In the United States, banks can empower the government in such a way as to crack down on 'problematic' things without a direct Constitutional crisis.
See Bank of America voluntarily handing the FBI their firearm related transaction dataset.
Private industry goves government a plausible deniability proxy in short.
They're not exactly risking nothing. Capital requirements mean that each dollar of deposits need to be backed by more than a dollar worth of assets. The extra assets serves as a cushion in case something goes wrong. That cushion makes up the equity of the bank, and comes from shareholders. If the bank "fails", the shareholders lose it all, so it's in their interest to prevent that from happening.
That's absolutely ridiculous. Where do I sign up. I want to gamble other people money at 10 to one leverage and nobody suing me if I fall.
My cushion if I make a margin account at the bank is what, 2 to 1? Do you know the interest rates you pay for these margins? Compare that to interest rates the banks give their customers.
They are absolutely privileged, by law. You as an individual or even as a corporation don't get this privilege.
Why is it in their interest not to risk it in a ridiculous way? If I had several margin accounts of 10 to 1 that can only go down to zero, the highest return isn't by spending it wisely. It's by spending it in the most risky way, getting that sweet 10x on that risk and the rest can go to zero for all I care. I don't even need a positive expectation value investment to have a positive expectation value from this shenanigan.
Even investing in an unfair coin toss of 40% to double, getting free 10 to one margins my expectation value is an absurd 400% return starting from what should be negative expectation value investment.
The banks have privileges that are absolutely rigging the game in the most distorted ways possible. The shareholders equity doesn't justify their privileges.
You can also put your cash into money market funds that invest in T-Bills, which is what anybody with some common sense and a large amount of money should do.
But in this world entities that offer you a return on your money will still exist, e.g. banks. If I can register my cash and you pay me x% per year, that’s better than getting 0. So banks would form regardless.
Banks make loans and create credit which allows the broader economy to grow. Better to have properly regulated private sector entities with skin in the game making lending decisions than having the federal government do it.
If you take a big chunk of credit creation and issuance out of service, the economy is likely to regress fairly significantly.
Clearly the existing bank regulations aren’t sufficient though.
Similarly, ceasing steroid use will reduce muscle mass.
We can move to a world without credit, but standard of living for people will drop significantly. Look at what happened when they tightened lending standards into a recession in the 1930s.
The key is to find the right balance in regulations to make the system robust
No doubt it would be "inflationary" or some other nonsense, but the reality is that banking is a form of deliberate rationing and enforced political hierarchy.
The financial industry exists solely for its own benefit, at spectacular cost to everyone else - not just by making significant capital almost cripplingly expensive for most of the population, but also by acting in irresponsible self-serving ways which everyone else has to pay for.
It's like wishing that healthcare system wouldn't exist because you imagine a world where people were just healthy instead.
Mortgages used to be boring and conservative, house prices were rational, but financial middlemen didn't make any money on it so it had to stop. It took the Reagan administration installing the Merrill Lynch CEO as head of Treasury to get it done.
The 2008 financial crisis and today's overinflated shitshow of a housing market are the direct result, along with tons of wealth creation for the rentier class.
How it usually works is, when a bank fails and is "rescued", the shareholders (owners) who "get to play" with the money get nothing. The ones who are "rescued" are usually some/most of the debt holders. Letting debt holders also shoulder some of the costs is worth considering, but the authorities generally believe it's too risky (the risk being a huge amount of debt holders pulling their money and/or demanding much higher interests which raises general borrowing costs).
If elements in the finance industry keep acting irresponsibly - clearly true - why should they get a pass on personal consequences?
Now we're saying, actually, banks effectively don't impose counterparty risk on their clients. So the government is actually who's taking the counterparty risk.
If that's the government and not the customers, why did they get that privilege? Why is the government only there when the risk is fulfilled?
Limited liability is fine. It's not fine when who's really liable is the government, while the original deal was between the bank and its customer. Student loans are also not fine either, since you don't get to set them to zero.
Revoke Banks privilege of handling money. Let them play the game like the rest. Even the government itself needs to raise money using Treasury bonds. I want a fair game. This game is rigged. One player has the privilege of effectively using the government as an insurer for it's counterparty risk. It has repeatedly blown and abused that privilege. Revoke it.
Let me hold my account at the Fed if I have positive balance, just like the rest of the banks. Call it CDBC or whatever. Let me get the Fed interest rates just like banks do. The banks are free to do business as they have always done, to loan money. They are free to deal with the trench of people who need loans. Not with my money. My money is only there because they forced me to. That's not a fair system. I don't approve their usage of it for their margins but I literally don't have a choice. Which is why they also get to give me zero interest rates while the Fed gives them much higher rates.
And that's the problem for banking.
Thought experiment: for bank functionaries a strategy that has an equal chances of +10% and -40% is better than guaranteed +4%. In the first case they are able to attract more depositors, by providing higher rates. Depositors will (rationally) chase highest rates knowing that worst case scenario - government bails them out.
