from just taking that activity off chain and doing it outside of the view of everyone, and that's how you get another Alameda and FTX or Terra or Luna or 3AC or Celsius or Voyager or any of these. If you could force everyone to do all their transactions on one blockchain, then what you're saying would be true. But the technical design of blockchains intentionally makes it so you can't do that and anyone can just create another token out of thin air, or fork an existing token into a second chain, and then start trading it on some exchange and loaning it out with no regulations whatsoever. This is what the cryptobros wanted. It's a perfect recipe for fraud.
Now the only real way to force all these people to use a single blockchain and make them follow normal accounting procedures would be to pass a law making them do it. On that note I always found it funny that a certain segment of cryptobro was pushing for CBDCs. Most of them would probably cry foul if they were forced by law to use a single central bank chain, because then it wouldn't really be decentralized anymore and they couldn't get away with so much fraud.
I can see exactly what Alameda and FTX was doing on chain. I can see the exact amounts of each token they sent, where they sent it, what they swapped it for, etc. It's all publicly documented.
Why should it?
Does your bank tell the world the details of what you shopped from the grocery store today?
Financial privacy either is or should be a human right. Banks fail to protect this right. Blockchains can protect this right.
The technology works. People use crypto for payments.
> Now the only real way to force all these people to use a single blockchain and make them follow normal accounting procedures would be to pass a law making them do it.
I wouldn't be surprised if someone put you up to coming here and writing all this, so you can go back and claim something like "I ran this by lots of smart people and they agree the only way is to pass a law", and then use this to back some legislation.
Not guaranteed compared to putting the account and phone passwords in a will.
Who has this policy? The blockchain??
I’m not interested in goalkeeping both sides of the convenience-security spectrum. Keep your keys in a buried tin can if you want, or custody at an insured exchange if that’s your preference. I think installing say Rainbow Wallet is a fine choice.
This is completely and utterly irrelevant and has not stopped anyone from performing massive fraud. Just look at the long history of crypto scams. They still happened constantly despite blockchains having that feature. It's just impossible for a blockchain to prevent these frauds. It doesn't matter if you still have all your coins if the value of that coin drops to zero after it's revealed the whole market for that coin is fraudulent, which is exactly what happened this week! And multiple times earlier this year, and multiple times before that! It doesn't matter if it's stored on a DEX either, when you're still stuck with a worthless coin that no one will pay you for! How many shitcoins need to collapse before this is understood? Blockchains do not and will never solve this problem because they create the problem, by design, by allowing anyone to manipulate and dump tokens anywhere they want with no regard for what's fraudulent and what isn't. On a DEX you can't even know if the person on the other end is a real person or not without going outside the chain. I can't believe I'm still talking about this after the long, long string of fraud that's happened over the last 12 years. FTX is not the problem, they are the symptom. The problem is blockchains. They're intentionally built to enable fraud. They have no other purpose, and they aren't even particularly good at that because they stop working when everyone notices the fraud.
I should also mention, your statement isn't even correct! There's a very easy way to get someone else to move their coins for you: threaten them. That's the entire principle that ransomware is built on. It's real easy for criminals and the police and anyone else using the threat of force to get people to give up their coins, blockchains don't prevent that and it's impossible for them to do so because they can't affect anything that happens in the real world outside the chain. I really can't understate this. Blockchains are a fraud. Every claimed authority or security provided by a blockchain is trivially defeated by just routing around it or by gaming the market, which is ridiculously easy for anyone with some cash to throw around because there are no real rules or safeguards. They're probably the worst "invention" that's come out of the tech sector in the last 15 years. I really hope this crash is the end for crypto.
why does it matter if the counterparty is a human?
Did someone pay you to come here and write these things?
Are you a lawyer?
Are you a crook?
> This is completely and utterly irrelevant and has not stopped anyone from performing massive fraud.
So is fiat currency.
You can read the first 1-2 sentences of each paragraph and get a sense for the main points.
No visibility leads to no accountability.
I argue this is what they wanted out of blockchains. I remember all the rumblings in the days of Silk Road and Mt Gox. The enthusiasts that are responsible for propagating this system into today wanted it to be a wild west where anything goes. They said all the same things back then. I heard people saying it was good that Mt Gox collapsed because it meant all the scammers got what they deserved and they learned their lesson. Well, they didn't! It continued to be a wild west and more scammers just showed up. They'll keep scamming and they won't stop as long as they can make money from it.
Visibility or accountability of what? Many blockchains are public.
I find you not only misinformed but possibly intentionally trying to mislead people.
"The amount of energy necessary to refute bullshit is an order of magnitude bigger than to produce it."
- Paul Kedrosky
This. Brand new account spreading blatant lies.
The way I find the OP isn't a blatant lie. It's the truth: how I find the OP.
Now I'm wondering about you.
I don't know how you ask these questions if you read the parent's post.
Clearly, the parent lays out situations where going off/on blockchain dilutes visibility.
The cross-collateralization of FTX assets wasn't on blockchain.
"No blockchain can ever guarantee there's any visibility or accountability."
Ever? Clearly this sentence is false. It takes only one counterexample to prove it.
Here's the counterexample. If all the world's money are on a single blockchain and there are no banks, the blockchain guarantees visibility and possibly accountability.
Please don't be gratuitously negative. It's to your benefit to be precise.
Your example misrepresents reality and a lack of understanding the point.
Where on the blockchain did it track FTX's cross collateralization?
There is your counterexample.
As far your ad hominem on negativity, I have no idea what you're referring to.
DeFi
There are always deposits and wihdrawals, and of course maybe you traded your tokens for another before withdrawing. So its hard to parse how much customers deposited vs genuinely withdrew, and so you cant really tell if the exchange is short unless they declare their actual assets and liabilities.
> Something of the sort must happen eventually, as the current system, with its layers upon layers of intermediaries, is antiquated and prone to crashing—the global financial crisis of 2008 was just the latest in a long line of failures that occurred because banks didn’t actually know what was on their balance sheets. Crypto is money that can audit itself, no accountant or bookkeeper needed, and thus a financial system with the blockchain built in can, in theory, cut out most of the financial middlemen, to the advantage of all. Of course, that’s the pitch of every crypto company out there. The FTX competitive advantage? Ethical behavior. SBF is a Peter Singer–inspired utilitarian in a sea of Robert Nozick–inspired libertarians. He’s an ethical maximalist in an industry that’s overwhelmingly populated with ethical minimalists. I’m a Nozick man myself, but I know who I’d rather trust my money with: SBF, hands-down. And if he does end up saving the world as a side effect of being my banker, all the better.
Disclaimer: I don't usually drop comments like this that don't contribute to anything, but... lmao wow.
This quote is complety antithetical to everything crypto is actually trying to achieve; which is a trustless financial system, a system that would be void of these sorts of melt downs.
Don't trust; verify.
While everything is dumping, RAI goes up.
(but yeah it’s wild)
These centralized exchanges are an inevitability and a requirement for crypto to function in the real world. You can't run a ponzi scheme without fresh blood, nor can you pump and dump shitcoins unless normal people can easily and quickly trade them.
Is there a coin that distinguishes agent and owner? Seems like you want trustless agency if you're pursuing trustless finance.
>The value of the tokens is completely and totally dependent on a consensus of crypto miners doing their job within the parameters of the system, assuming you want them to maintain a price and trading volume that's favorable to the token holders.
Number of miners has absolutely nothing to do with trading volumes, not sure where you got that from. Miners don't maintain a price any more than a whale maintains a price.
>If the majority of miners suddenly go bust due to outside circumstances
The rest of the miners would step in and start making more money, actually.
>they decide to conspire together and attack the system, or conspire with some whales to perform a rug pull
Not much of a rug pull to sell the tokens you've legitimately acquired through mining or fiat buying. That's just selling. High volatility selling, yes, but still just selling.
>it's extremely likely that your tokens aren't going to be worth anything anymore. This applies to every token, including bitcoin.
Oh yes, Bitcoin has died thousands of times. Maybe you'll be right one day, but I doubt it.
Avoid this style of comment, please.
>Miners don't maintain a price any more than a whale maintains a price.
Yes, my point is both of them have a means and incentive to manipulate the price in ways that may not be favorable to the trader.
>The rest of the miners would step in and start making more money, actually.
Yes, at the cost of removing some of the security of the system. They can only maintain security if they have immediate access to more hash power which they probably don't. In that moment because of the sudden drop in hash power, the network is vulnerable to an attack by other malicious miners coming in and taking over. Alternately, if the rest of the miners notice what's going on they could see this as increased opportunity for them to conspire and become malicious.
>Not much of a rug pull to sell the tokens you've legitimately acquired through mining or fiat buying. That's just selling. High volatility selling, yes, but still just selling.
