>There is probably some value in having banks to do loan underwriting and allowing private credit creation

but why would you ever put your money in a commercial bank when you can deposit at the federal reserve with 0 risk?

Interest

I’m not an expert in the mechanics but I think there is also a way for private credit creation to run as a separate operation, similar to how loans were originated in the sub prime mortgage crisis and then immediately sold on. I’m not recommending that happen, but a similar system would allow private credit creation without the loan issuers being the primary deposit taking institution.

But yes private banks could also operate term deposits and pay interest to attract deposits to satisfy net flows of funds with other institutions.

I can't edit my above comment anymore but going back to the original lecture in which I saw this he does specifically say that loans should be held to maturity by the issuer:

https://youtu.be/gI86w6bSmS0?t=445

Presumably to avoid exactly what happened in the sub-prime mortgage crisis :)

That would be nice. Presently, most private banks pay less interest to depositors than the Fed funds overnight rate.

Presumably you would get at least T-bill equivalent interest rates in a postal saving system, but that still leaves room for higher interest alternatives.

How do you handle fraud in this setup? Lol.

The bank doesn’t need to perform those functions like debit and credit cards in this set-up. Transfer funds to a private bank for that. The public bank is just to secure deposits.

Same way as now? Eventual Consistency that the current financial industry uses.

I agree. It’s not even clear that banks need customer deposits to create credit and loans anyway [1]. Just let them continue with their commercial credit/loan operations, and provide a postal savings system for zero-risk savings for the public. Seems like a much less calamity-prone system.

[1]:https://www.youtube.com/watch?v=3N7oD5zrBnc

If basic customers could be served by a federal deposit system and more "unique" customers might look for private options that cater to their needs (basically all of SVB's customers), nothing that played out in SVB's collapse would have changed.

Probably true for SVB, but still useful for the banking system overall.

You reckon they would have been holding cash for payroll in SVB if they could have an account directly with the fed instead?

Consider the reasons why most of SVB's clients chose SVB instead of a larger, more traditional bank. The traditional banks work very slowly, are hyper-cautious with/outright deny businesses they don't understand, and if a startup did manage to get an account, its transaction maximums would be extremely limited relative to its growth. Now imagine the government is the custodian, and those problems presumably become 10x worse.

I looked up "why would a startup choose svb" and found that the reasons are those which could be fulfilled in a myriad ways:

https://au.finance.yahoo.com/news/silicon-valley-bank-served...

There was nothing especially "startuppy" about their traditional banking services.

Yep, precisely, Wray says as much in this lecture:

https://youtu.be/gI86w6bSmS0?t=445

Banks use some of those deposits to make loans to private parties. This is, on the whole, beneficial to society so we want it to continue.

You do not want the government, which is supervised by politicians, picking who gets loans.

I agree that having a banking system in any major degree at the whims of politicians could and likely is a bad idea.

I don’t think however having the Civil Service running a public bank would be a bad thing though. Career government employees are at the whims of politicians no more than private businesses are, has been my observation, and can when structurally enabled make good sound decisions.

I think having a public option for banking in this light would be positive

Except if you look at mortgages as an example, the government already has a huge impact on who gets loans (via Fannie Mae and Freddie Mac, plus programs like USDA home loans). That influence is largely to expand access to people who would otherwise get cut out of the system.

> You do not want the government, which is supervised by politicians, picking who gets loans.

Yes that's why I said there's some value in having private credit creation. In fact, my comment was just lifted from this lecture by Randall Wray where he says precisely what you just said:

https://youtu.be/gI86w6bSmS0?t=445

Although correction to another comment I made: he does specifically say loans should be held by the issuer until maturity.

They don’t.

Loans create deposits.

Deposits in a bank never go anywhere. All that happens as you “move” money around is the ownership tag changes. And that tends to change the price the bank has to pay on those deposits.

Banks depend on depositor's money to generate loans. How would loans be generated, then, if consumers kept their money with the central bank? Issuing debt is a key engine for economic growth. This would incur an extremely contractionary effect.

The way any other creditor issues loans? Investors put money together, loan it out at interest to make a profit and cover losses.

That would be a fraction of the size of depositor back lending which would significantly reduce capital available for all kinds of uses. The current system is better specifically because it supplies guard rails that incentivize private investors and all savers to lend their money.

The venture capital and stock market are not capitalized with bank deposits, and that comprises the bulk of commercial startup capitalization and investment. What percentage of startup capitalization and investment comes from deposit-backed bank loans? I'd guess not much. None of the tech startups impacted by SVB's insolvency were capitalized by loans from checking deposits. Their deposit accounts were lent out to mostly non-business securities (mortgages and government bonds). Fractional reserve banking always will and always does result in bank runs.

The idea of separating deposit and investment banking goes back to the 1930s. It's known as "The Chicago Plan" (full reserve deposit banking). The IMF published a study that estimates no negative impact on economic growth.

https://en.wikipedia.org/wiki/Chicago_plan

https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The...

https://qr.ae/pGQXNx

When a company is capitalized that money gets deposited into an operating bank account. Many start ups used SVB, so all of their capital became a deposit at a bank. It doesn’t matter that the original source was a VC firm and wasn’t from other depositors. Because now the company can’t access its capital to pay employees.

This has nothing to do with separating deposits from investment activities, no one is alleging that SVB was speculating in stock or risky securities. They were placing deposits grade A securities as any regulatory body would sign off on.

By paying interest to attract depositors.

With banks paying almost nothing to depositors, I don’t see why we should be forced to use them. Give us the same deal they get with the Fed.

This isn't actually true in the modern system; loans are generated by the bank taking a loan from the Federal Reserve at that interest rate, and then applying a markup that covers the cost of KYC, due diligence, customer service, and of course the bank's profit.

If the depositors were willing to accept a lower rate than the federal funds rate, the banks make a bigger profit from the loan interest spread.

Therefore, it is always an incentive for a bank to attract deposits.

> loans are generated by the bank taking a loan from the Federal Reserve at that interest rate

This is incorrect. Most bank assets are not Fed financed. (That’s the discount window and reverse repo operations.)

Loans create deposits. Always have always will.

Deposits don’t move banks. What happens is the ownership tag changes.

So when you “move” your money to an account at the central bank, the central bank necessarily takes over your old deposit in the bank you’re moving from. That becomes an asset of the central bank and they create a new deposit for you against that.

That’s how all bank transfers work at root.

> There is probably some value in having banks to do loan underwriting and allowing private credit creation but this whole thing if allowing private banks to run everything and then providing a federal guarantee of some deposits is absurd, just take that function away from the private sector.

Could you explain this better? I don't understand

I probably can't explain it better than Randall Wray from whom I got the information, in this lecture:

https://youtu.be/gI86w6bSmS0?t=445