Converting from (EV on bank accounts) to return for shareholders is non-trivial, but as long as shareholders get > 100% RoI in successful case their EV is positive.
> Bank employees could get higher bonuses, but also run higher risk of 0% bonus and losing their job.
Losing job aside, equal chances of 100% and 0% bonus is better than guaranteed 30% bonus. Depending on premium you put on having the same job, it may be better even with risk of losing job.
This scenario will not work for investments, as people understand that if startup X fails - you loose money. In "government bails out depositors completely" scenario: you invest money in bank, bank loans it to startup X, startup X fails - you get your money back (from government and ultimately taxpayers).
AFAICT the only special stakeholders in banks are depositors. Are you trying to say that depositors should run a lot more risk (i.e. not always made whole in case of illiquidity/insolvency)?
Some people, including YC CEO, argue that taxpayers should drop the "up to FDIC limit" part.
I've took another look at out conversation and you didn't do that. I was arguing against position you didn't hold. Sorry for that.
Where even getting margin called on extremely big margins compared to my initial investment, the government would sweep in because that margin wasn't even mine to play with?
Where I get absolutely ridiculous interest rates from the Fed which I don't need to pass on to my meat shield clients, I just get literally free money from the central bank?
All these privileges for no responsibility. This has to end. If we all admit it's other people's money, and we all admit that in failure, the government will also cover for them, and they get to play these completely absurd investments with leverage of 20 to 1, their privilege is just unjustified.
When the broker fucks up and let you blow your margins, the broker pays the bills. But banks get to blow the margins with everyone's money and somehow the government only comes in when they blew it, but wasn't responsible to keep tabs on their margin in the first place? And there's barely any margins, the leverage ratios are insane.
Of course debt holders would require much higher interests. The whole thing is just a sad scheme where the government is letting privileged entities a monopoly of using leverage on other people money, while the government holds the tail risk.
I would love to get 20 to 1 margin with the government taking all the tail risk to zero and allowing me to dip below zero by design. If I blew it I could start again just like Lehman CFO which moved over to SVB.
If you take their responsibility, you have to take their privileges too.
As for the shareholders whose money get leveraged, most large banks are public and you're free to buy stocks. If you money in index funds or other diversified stock funds, you likely already have invested substantial amounts.
I don’t think that is practical at all. Not enough of people are going to be doing their due diligence on bank risk profiles, 20 years later.
Making excessive risk illegal through regulations seems more practical, but maybe your point was also that these failed.
If you banked directly at the Fed, or with crypto, then moving some of your money to a bank would actually be a choice. And the entire incentive structure would shift accordingly.
They have no incentive to change. They are given a government backed mandate to be your only choice. Given those privileges, it's their incentives to abuse them. They have been continuously abusing them for years. It's not only risk, it's the interest rates they give customers. They get to arbitrarily pick and choose their friends to get good interest rate while you get trash.
They get to do all of this because they are protected with innocent people as meat shields. Meat shields that have no other choice but to protect these people from consequences.
Presumably you apply for a banking license, commit a lot of capital and subject yourself to countless onerous regulations (with more to come, as usual). I'm pretty sure it's significantly less fun than you imply.
The logical conclusion to these bailouts was that the regulatory environment surrounding banking was plain bad which was unsurprising because successive neoliberal governments had torn down most of it. The conclusion to this one is that it still is and what was done in 2010 (Dodd-Frank) is a joke and clearly insuffisant. Something everyone knew.
You want to be mad at someone? Start with your government.
SVB was exempted from much of Dodd-Frank and Basel III.
We're only in this mess because banks have excessive privileges. These privileges lead to misaligned incentives. No amount of regulation can realign the incentives back. Only revoking their privileges.
Their privileges include being the only entities able to deal with the Fed and hold deposits .
Let people bank directly at the Fed. Or with crypto. But banks don't deserve a special privilege of being the only way people can hold money.
Furthermore, loans should not be transferable.
Now banks will actually have to price loans correctly. And putting your money in a bank would be a choice they will have to tempt you with, by actually giving real interest rates. And you won't have misaligned incentives, because there is no captive audience.
Giving your money to the bank would be a risk you're doing willingly. A risk they will pay you for taking instead of robbing from you by their regulatory privileges.
I also agree that banks shouldn’t be the sole intermediating agents for money creation but this has absolutely nothing to do with retail banking.
Who exactly is the captive audience in retail banking? Last time I checked there was plenty of choice there.
Anyway, SVB clearly is a failure of risk management which is a failure of the regulatory environment.
If banks are rescued from this, the only logical conclusion is that all banks should just cease to exist. Why should they get to play with what is effectively taxpayer's money, since that is where the risk will be paid from if they lose?
Let it all fail. If you don't let it fail, might as well go full on CDBC and revoke banks privilege and role in managing money. What's even the point of having banks when the banks don't really hold the risk themselves? Why have them as gatekeepers? They don't deserve a single dollar earned from risk that they don't hold.