This right here is the conversation I most dread having with crypto people. It's fraud. You can call it fraud. Manipulating the market so the price is artificially high and then dumping it off onto unsuspecting buyers is a fraud. It doesn't matter how you initially got the coins. Yes, we can group different types of selling into different categories, like ones that are fraudulent and ones that aren't.
>Oh yes, Bitcoin has died thousands of times.
The exception that proves the rule, huh? There are definitely thousands of shitcoins that have crashed and burned and won't ever recover because they were plain old ponzis. Bitcoin crashed a lot of times, not thousands, but enough to wipe lots of people out every time it happens, relative to the number of people using bitcoin at the time. It's still not clear that any of the money moving around in bitcoin is actually real money or assets. I'm certain it's a ponzi too.
>Maybe you'll be right one day, but I doubt it.
So you're saying bitcoin is too big to fail, is that right?
> Nobody actually has any custody of anything in crypto.
This is insanely wrong and it’s unreal things like this are being said in 2022.
DeFi Example: Take your self-custody bitcoin to Thorswap and exchange it for Ethereum. Pure defi. No trust needed. Total self-custody cross chain trading.
a decentralized decentralized decentralized exchange!
That's bullet proof folks!
FTX was based in the Bahamas.
It is also a regulatory failure, there are reasons this kind of dipping into customer funds is quite illegal in the US. FTX should not have been reachable by US citizens (funding should have been impossible) _or_ FTX should have been sanctioned _by_ the US. There is no reason at all that rogue financial institutions should be allowed to transact with American-regulated banks. If you want to do business in the finance sector with Americans you need to be regulated. Any argument to the contrary is very clearly contradicted by the series of crypto, defi, etc. failures in which gullible Americans lost tons of money while institutions they trusted violated common sense rules that every traditional financial institution in the US must abide by.
If you want to have freedom from this kind of regulation, you have to live in a world where these kinds of failures and frauds don't happen. Clearly they happen over and over without competent government watching them.
I wonder if Sam being the 2nd biggest funder of Democrats has anything to due with this...
Ostensibly this has already been the case. You can't even properly access ftx.com in the US. It just redirects you to the US exchange. FTX US is a distinct company from the international FTX exchange, at least according to Axios. If you still manage to get to ftx.com it gives you a banner saying its read-only, you aren't allowed to use it, and they wont let you.
FTX US is still allowing withdrawals at the moment, unlike FTX proper.
"The #LightningNetwork has a theoretical throughput of 40 million #TPS... Lightning enables #Bitcoin to be a planetary scale decentralized medium of exchange."
https://twitter.com/Excellion/status/1456088664132440069?cxt...
The only time you actually are part of the trustless system is when you are sole custodian of any private keys necessary to access the coins.
The issue with this is that a whole lot of people have no idea what it is, how it works, how to be part of the system and how to keep keys secure and safe at the same time.
And it is fine. People can't know everything.
But one thing I know, if you buy stuff you do not understand and then you loose money, it is on you.
I can try to seek "justice", but this rarely happens with cons that really know what they are doing. It is what I call victim thinking. That you do something stupid and then get bailed out by some authority.
Of course, the automatic processes in Etherium produce a bunch of other weird effects.
Overall, I'd suspect people not immersed in the crypto world would easily fall into a spelling that "sounds" like they remember it - spelling phonetically is a lousy way to spell but some percentage of the world does it.
So, there is no interesting lore behind it?
We’ve got this imperfect system of laws which we use to govern the way we live. Its flawed but it isn’t a free for all either.
When the ends justify the means, anything goes.
I think he figured in a million realities, the expected value is net very large. He just happens to live in a reality where it collapsed, but how much of his wealth is due to these games? I don't know if the probabilistic method is common among EA. For instance, if you gave me a chance to bet my entire net worth on a 51% odds game, sure the expected return is positive and if i had a million realities and netted everything out, I should take the bet. But most people would see that as insane
https://web.archive.org/web/20221027181046/https://www.sequo...
[1] https://www.britannica.com/topic/utilitarianism-philosophy
Here, we have a guy who is taking money for a specific purpose under circumstances that he completely lied about. And he used that money to attempt to enrich his company at catastrophic risk to the customers.
The cryptocurrency bubble was very transparently built on delusion and avarice, and everyone involved knew it. There are very few truly innocent victims here.
Are you suggesting FTX customers deserved this?
"SBF was planning to spend up to one billion dollars to help influence 2024 presidential election campaigns. His real plan is to bankroll the candidate running against former president Donald Trump. In 2020, SBF donated $5.2 million to the Joe Biden presidential campaign.
According to Open Secrets, a platform following the money in politics, SBF is the sixth largest political contributor. The platform reports that he has made a total contribution of $39.8 million for the 2021-2022 cycle."
There should be a tracker for companies that come out of nowhere and buy themselves into the top 10 of any major politician contributors list. So much money, so fast, should be a red flag for astute investors.
Side not but that’s not really how banking works. Banks create deposits when they originate loans and separately look for the assets they need in order to satisfy any regulatory requirements and net flows of funds for inter bank settlements.
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
Nobody expects that their money deposited into a savings account is going to sit in a bank vault until it’s time to go pick it up — they know the bank is going to loan it out and pocket the difference between what they charge the borrower and what they pay in interest.
Checking accounts are different in that they should have the money on hand to settle whatever spending the customers get up to but instead they practice fractional reserve deposits with a central bank to bail them out if needed.
The difference here is the crypto bros are practicing fractional reserve without someone to bail them out so depositors just get screwed.
Reserve requirements are about how much cash they must keep as a percentage of their assets, where capital requirements (which are non-zero) are more relevant to the fraction held in fractional reserve systems and are about ensuring solvency.
As FTX showed, if most of your capital loses its value then you are insolvent. The banking system is just a little more insecure than it was with fractional reserves.
I'm happy to be shown that I'm wrong, since I am not an expert.
Further, from the announcement that lead to this, it seems that the reserve requirement is zero because the mechanisms have changed. The reserve requirements appear to have applied specifically to reserve accounts held centrally at the federal reserve.
To me this looks very much like a ‘scare’ factoid that can be latched onto and shared in order to persuade people that the banking system is way more fragile than it is, and that it’s collapse is either imminent or inevitable.
OMG zero reserves! Dig a bit deeper and that’s partially true and perhaps not all that important, and represents a technical change in operations rather than the massive risk increase it gets portrayed as.
It's an interesting double standard.
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...
“to lend the remainder to borrowers”
Can you describe how money that a bank has in deposits is lent out to borrowers?
There is the department that issues loans. Their job is to identify credit worthy borrowers and issue loans to them.
Then there is the department that handles compliance. Their job is to make sure the bank complies with the various regulations imposed by the government, such as Basel III and capital requirements and the like.
They are separate operations though. The people issuing loans don't call up the people complying with regulations and check whether or not there are enough reserves there to issue loans today, they just issue as many loans as they possibly can because that's how they make money.
Banks borrow from each other to satisfy their liqudity and other requirements, and the central bank is generally a lender of last resort, so banks can always satisfy their short term flow of funds requirements by borrowing money. The reason banks want to attract depositors is that it's CHEAPER than borrowing the money, and without any deposits they may not actually be profitable.
So the more deposits a bank can attract, the more profitable their lending operations are, but their lending operations are not constrained by their reserves per se.
When you get a loan, the bank creates a liability and deposit out of thin air. The deposit is a "demand deposit", which is effectively equivalent and fungible to reserve-backed currency (hence the term "money" usually applies to both, though they are different things).
The bank needs no existing customer deposits to create a demand deposit and liability in your account.
You should run through your example again, except begin by creating a loan, rather than first beginning by a customer lending the bank a deposit.
The BoE article linked above is absolutely correct.
But also qnt is clearly well versed in MMT which is what I was referring to.
Furthermore, it's not clear to me how you believe that the BoE article contradicts what I'm saying. I'm under the impression that you (along with most other people) are simply misunderstanding what you are reading here.
EDIT: note that this paragraph (and the one preceding it) directly contradicts what you are saying:
This description of money creation contrasts with the notion that banks can only lend out pre-existing money, outlined in the previous section. Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out. A related misconception is that banks can lend out their reserves. Reserves can only be lent between banks, since consumers do not have access to reserves accounts at the Bank of England.
The classic "bank takes your deposit and lends it out" only applies to certificates of deposit, after all, you have no access to that money. You can't transfer or withdraw it until the agreed date.
Yes.
If I take a loan out of a bank in physical banknotes, then the bank physically loses the amount of banknotes that I physically receive. Physical banknotes are not duplicated. If I take out 100 euros in physical banknotes, then the bank loses the corresponding 100 euros in physical banknotes. The bank does not magically create physical banknotes out of thin air.
If I take a loan out of a bank in the form of electronic transfer to another bank, then usually one of 2 things happen:
1. The receiving bank requires the sending bank to settle all transfers that occurred throughout a timespan such as 1 day, by transferring reserves held at the central bank. For example, if the net outflow from bank A to bank B is +2M, then bank B would require bank A to transfer 2M of reserves to settle the transfers. Note that also in this case bank A loses the amount of money that it lent to me. Money wasn't duplicated. It was transferred out of the bank.
or
2. The receiving bank B has looked through the books of sending bank A, they have a prior relationship, and bank B provides an unsecured loan to bank A. Note that if bank A actually had 0 money anywhere, then bank B wouldn't want to provide bank A an unsecured loan. In this case bank A does not lose physical banknotes, and does not lose reserves held at the central bank, but they still have to record the unsecured loan. In an accounting sense, they didn't magically gain "free money" by providing a loan to their customer.
> This description of money creation contrasts with the notion that banks can only lend out pre-existing money, outlined in the previous section. Bank deposits are simply a record of how much the bank itself owes its customers. So they are a liability of the bank, not an asset that could be lent out
I believe this is referring to the creation of the accounting entry. It's true in the most pedantic sense, which is incredibly misleading and unhelpful. Yes, when you type a number into a computer, you can type any number. If I were to open a business where I operate like a bank, taking deposits from people and loaning money to people, and I were to keep a ledger of how much money each person has at their "accounts" with me, I could type any number I want in that ledger. Let's say I type in "9999999999999 dollars". Sure, why not. If your argument is that one can type in any number they want on a computer, then that's true, but it's not a useful argument to make.
Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air? Sure it can type "9999999999999 dollars" on a computer, but that wouldn't be "real money" in any practical sense, because you wouldn't be able to exchange it for goods and services.
Follow-up question: if you genuinely believe this to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened?
The contradiction seems fundamental. You're suggesting existing deposits facilitate the creation of loans. The entire BoE article is a repeated attempt at showing how loans create deposits.
> Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air? Sure it can type "9999999999999 dollars" on a computer, but that wouldn't be "real money" in any practical sense, because you wouldn't be able to exchange it for goods and services.
That's ... exactly how it works. If the bank believes you are good for 9999999999999 dollars over the term of the loan, they put +x in your demand deposit account, and -x in your loan account (and from bank's view those are respectively the bank's own liabilities and assets).
You can then go and send that money (demand deposit) somewhere else to buy a house or whatever (goods and services). Bank A and bank B both have banking licences, which means they mutually trust using each other's customer demand deposit accounts as 'money'.
You mentioned you wouldn't be able to exchange that for goods and services - but that's exactly what happens. You then need to find those dollars and pay back the loan eventually from a job or whatever, or else you go bankrupt.
If you would like to turn that demand deposit into hard cash to keep under the mattress, your commercial bank will send your demand deposit to the commercial bank's account with the central bank, and the central bank will truck over some cash in return.
I know you get this since you write it as IOUs in the article. What I'm trying to get across is that nothing has to precede the creation of the IOU, whereas I think you say an initial deposit of government-issued central bank money (cash) is required.
> Follow-up question: if you genuinely believe this to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened?
Try it :) I think odds are you end up in jail.
And if a bank (or crypto exchange!) is in the business of writing crap to counterparties who can't pay them back, the bank probably goes out of business once everyone realizes the bank assets (loans) are garbage.
Trying to get a loan without intention of paying it back is bank fraud. It happens and occasionally for very large sums; https://www.afr.com/companies/financial-services/papas-mazco...
Further, regulators like to see banks hold capital against their assets to make sure they can fill the gap when some loans inevitably go bad. That capital could be retained earnings, shareholder capital, etc etc. It just doesn't have to come from an initial deposit.
I'll start responding to this because I think it's a point where we agree: yes, you can type any number in a computer and call it "money". Yes, I agree nothing has to precede the creation of numbers on a computer. However, in order for those numbers to actually "be money" in a practical sense where someone could exchange them to goods and services, the bank has to actually own some real money. If the bank literally has 0 reserves, then the money that it creates on the computer will not be in practice exchangeable to goods and services.
> > Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air?
> That's ... exactly how it works. [...] You can then go and send that money (demand deposit) somewhere else to buy a house or whatever (goods and services). Bank A and bank B both have banking licences, which means they mutually trust using each other's customer demand deposit accounts as 'money'.
If bank A tries to send 9999999999999 dollars to bank B, bank B doesn't simply trust that bank A is good for it. The transfer would not actually go through in the real world. Please produce a single example where this has happened: a single example where a bank had 0 reserves, created >9999999999999 USD out of thin air, and then somebody exchanged that money to goods and services. A single example is enough to prove me wrong. What you're claiming to be possible has never actually happened.
> If you would like to turn that demand deposit into hard cash to keep under the mattress, your commercial bank will send your demand deposit to the commercial bank's account with the central bank, and the central bank will truck over some cash in return.
So in this scenario we have a bank that has 0 reserves in the central bank, and the bank then goes to the central bank and says "I would like to withdraw 9999999999999 dollars in cash, please". This scenario is comparable to you opening up a checking account at a (regular) bank with 0 dollars in it and then walking into the bank saying "I would like to withdraw 9999999999999 dollars in cash, please". The bank would tell you "sorry, your account has 0 dollars, which is less than the 9999999999999 you are trying to withdraw, so we can't make the withdrawal". This is exactly what the central bank would respond to a bank that is holding 0 dollars in reserves at the central bank while trying to withdraw an amount greater than 0 dollars. Even if the bank was asking the central bank to produce $5, the central bank would say no, $5 > $0, you can't withdraw money you don't have.
Edit: to add clarity, I'm saying that this specific part of your claims is wrong: "your commercial bank will send your demand deposit to the commercial bank's account with the central bank". To the extent that the commercial bank is able to "create money out of thin air", it isn't the type of money that the central bank would accept as a deposit. You can fact check this.
> Trying to get a loan without intention of paying it back is bank fraud. It happens and occasionally for very large sums [...]
That's completely unrelated to this discussion. Yes, a bank can loan out money (money that it has) to a fraudster who has no intention of paying back the loan. The question we have here is, can a bank that has 0 money, can it magically create 9999999999999 dollars out of thin air and loan it out. That's unrelated to whether the loanee will eventually pay it back or not.
> The contradiction seems fundamental. You're suggesting existing deposits facilitate the creation of loans. The entire BoE article is a repeated attempt at showing how loans create deposits.
You present these things as mutually exclusive - they're not. Existing deposits facilitate the creation of loans, and the creation of loans expands the amount of existing deposits. Both of these things can be true at the same time, and they are true at the same time.
The withdrawl of money from a bank as notes/coins is a different operation than the origination of a loan. When banks originate a loan, the first thing that happens is that you see the balance appear in your account. You can then choose to withdraw that in cash.
> If I take a loan out of a bank in the form of electronic transfer to another bank, then usually one of 2 things happen:
Again, the origination of the loan and the transfer of settlement funds to another bank are separate operations. You cannot take out a loan in the form of electronic transfer to another bank.
> 1. The receiving bank requires ... they didn't magically gain "free money" by providing a loan to their customer.
Agreed, so what you've described so far is that banks need reserve balances sufficient to cover interbank settlements and cash withdrawls, and banks do not receive money by originating loans.
What they do when they originate loans is provide an asset to the customer (a demand deposit balance) in exchange for a liability of the customer (the loan agreement).
> I believe this is referring to the creation of the accounting entry
All "money" is simply an accounting entry.
> It's true in the most pedantic sense, which is incredibly misleading and unhelpful.
It's true in every sense, and is very helpful if you want to understand how banking and money work.
> Yes, when you type a number into a computer, you can type any number. If I were to open a business where I operate like a bank, taking deposits from people and loaning money to people
You haven't described the mechanism by which a bank can use deposits it has taken from customers to originate loans to other customers.
> and I were to keep a ledger of how much money each person has at their "accounts" with me, I could type any number I want in that ledger. Let's say I type in "9999999999999 dollars". Sure, why not. If your argument is that one can type in any number they want on a computer, then that's true, but it's not a useful argument to make.
Yes it is, because it's an accurate description of how banks originate loans.
> Do you think that a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air? Sure it can type "9999999999999 dollars" on a computer, but that wouldn't be "real money" in any practical sense, because you wouldn't be able to exchange it for goods and services.
Deposits created by a bank are good for all transactions within that bank. If all people were customers of the same bank (some sort of "central bank" if you will) and all currency were digital, then the bank could indeed create infinity dollars without liquidity risk, because all transactions would occur within their own accounting system with no external settlements.
> Follow-up question: if you genuinely believe this to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened?
The reason it has never happened in precisely the way you outline above is quite simply regulation. But also, it does happen, fraud in loan origination isn't that rare. Here's a recent example of a banker originating $16m in loans to Paul Manafort in exchange for a shot at working with Trump:
https://www.cnbc.com/2019/05/23/banker-indicted-for-loaning-...
But let's imagine that a bank did attempt to operate without any settlement balances. What would that look like?
It would originate loans by adding $9,999,999,999 to someone's account, and since they're not the only bank, the person has the choice to spend that money wherever they please and some of that money will end up being withdrawn as notes/coins or transferred to another bank.
The originator of the loan would then have to borrow settlement balances sufficient to cover withdrawals in notes/coins and cover interbank settlements. As a result it would be paying interest, which puts up its costs. Now let's imagine all banks did that, starting from $0 on day one.
What happens? The central bank, which is the lender of last resort, lends money to all those banks and they have to pay interest on it, but in lending the money, the central bank has created reserve balances. Now, the bank that is most successful at attracting people to create accounts receives more reserve balances than the others, which they can use to pay back the central bank, thus reducing their costs. If they continue being more successful, they will eventually not only have paid back the central bank, but will have excess reserves which they can use to satisfy future interbank settlements and cash withdrawls and they may even have so much in reserve that they can compete with the central bank to lend those reserves to other banks (at an interest rate just below what the central bank charges -- ringing any bells?) which makes them EVEN MORE money.
So the reason banks like to attract deposits is that it makes them more profitable.
Of course, there are also regulations and capital requirements that are imposed on banks, and the government also creates net financial assets in the banking sector by issuing bonds on the primary market (which is a vestigial way of overt money creation kept in place because it is convenient for a bunch of rich people to get richer, but that's another story).
But fundamentally, we could have a banking system that operates exactly as I described where ALL money creation occurred only through the origination of private credit and subsequent lending of reserve balances by the central bank. It would be a horrible economy with massive inequality and instability, but you could do it, if you so desired. The reason we regulate it is to remove some of that instability (removing the inequality, we're still working on!)
Correct. The first operation ("writing a number on a computer") can occur regardless of how much money the bank has. But if operation 2 is not possible, then the number that was created in operation 1 is de facto not money. Remember, we're arguing whether the bank needs to have physical banknotes and central bank reserves in order to "create money" when originating a loan. We're not arguing about whether the bank can type in random numbers on a computer - on that point we are already in agreement. The disagreement concerns whether/when those numbers can be considered to be "money".
> All "money" is simply an accounting entry.
Excluding physical banknotes, yes that is true, but you are implying the reverse of that statement to be true and it's not true at all: all accounting entries are not "money". If I open an excel sheet right now and type in "99999999", that is an accounting entry, but it is not money. Likewise, if a troubled bank has completely ran out of capital and is not supported by structures like the FDIC, and it proceeds to type in "9999999" as an accounting entry for the account balance of the chairman's wife, that is not "money". The chairman's wife will not be able to exchange it to goods and services - hence, it is not "money".
> Deposits created by a bank are good for all transactions within that bank. If all people were customers of the same bank (some sort of "central bank" if you will) and all currency were digital, then the bank could indeed create infinity dollars without liquidity risk, because all transactions would occur within their own accounting system with no external settlements.
Yes, central banks have the ability to create practically infinite amounts of real money from thin air. The argument doesn't concern the central bank's ability to create money, it concerns a commercial/retail bank's ability to create money in the process of originating loans.
> > Follow-up question: if you genuinely believe [a bank which has NO MONEY is able to (in a practical sense) create infinite money out of thin air] to be possible, then why isn't anybody doing that? Surely there are many people working at banks who would like to collude with their friends and family to create infinite money. If you believe that to be possible, why has it literally never happened?
> it does happen, fraud in loan origination isn't that rare. Here's a recent example of a banker originating $16m in loans to Paul Manafort in exchange for a shot at working with Trump:
Nope, that is not an example of a bank issuing an infinite amount of money while having literally zero money in reserves. That is an example of a bank which has >16M in reserves, then issuing loans for 16M. Nothing weird about that. Completely unrelated to what I was asking for. Show me a bank which has 0 reserves, then issues loans for billions of dollars, and then exchanges those billions to goods and services. You can't do that, because that has never happened, because it's not possible.
> But let's imagine that a bank did attempt to operate without any settlement balances. What would that look like? It would originate loans by adding $9,999,999,999 to someone's account, and since they're not the only bank, the person has the choice to spend that money wherever they please and some of that money will end up being withdrawn as notes/coins or transferred to another bank. The originator of the loan would then have to borrow settlement balances sufficient to cover withdrawals in notes/coins and cover interbank settlements. What happens? The central bank, which is the lender of last resort, lends money to all those banks and they have to pay interest on it, but in lending the money, the central bank has created reserve balances
No, the central bank would NOT provide a loan in this outrageous, obviously fraudulent instance. Again, you're claiming this to be possible, but it has never happened.
> But fundamentally, we could have a banking system that operates exactly as I described where ALL money creation occurred only through the origination of private credit and subsequent lending of reserve balances by the central bank. It would be a horrible economy with massive inequality and instability, but you could do it, if you so desired. The reason we regulate it is to remove some of that instability (removing the inequality, we're still working on!)
Now I'm confused. So the example you provided was not supposed to reflect reality? It was just a "we could in theory have a banking system like this"? Yes we could in theory, but in practice we don't. In practice normal banks need reserves in order to issue loans.
I agree that money is a very ambiguous (and probably not very helpful) term, but insofar as we can consider the M1 money supply measure to be the quantity of money available in the economy at any given point in time (which is what the BoE paper is referring to when it says "money creation"), originating loans definitely creates money[0]. When you get a loan, the money lands in your demand deposit account, it's definitely "money" according to the definition of money being used in the BoE paper.
>> All "money" is simply an accounting entry. > Excluding physical banknotes, yes that is true
Minor point but I would include notes and coins as "entries" in the same accounting system, in the same way as receipts, invoices or cheques. Not really critical to the conversation though ...
> but you are implying the reverse of that statement to be true and it's not true at all: all accounting entries are not "money". If I open an excel sheet right now and type in "99999999", that is an accounting entry, but it is not money.
Well, they sort of are. I mean, any liability denominated in the state's unit of account is, in some way, money. This is the crux of Minsky's "Heirarchy of Money"[0]
For Minsky, there is nothing special or elusive about money. In fact, he says, "everyone can create money; the problem is to get it accepted" (1986, p. 228)[1]
> Likewise, if a troubled bank has completely ran out of capital and is not supported by structures like the FDIC, and it proceeds to type in "9999999" as an accounting entry for the account balance of the chairman's wife, that is not "money". The chairman's wife will not be able to exchange it to goods and services - hence, it is not "money".
Right, but banks are supported by those structures. That's what makes them banks. As we saw in 2008, the government went to extroardinary lengths to insure that even the most recklessly issued loans didn't result in banks becoming insolvent. Bill Black is definitely worth a listen to on this topic[2].
>> Follow-up question: ... Nope, that is not an example of a bank issuing an infinite amount of money while having literally zero money in reserves. That is an example of a bank which has >16M in reserves, then issuing loans for 16M. Nothing weird about that
Well, we don't really know what the reserve position of that bank was, and $16m was probably a relatively small amount relative to the overall capital position, but this is definitely an example of someone going outside of what would be considered normally regulated procedure (regulation being the only thing that separates "good" loans from "bad" loans) for personal gain which is why I thought it was relevant to your point.
>> But let's imagine that a bank did attempt to operate without any settlement balances ... No, the central bank would NOT provide a loan in this outrageous, obviously fraudulent instance. Again, you're claiming this to be possible, but it has never happened.
When a bank receives its license, it can immediately start both taking deposits and issuing loans. Banks lend money to each other all the time, and most loans from the central bank are against collateral such as government securities and other very liquid forms of capital[3] however the central bank will, under some circumstances, lend money to banks against the assets they have themselves created through loan origination[4].
So while my little thought experiment about "starting from $0" is not quite accurate, it's not that far off!
>> But fundamentally, we could have a banking system that operates exactly as I described ... > So the example you provided was not supposed to reflect reality? It was just a "we could in theory have a banking system like this"? Yes we could in theory, but in practice we don't. In practice normal banks need reserves in order to issue loans.
My example was intended to show you how banks hold reserves in order to make their loan operations more profitable. The point was that even if you started off with all banks at $0 in reserves and funded the entire operation using only central bank loans, you would end up with a system similar to what we have now where the primary reason banks need reserves is to increase profitability. It may be the case that a bank that had no reserves at all would go bust because it wouldn't be able to compete with other banks, but it's certainly not the case that they all need to attract reserve deposits equal to the amount of loans they want to originate. They only need sufficient reserves to satisfy net flows of funds and, because they're banks, they have access to the types of credit facilities they need in order to satisfy short term liquidity shortfalls.
In fact, there was a spectacular neobanking collapse in Australia recently:
"Xinja failed in part because it started taking deposits before it made loans. That meant it had to pay interest to customers before it was generating income."[5]
Banks don't need a certain level of reserves or even highly liquid government securities to satisfy capital adequacy requirements. If you look at the documentation around commencement of a bank and capital adequacy standards[6][7] you'll find a story that is much more complicated than simply "reserve funds". They look at all sorts of financial instruments able to "absorb losses" or "commitment of funds". These mean that you can have investors who have pledged to step in to satisfy liquidity requirements or provide collateral/security for loans from other banks and/or the central bank.
There is a difference between the "capital adequacy" requirements placed on banks and the imagined "reserve requirement". Bill Mitchell sets it out clearly:
"To understand why reserve requirements do no constrain lending you have to understand how a bank operates. Banks seek to attract credit-worthy customers to which they can loan funds to and thereby make profit. What constitutes credit-worthiness varies over the business cycle and so lending standards become more lax at boom times as banks chase market share (this is one of Minsky’s drivers).
These loans are made independent of the banks’ reserve positions. Depending on the way the central bank accounts for commercial bank reserves, the latter will then seek funds to ensure they have the required reserves in the relevant accounting period. They can borrow from each other in the interbank market but if the system overall is short of reserves these horizontal transactions will not add the required reserves.
In these cases, the bank will sell bonds back to the central bank or borrow outright through the device called the “discount window”. There is typically a penalty for using this source of funds. At the individual bank level, certainly the “price of reserves” may play some role in the credit department’s decision to loan funds. But the reserve position per se will not matter. So as long as the margin between the return on the loan and the rate they would have to borrow from the central bank through the discount window is sufficient, the bank will lend.
So the idea that reserve balances are required initially to “finance” bank balance sheet expansion via rising excess reserves is inapplicable. A bank’s ability to expand its balance sheet is not constrained by the quantity of reserves it holds or any fractional reserve requirements. The bank expands its balance sheet by lending. Loans create deposits which are then backed by reserves after the fact. The process of extending loans (credit) which creates new bank liabilities is unrelated to the reserve position of the bank."[8]
In other words, banks issue as much credit as they can to as many credit worthy customers as they can find, and separately look for ways to satisfy any regulatory requirements. It is the case that regulatory requirements will inform lending criteria but it's nowhere near as simple as "x% of reserves".
[0] https://fred.stlouisfed.org/series/M1SL
[1] https://www.levyinstitute.org/publications/the-hierarchy-of-...
[2] https://www.youtube.com/watch?v=WQBIfSWDx9s
[3] https://www.rba.gov.au/publications/bulletin/2017/dec/2.html
[4] https://www.rba.gov.au/publications/bulletin/2020/sep/pdf/ma...
[5] https://www.afr.com/companies/financial-services/xinja-s-col...
[6] https://www.apra.gov.au/sites/default/files/2021-08/Guidelin...
[7] https://www.apra.gov.au/sites/default/files/2021-08/APS%2011...
It sounds like we are mostly in agreement, but we disagree on:
1. When something should or shouldn't be called "money"
2. Will the bank - in practice - lose its money-printing ability if it behaves extremely bad
Regarding point 1, I guess we're going to just agree to disagree.
Regarding point 2, it's up to you to provide a single counter-example and prove me wrong. Theoretical arguments won't cut it here.
I'll answer some individual points below:
> I agree that money is a very ambiguous (and probably not very helpful) term, but insofar as we can consider the M1 money supply measure to be the quantity of money available in the economy at any given point in time (which is what the BoE paper is referring to when it says "money creation"), originating loans definitely creates money[0]. When you get a loan, the money lands in your demand deposit account, it's definitely "money" according to the definition of money being used in the BoE paper.
The BoE paper wasn't describing the case where a troubled bank with 0 capital makes up infinite amount of demand deposits. If such a case were to happen in practice, automated systems might initially report the amount of circulating money as infinite, but very soon someone would "correct the error".
> When a bank receives its license, it can immediately start both taking deposits and issuing loans.
This might be as it is written in Australian law, but in practice no bank is going to receive a license if it has 0 capital when starting up. Sure, it doesn't need deposits to start lending, but it still needs reserves.
> Banks lend money to each other all the time, and most loans from the central bank are against collateral such as government securities and other very liquid forms of capital[3] however the central bank will, under some circumstances, lend money to banks against the assets they have themselves created through loan origination[4]. So while my little thought experiment about "starting from $0" is not quite accurate, it's not that far off!
Well, I'd say it's far off. We're comparing "normal bank issuing loans more or less prudently" to "bank with 0 capital issuing infinite money to the chairman's wife". I would argue that your typical central bank is willing to bail out most cases in the former category, while refusing to bail out any case in the latter category.
> It may be the case that a bank that had no reserves at all would go bust because it wouldn't be able to compete with other banks, but it's certainly not the case that they all need to attract reserve deposits equal to the amount of loans they want to originate.
I'm obviously not claiming that banks need reserve deposits equal to the amount of loans they originate. I'm saying that banks need some deposits to issue loans, and I'm saying that any one individual loan is never going to be larger than the amount of reserves held by the bank. The sum of all loans might be larger than the amount of reserves held, but no single individual loan is going to be.
> They only need sufficient reserves to satisfy net flows of funds and, because they're banks, they have access to the types of credit facilities they need in order to satisfy short term liquidity shortfalls.
If a bank issues a huge loan that the customer intends to withdraw from the bank, that can cause a short term liquidity shortfall. So if you're saying the bank needs sufficient reserves to cover for potential short term liquidity shortfalls, then I suppose we are in agreement over the main question in this debate.
> loans are made independent of the banks’ reserve positions [...] Loans create deposits which are then backed by reserves after the fact. The process of extending loans (credit) which creates new bank liabilities is unrelated to the reserve position of the bank."
I'd be to happy to accept a single counter-example where a bank with 0 reserves issues >999999999 dollars to a family friend who then exchanges it to goods and services. Just a single example of this, and I will say I was wrong. Without a single documented case of this happening, you are essentially claiming "this could happen in theory". That's different from "this is how the world actually is today". Many things could theoretically happen in the world, but they don't, and that's not how to world is. In practice banks are constrained in their loan-making by their reserves, even if you have 9 research papers that claim otherwise "in theory".
I actually agree with you really, I think the term money is terrible and leads to all sorts of misunderstandings about how the world works. But in the sense of the word being used in that BoE paper, bank loans create "money" as in "money supply" as it is measured in official documents.
> 2. Will the bank - in practice - lose its money-printing ability if it behaves extremely bad
I absolutely agree that bad behaviour will (in an ideal world!) lead to the loss of a banking license (although recent events point to the contrary, "To Big To Fail" and all that -- I think that banks should have gone bankrupt and people should have gone to jail after 2008!)
But, with regulation as it stands currently, not having enough reserves to remain liquid prior to originating a loan isn't bad behaviour. In some cases banks can have a negative balance as long as it's not negative for a sustained period of time (regulations differ between jurisdictions). Capital adequacy is not the same as a reserve ratio!
> If a bank issues a huge loan that the customer intends to withdraw from the bank, that can cause a short term liquidity shortfall. So if you're saying the bank needs sufficient reserves to cover for potential short term liquidity shortfalls, then I suppose we are in agreement over the main question in this debate.
I think the key here is the sequence of events, which is subtle but crucial.
Banks don't first take deposits equal to the amount of loans they wish to originate, and then subsequently go looking for people to whom they will originate loans with those reserves as a guarantee of their ability to ensure liquidity to satisfy net flows of funds.
They originate the loans and then separately go looking for whatever funds they need to satisfy their liquidity.
Capital requirements are far more complicated than simply having a reserve ratio. They can be things like commitments of funds subordinated to demand deposit liabilities. In other words capital can be a potential source of liquidity, rather than actual reserves sitting in your account.
They also borrow from each other and from the central bank, including with self securitisation.
> I'd be to happy to accept a single counter-example where a bank with 0 reserves issues >999999999 dollars to a family friend who then exchanges it to goods and services
It doesn't have to be fraudulent in order to fit what the BoE is saying. It just needs to be the case that banks aren't constrained by their deposits, but rather their capital which can take many forms. Reserves make their operations more profitable, and if they're unprofitable enough for long enough, they'll go bust. But the statement "banks lend out reserves" is demonstrably wrong.
> In practice banks are constrained in their loan-making by their reserves, even if you have 9 research papers that claim otherwise "in theory".
I've provided reference documentation from the RBA (that's Australia's central bank) and APRA (Australia's financial regulator), and the original paper is a document produced by BoE which is the UKs central bank, so I think this is a little more than a purely theoretical argument!
I've also discussed this personally with Sean Carmody[0] who works for APRA and has a long history of working in banking with extensive experience particularly in liquidity risk management.
I'm not making it up!
EDIT: Also if you're interested, this whole lecture series is very good (gotta skip over the start with the host economist talking he rambles on a bit) but in particular lectures 6&7 address banking structure and regulation based on the work of Minksy https://www.youtube.com/playlist?list=PLnw-449iRxO-BbfN55FdO...
It is indeed wrong, but nobody here has made such a statement. Saying "banks lend out reserves" implies that when a bank issues a loan worth $X, their reserves are immediately reduced by $X. I've been pretty clear in my statements that their reserves are not reduced until the customer withdraws $X to another bank (which does not always happen, and even when it does happen, other customers from other banks transfer funds back into this bank, so the net flow is not always negative as multiple banks keep issuing loans and money is shuffled between banks).
> banks aren't constrained by their deposits, but rather their capital which can take many forms
Sure! I like this way of putting it.
Now, a bank which has a high amount of capital can in practice issue more loans than a bank which has a low amount of capital. And one way of increasing the bank's capital (and thus improving the bank's ability to issue loans) is increasing the bank's reserves. So there's some kind of positive correlation between a bank's reserves and its ability to issue loans, right? You mentioned yourself that a bank has to have sufficient capital to survive short term liquidity events, and issuing a large amount of loans increases the probability of such events.
> I've provided reference documentation from the RBA (that's Australia's central bank) and APRA (Australia's financial regulator), and the original paper is a document produced by BoE which is the UKs central bank, so I think this is a little more than a purely theoretical argument!
The sources you've provided describe the "general case" of banks making loans as part of normal business proceedings. The documents do not describe the extreme case of a bank issuing infinite money to the chairman's wife. I don't believe that the writers had this extreme case in mind at all when they were writing these papers. You're making the argument that the same mechanisms that enable the general case would equally apply to the extreme case. I don't believe that, and I don't believe all of the writers of those papers would agree with you either. Even if the writers are sometimes using inappropriately strong expressions like "there is no relationship between customer deposits and loan issuance", I don't believe they mean that literally (and if they do mean that literally, then I'm going to argue that the papers are wrong).
Let's go back to the concrete example: A bank is known to have lost ALL of its capital and is known to have billions in liabilities that it will never be able to pay off. The bank then issues a $10B loan to the chairman's wife. The chairman's wife then exchanges that $10B to physical yachts and aeroplanes. You believe that this can happen in practice, because you believe that the central bank would provide the reserves needed to settle the transfers, even though the central bank is aware that the bank is acting with malice and committing fraud. You believe that this behavior might "lead to the loss of a banking license", but you don't believe it might prevent yacht-buying and aeroplane-buying before the loss of banking license occurs? If I understood your position correctly, then we disagree here, and I'd be happy to change my position when a single counter-example is presented. If something like this has never happened in history, then I don't believe it can realistically happen in the future either.
The reason why I'm bringing up this extreme case is to demonstrate that clearly there is some connection between the bank's... I'm going to say capital... and its ability to issue loans. This connection also exists in less extreme cases, but it's easier for me to demonstrate with this extreme example.
Really? The very first comment I replied to was:
"banks at least tell you they are loaning your deposits out"
My response:
"Side not but that’s not really how banking works. Banks create deposits when they originate loans and separately look for the assets they need in order to satisfy any regulatory requirements and net flows of funds for inter bank settlements."
Your initial response:
"No, when you take a loan out of a bank, the bank doesn't "create deposits" that it loans to you. The bank loans you existing deposits"
Are you saying there's a distinction between "banks loan you existing deposits" and "banks lend out reserves"? They seem to be the same statement to me ...
> Now, a bank which has a high amount of capital can in practice issue more loans than a bank which has a low amount of capital. And one way of increasing the bank's capital (and thus improving the bank's ability to issue loans) is increasing the bank's reserves
Yeah that's one way they can do it. Those reserves would then almost always be swapped for bonds unless there's more money to be made by loaning them to other banks (which is how the central bank sets and defends the interest rate).
> So there's some kind of positive correlation between a bank's reserves and its ability to issue loans, right? You mentioned yourself that a bank has to have sufficient capital to survive short term liquidity events, and issuing a large amount of loans increases the probability of such events.
You could, if you wanted to, have a bank that capitalised entirely with reserves, but it's way more profitable to attract reserves, lend them out to other banks who have attracted less reserves, and buy bonds with said reserves. You can use the loans you made yesterday to another bank as collateral to borrow at the discount window, for example, if you find yourself in your own liquidity crunch.
So I'd say a more accurate statement is that there is a positive correlation between a bank's ability to attract reserve deposits and its profitability, both due to additional loan origination capacity and due to low capital costs. But reserves are only one piece of the puzzle.
I would say that reserves within a bank's capital mix are similar to tyres and car safety. Having bald tyres is really unsafe, and having better tyres improves your car's safety, but there are tonnes of other ways to drive safely and there's a point at which you're over spending on tyres that won't make any difference to the overall safety of the car (don't you just love car analogies?)
> The sources you've provided describe the "general case" of banks making loans as part of normal business proceedings.
Yes agreed.
> You're making the argument that the same mechanisms that enable the general case would equally apply to the extreme case.
Not really, the part where I used "starting from scratch" as an example was to highlight that reserves increase profitability of a bank and that while, due to regulation, banks can't just start with "nothing" (they need some way to satisfy their liqudity requirements, aka capital), but the system we end up with a little while after "starting from scratch" is very similar to what we have now. The crux of the matter is that reserves increase profitability. It is almost certainly the case that a bank that always has to borrow to satisfy all liquidity requirements will go broke, so regulators don't let that happen, but also a bank which over capitlises reserves relative to loan origination (Xinja being the extreme example of that) will also fail.
The genesis of this thread was the notion that banks "lend out deposits", that's what I'm arguing against.
> but you don't believe it might prevent yacht-buying and aeroplane-buying before the loss of banking license occurs?
Well, actually probably not! Like, they couldn't do it twice, but banks are allowed to have negative reserve balances for a time. If they had been found to be fraudulent then they should go to jail (would they though?) but on the actual day that this happened, the yacht transaction would probably actually succeed. Of course, if the owner of the yacht could be traced back to the fraud committed as a willing participant then that yacht could well be siezed as part of the estate and so on, proceeds of crime and whatnot.
But if some dude really flipped and just typed in the numbers, they could do it, but it would wind up very quickly.
However there are not-too-dissimilar tactics used in banks such as appraisal fraud and liars loans. If you listen to Bill Black's recipe for control fraud it's more or less what you're describing[0], just a little slower and a little more "book cookey".
His book "The Best Way to Rob a Bank is to Own One" has many examples of control fraud. Sure it's a little more deceptive than just opening a spreadsheet and typing in the numbers, but they're totally faking capital levels in order to obtain liquidity to satisfy net flows of funds, resulting in tremendous short term profits and eventual collapse.
> The reason why I'm bringing up this extreme case is to demonstrate that clearly there is some connection between the bank's... I'm going to say capital... and its ability to issue loans. This connection also exists in less extreme cases, but it's easier for me to demonstrate with this extreme example.
Right so what you could say is there's definitely a "credit limit". If you typed in $9,999,999,999,999 into the spreadsheet and then tried to spend it all externally (meaning that none of the people you were buying from had accounts at the same bank, OR you tried to withdraw all that money as notes and coins) then that would set off some sort of warning: either you'd be trying to borrow too much too quickly from too many people, or your account would be so negative overnight that the Fed would give you a call and be like "ummmm ... no". This is pretty similar to what things might look like if you or I tried to spend too much too quickly on our AMEX card.
But "having reserve deposits" is not a pre-requisite for originating a loan. Banks can (and do!) get away with somewhat subtler forms of control fraud over a period of time that is not really that long (2 - 3 years, say) during which time executives can stash an enormous amount of cash and just leave the mess for the regulators to clean up.
There certainly are people who advocate for 100% reserve banking and an end to private credit such as Positive Money[1] but their policies are not very practical and (as per the lecture series I linked to earlier) some private credit creation is probably a good thing to have in an economy. The problem is how dominant the financial system itself (which is, ultimately, just a record keeping system) has become in terms of GDP. We need to make finance boring again!
[0] https://www.youtube.com/watch?v=ClfBxWPkBKU
[1] https://positivemoney.org it's worth noting that while I do, in general, not agree with much of what PM has to say my understanding is that they were actually quite instrumental in lobbying to get the BoE to produce the paper to which I originally linked. In their case they were motivated to "expose the reality" and shock everyone into demanding 100% reserve banking but I don't think anyone was actually all that shocked by it, except David Graeber who wrote about it https://www.theguardian.com/commentisfree/2014/mar/18/truth-... and, as luck would have it, was where I first learned about MMT in the comments section when someone linked to this youtube video https://www.youtube.com/watch?v=bTZGU9s0idM
> Really? The very first comment I replied to was: "banks at least tell you they are loaning your deposits out"
Hmmh, you're right, that claim has been made. Also I acknowledge that I have phrased some sentences ambiguously. Specifically this one that you dug up:
> > "No, when you take a loan out of a bank, the bank doesn't "create deposits" that it loans to you. The bank loans you existing deposits"
> Are you saying there's a distinction between "banks loan you existing deposits" and "banks lend out reserves"? They seem to be the same statement to me ...
No, I wasn't trying to make that distinction in this context (in another context we were discussing a hypothetical of a newly-founded bank which might have a lot of reserves even before it has depositors, and in that context that distinction is meaningful).
I was making a distinction between the act of writing numbers on a computer, and the act of taking money out of a bank. Note that my sentence began with these words: "when you take a loan out of a bank". When I say "out", I'm referring to a cash withdrawal or bank transfer to another bank. When you withdraw your loan out of the bank, the bank needs to spend some reserves in order to settle the transfer.
You made a point that sometimes the bank acquires those reserves AFTER it issues the loan, and I take your point. You also made a point that the bank might fraudulently acquire those reserves, I accept that as well. My point wasn't really focused on when the reserves need to be available for the bank, or how the reserves were originated (deposits vs fraud vs selling off assets vs ...). My point was that when you take money out of a bank, the bank can't fake it. It needs to have some stuff that it can't make up out of thin air, and after you take that stuff, the bank no longer has that stuff.
> You could, if you wanted to, have a bank that capitalised entirely with reserves, but it's way more profitable to attract reserves, lend them out to other banks who have attracted less reserves, and buy bonds with said reserves. You can use the loans you made yesterday to another bank as collateral to borrow at the discount window, for example, if you find yourself in your own liquidity crunch.
I take your point that a bank's capital mix can consist of many different kinds of assets and reserves play only a small part. We can continue this by discussing the relationship between the bank's capital and its ability to issue loans, since that is a more accurate way of describing things.
> Right so what you could say is there's definitely a "credit limit" [...] Fed would give you a call and be like "ummmm ... no" [...] But "having reserve deposits" is not a pre-requisite for originating a loan. Banks can (and do!) get away with somewhat subtler forms of control fraud over a period of time that is not really that long (2 - 3 years, say) during which time executives can stash an enormous amount of cash and just leave the mess for the regulators to clean up.
Awesome. It sounds like we agree.
Listen, I've enjoyed this discussion so far, and I learned some things I didn't know beforehand, but it's time to call it a day. If you feel that we still disagree on some substantial points, I'd like to hear you hash it out in the form of "this is my opinion, and here is how that's different from your opinion" (articulate not only your own point of view, but also the opposing point of view, and how it is different from yours). I suspect that we're actually in agreement of all substantial points, while we might somewhat disagree on minor things like definitions for words or how easy it is to swap fake money to yachts.
Agreed.
And yes, very enjoyable discussion. Peace out!
- Bank starts with $0 capitalisation or deposits - Customer goes to bank and asks for $1 loan - Bank believes customer is creditworthy and says yep - Bank creates two accounts for customer, loan account and deposit account. Loan account is -$1 and deposit account is $1 - customer transfers $1 from their deposit account to someone else's account at a different bank in exchange for goods/services - customer account at the bank is now loan account -$1 and deposit account $0 - Customer eventually needs a way to get $1 back from somewhere else to pay the loan back, else face bankruptcy proceedings etc etc
Commercial banks all agree with each other that they accept each other's demand deposit accounts as a form of money.
No bank starts out with $0 capitalisation and then makes up money along the way. This has never happened.
> Commercial banks all agree with each other that they accept each other's demand deposit accounts as a form of money.
This is not true either. If a bank is known to have no capital, other banks will refuse to accept transfers from it without immediate settlement.
I mean, Madoff got 150 years and died in prison after about 10 years. While I don't see the FTX fraud in the same league (Madoff went to great lengths, for example, to generate phony statements over many years) it still sounds like fraud to the tune of billions.
>tell people their money is safe then basically steal it by giving it to your friend
SBF needs to be thrown in jail, he won't though, for obvious reasons.
He's the second biggest donor to the Democratic Party. He has a lot of political cover.
Seriously.
In modern bank operations, incoming fund transfers (which involve deposits) do provide liquidity that help allow the bank to be able to lend, but banks are actually levering up capital (paid-up share capital, retained earnings, etc.) to lend. The primary limit on how much they are able to lend (by Basel III regulations) is a multiple of this capital, nothing to do with the amount of deposits. Delinquent loans are therefore a loss recorded against this capital, which is shareholder equity - not customer deposits. The real problem for the bank is if more loans become delinquent than the capital they have, and they can't sell collateral for enough to cover it. Then they become insolvent. The Basel III rules increased the capital adequacy limits to try and lower the chances of banks failing after what happened in the GFC.
Bank runs are a liquidity problem because the bank's assets aren't all liquid enough to transfer out all the deposits the bank holds, but they can borrow bank reserves from other banks or the central bank in an emergency.
If they were not lent out, where did they go?
If some people don’t pay back their loans, then that loan gets written down, so the bank has fewer assets than before. A certain level of default is expected and baked into their operations.
If many people don’t pay back their loans, the bank no longer as as many assets as it expected. But it still has as many liabilities. The value of the bank will decrease, potentially to nothing.
As the grandparent notes, banks are subject to special requirements in law that define how much capital the bank needs to have to remain solvent. If the bank is no longer solvent then it can’t cover the liabilities (deposits).
In that case either the government will step in to bail the bank out, or the bank will collapse and the depositors will have to be paid from a deposit insurance scheme.
Such is what I have pieced together.
When a bank pays a loan out to its lender, it must have capital (valuable assets actually owned by the bank) to back it up. But these "assets" are not always easy or possible to liquidate, or turn into cash. This is where the other person's deposit comes it. They use the deposits for "cash" instead of liquidating the assets they own in order to pay out the loan. This is what is meant by providing liquidity.
Technically, the bank's own assets can be considered to be backing the loan, but the long-and-short of it is that YES, bank's do use the cash from their deposits to make loans, and that is why there is no money available when the bank run happens.
Disclaimer: this is my interpretation of what others on this thread are saying. I don't actually know if this is right or wrong
Because unlike in engineering, in finance, conservation of "energy"/"money" allows arbitrary creation of negative money to cancel out arbitrary created positive money.
We pretend money is a real thing you can have, but it's actually more like one of the two opposite poles of magnet.
It's a game with made up rules, not a natural consistent system.
The problem essentially is that the money can be withdrawn all at the same time but the obligations cannot.
The bank originates a mortgage to someone. It uses (some of) your $10k to give cash to the customer getting the mortgage, and the customer then uses that cash to buy the house.
For whatever reason, a bank run happens, i.e. everyone comes to make a withdrawal all at once
You try to withdraw your $10,000. The problem is that everyone wants cash, not shares of houses, but the bank only has so much cash.
The bank is good for your $10k, but not on the timeframe you want it. The bank is _illiquid_, but _insolvent_.
The bank will try and sell it's mortgages to someone else for the money, but if it tries to do this all at once it will likely end up selling them at prices that are below par. In that case the bank might end up with less assets than liabilities; this makes the bank _insolvent_.
In a deposit insurance scheme, the government takes over the bank, pays out to customers, and services the loans. The government can do this because it can easily create liquidity. Generally in recent history the government still makes a profit when it reduces an illiquid bank
https://www.bankofengland.co.uk/knowledgebank/how-is-money-c...
This is balanced by a mix of assets, which are a whole number of things. A tiny amount of cash, a small amount of central bank reserves, some in treasuries and bonds, and the assets created by the bank loans, etc.. (When the bank creates those loans, they create new deposits and a new asset in the loan, in equal amounts. So the assets and liabilities of the bank increase but the balance is zero).
So if the bank gets in trouble, it's because some of the asset mix has declined in value (like too many people have defaulted on their loans) to the point that the assets no longer cover those liabilities.
There is no specific pile anywhere that is "my money", but if I withdraw $10k, the bank has $10k less to lend out.
Deposits are liquidity that help grease the wheels, so it’s necessary, but it’s actually more the transfers of money moving in and out that they need, not liabilities sitting on their balance sheets.
So yeah although this is still theoretical, it is indeed possible to do banking without having a single customer cash deposit.
There are non-bank lenders (and non-bank payment services companies that offer prepaid visa/mastercard products), but they ultimately are then customers of the bank and they are much more limited in what they can do that banks are. That's why it's crazy difficult to get a banking license.
Like sure, it’s loan to capital ratio that matters but as you point out:
> Bank runs are a liquidity problem because the bank's assets aren't all liquid enough to transfer out all the deposits the bank holds,
This is because in practice the money you give to a bank is lent out, even if it’s technically leverage against capital.
Because they need a liability to offset their assets? Ok wildly backwards but sure.
And wait, in your metaphor, where does the $500k asset of cash that a depositor gives a bank (which offsets that liability) go? It’s just fake in your mind?
Also, banks don't really do a lot of maturity transformation -- there are so many myths about how banks operate -- if you look at a bank's balance sheet, you will see a range of short, medium, and long term debt that is constructed to roughly match their short, medium, and long term assets.
Rather, banks make money off of spreads, because banks have lower funding costs than their customers, due to a web of in house expertise, government guarantees, access to special lending facilities and payment networks that others can't access.
If you want to really understand banks, you should stop talking about deposits, which aren't particularly important, and instead focus on mortgages, which dominate the entire financial industry. If you want to buy a house, you could try to sell a bond into the bond market. But a household will have a hard time selling a bond. So they go to a bank, which performs its own credit analysis and then gives you a loan while they sell a bond. The interest you pay to the bank is more than the interest the bank pays on the bond. Banks make money off of this spread, which is small, but it is leveraged, so the total return on capital for the bank is high.
If you don't like it, you are welcome to try to sell your own bonds for a lower rate than what the market charges the bank. Doing that will be an educational exercise that will explain how banks make money, and it has nothing to do with funny business about deposits.
Most banks basically just break even on the deposits, given the costs of owning all those branches, paying the tellers, etc. Even if they make a profit, it's a small profit, but it's a great way to upsell other financial services (mortgages, auto loans, lines of credit) that make money for the bank, as well as charging fees, etc. They certainly don't need your deposit in order lend someone else money, because they borrow from the capital markets at one rate, and lend at a higher rate.
LMFAO. I want to go to Goldman Sachs's Balance sheet and then tell me how much they have in deposits ($394 billion!!!). I want you to go to Morgan Stanley's and tell me the same ($338 billion!!!). Nearly all banks use deposits as an easy source of capital that they then invest/lend out.
You are confusing retail deposits with deposits.
Like sure, there's boutiques like Qatalyst and Allen that limit their deposit base for one reason or another, but they are marginal in scale vs. real investment banks.
>If you want to really understand banks, you should stop talking about deposits, which aren't particularly important, and instead focus on mortgages, which dominate the entire financial industry.
This is such a wild conversation! I am talking about mortgages, which are funded by deposits!
>But they don't need your deposit in order lend someone else money, because they borrow from the capital markets at one rate, and lend at a higher rate, and this has nothing to do with borrowing short term and lending long term. Rather, the primary risk for banks comes from leverage.
Yes we agree! And one form of extremely cheap borrowing is taking deposits! That's why they pay interest on it! It's borrowing! It's a liability on the balance sheet! How is this not clicking for you?!?!?!
For the second part, I agree that if you bring $500k cash to your bank and deposit it, then that asset is real and it basically goes into the bank vault. But that is not the typical case. Most deposits do not come from putting cash in the bank (after all, the amount of cash/central bank reserves is much smaller than the amount of bank deposits). Most of them are just an IOU from the bank and we use these IOUs as the most frequent form of money.
Yeah, why it's confusing to you is that you're segregating "borrowing from capital markets" from "borrowing from depositors" when they are effectively the same thing (both are interest-bearing liabilities).
>For the second part, I agree that if you bring $500k cash to your bank and deposit it, then that asset is real and it basically goes into the bank vault.
I suggest you google 'fractional reserves,' because no, the money does not go into a bank vault (though some of it does!).
> Most of them are just an IOU from the bank and we use these IOUs as the most frequent form of money.
The logical fallacy here is that you're seeing how many IOUs there are (many) and how many cash dollars there are (much fewer!) and then assume that IOUs don't have to be attached to a physical dollar but they do (keep in mind, a physical dollar could just be a line item on The Treasury's balance sheet, it doesn't have to be paper) It's just that many IOUs can be attached to the same dollar through the credit multiplier.
It's actually the other way around - trying to follow a physical dollar just makes you confused, because all the actual business of the bank is happening in accounting-land (the bank's balance sheets and electronic records of customer accounts).
But in practice when people say they 'pay cash' for something large like a house or a car, they are usually effecting a bank transfer (well, in Korea at least). I understand that under the hood in the US this is an IOU between banks, but to the depositor there is no difference whether the money is cash or bits. What matters is whether the bank has the liquidity to provide upon request.
Trust me, I get that people aren’t Fedexing cash envelopes between banks, but that doesn’t mean money is fake and banks can invent it out of think air (they can only multiply it)
And to be clear, again, you can very easily follow physical dollars at banks (otherwise imagine the fraud that could happen!), it’s just circular so multipliers get applied.
Like I get it’s complicated, but my deposit goes into a mortgage that then goes into another account, etc etc etc. that’s called the “credit multiplier” and we can definitely track it.
Things became interesting when electronic transactions came into play. Banks virtually no longer have to payout any cash when they issue a loan to a client as they now only need to change two numbers: credit their asset account, and debit loan customer's cash account. So unless there were transactions paying out to another bank, there were no cash movements. So the minimum cash the bank should keep in their operation accounts is just the difference of the transactions paying out and those receiving in.
But does that mean customers' deposits are not significant to the banks? Nope. Banks actually lend out much more than their customers' deposits. How much can they lend out is basicly the deposit amount divided by the reserve rate, e.g. 20%.
If a bank does a transfer to another bank it will have to send its reserves which means it might have to borrow reserves from another bank or sell its long term assets to get enough reserves and that long term asset might worth a lot or worth very little depending on the difference between it's locked in interest rate and the current interest rate.
This is why banks sell their treasuries to the Fed, they have a long duration asset and a short term liability, so they give it to the Fed to get a short term asset.
I don't know what SBF is doing but maturity transformation is probably the riskiest thing you can do as a bank and it is very likely to break down eventually unless you have a central bank that spreads around the risk. From a purists perspective banks should only use certificates of deposits to ensure that their liability duration is longer than their asset duration. Of course that is difficult in practice because nobody is buying CDs nowadays.
The difference between a bank run on the licensed banking system and a crypto exchange is that the licensed banking system has a lot of experience with these types of problems meanwhile in the cryptospace you ask your neighbor and hope he doesn't shrug.
"Assets = Liabilities + Equity" <-- should "L" be in here or not?
But if the liabilities are mostly deposits, then it's the deposits that allow it to be a levered business at all.
Let's imagine a simple bank where my company is the sole depositor - it deposits 100k dollars. Let's assume the bank has no other assets or liabilities - its only asset is the 100k dollars I deposited, and its only liability is the 100,000 dollars it has to pay back to me.
Alice comes in and asks for a 50k dollar loan. The bank accepts the loan, and now has another asset - the 50k dollars that Alice owes them, and a new 50k dollars liability - the deposit with Alice's money. Alice than buys an antique one of a kind Russian doll with her 50k dollars from Bob, and the bank transfers this liability to Bob's bank. Alice fails to pay back her loan, and the bank becomes the owner of the antique one of a kind Russian doll worth 50k dollars.
However, someone finds a new trove of similar dolls, and this ones becomes essentially worthless. So, now the bank's assets are in total only 50k dollars, but its liabilities are still the 100k it owes me. If I try to buy another of Bob's dolls for 80k dollars, the bank must find someone willing to lend it 30k dollars, or it can't honor the transaction, even though I had deposited 100k dollars with them: they lent out my deposit.
Of course, in practice, when Alice asked to transfer her funds to Bob's bank, the bank would have not immediately used my deposit, it would have sought to obtain credit from someone else, using some of the 150k dollars in assets it had at the time as collateral. But, if it couldn't obtain such a loan fast enough, it would have indeed used money from the deposit it had.
In the FTX International terms of service ( https://help.ftx.com/hc/article_attachments/9719619779348/FT... ) they say that users have full title, ownership and control of digital assets. They say that the assets are the property of the user, and shall not be loaned to FTX trading, shall not be treated as they belong to FTX trading, and that users control the assets in the account.
So if they did indeed loan out customer deposits, that is just straight up criminal fraud, open and shut. This isn't like some DeFi scheme where they are working around some legal loophole or in the fine print tell you that they will probably lose your money. This is just straight up illegal under the plain vanilla theft and fraud laws of any country. This isn't even a bank run (banks at least tell you they are loaning your deposits out) -- it's a run on a U-Haul self-storage where you find out that they actually sold all the furniture in your storage unit to a pawn shop.