Well, I think we've discovered banking is a "public utility" -- things which are too big to fail.

that’s fine, but if we’re going that way then people shouldn’t be getting rich running them by socializing the risk and not the profits

Or we can just not socialize the risks to lenders. I mean that’s always an option.

Fine, then they should be non-profit credit unions.

No, they’ll be replaced by something like The People’s Ledger, as proposed by Comptroller of the Currency nominee, Saule Omarova, in her paper of the same name. (She was nominated by President Biden in 2021. Not just a random kook!)

Under such a regime all banks will put customer funds at the Fed, which will be the sole entity to allocate credit, with banks as mere customer service frontends. It will use that power to allocate credit to advance nakedly political goals, with much less attention paid to minutae like risk, ability to repay, and other pesky economic concerns the free market would elevate. We’re already forgiving student loans; watch the People’s Ledger forgive mortgages!!

And when that bank fails it will just fall back on moneyprinting.

I would actually be fine with this if the mandate is simply to hold deposits and lend deposits with appropriate risk controls. But if the goal is to use that control to accomplish political ends like suppressing wage growth or providing stimulus then I don't think it's a good idea. If the Treasury wants a loan from the Fed to do these things that should be how it's done.

Student Loan forgiveness is another thing entirely because those loans are held in public corporations, and if congress wants to use tax money to forgive them they can. You can already get some or all of your loans forgiven in very limited circumstances such as paying them for 20 years without paying them off, or if you teach at a public school for more than 5 years.

20 years of repayment at 300-600 a month is pretty crippling. That's like buying a new car on a loan every 3-5 years. Even income-based repayment has limits on how small your payments can be.

Student loans are also statutorily impossible to discharge in bankruptcy, unlike every other form of debt.

So I think we need to do something, and it seems like the simplest thing to do is make them the same as other loans. We should allow you to declare bankruptcy and discharge your student loans. This won't fix a lot of the knock-on effects but it will get people out from under the loans.

> lend deposits with appropriate risk controls

Forget stimulus/inflation political goals, can you imagine how horribly this would get weaponised against "people the current administration doesn't like"? I don't have faith that this exceptionally powerful tool would not go unused.

Putting that aside, what risk controls are and aren't appropriate? An advantage of having a variety banks is that there's much less of a 'one size fits all' approach to banking services. I also don't have faith that a federally-run bank would be very flexible to anybody outside of the box. I've been in a situation where some bulge-brackets institutions wouldn't provide certain products since I didn't fit exactly in some pre-ordained image of what a customer would look like (and it wasn't even something you'd think a bank would have issue with.....)

“ if you teach at a public school for more than 5 years”

That’s fairly misleading. It’s only a relatively small sub-set of public school teachers who are eligible.

The TCLI Directory can be found here: https://studentaid.gov/tcli/directory-search

> Student loans are also statutorily impossible to discharge in bankruptcy, unlike every other form of debt.

If this weren't the case, student loans would just not be offered to anyone not deemed creditworthy. (Or they would only be offered by the government, who would offer them expecting to lose their money.)

I think this would probably be a good thing, since easy access to student loans is probably related to why college has gotten so expensive, but the first-order implications of changing this policy are pretty detrimental to poor people.

This is not at all how I understood the paper. It was to allocate consumer funds directly with the Fed to prevent bank runs from restricting access to cash on hand for consumers. They just move spigots to different institutions this way. Nominally, this is what the proposal is all about. I didn't see anything about the Federal Reserve or the Government being able to access that money on a 1:10 basis or any other reserve basis. It does however outline how this would stream line government policies and operations, such as Tax Refunds, Social Security Disbursements, or any other qualifying disbursements.

Additionally, the idea that is also present in the paper is expanding low risk (demonstrably historically "safe" loans such as SBA Loans, FHA loans, traditional mortgages etc) through the Fed directly, but explicitly bans things like margin loans, PE bridges and other risky behavior.

Which, as anyone who has gotten these kinds of loans, knows the government already does this, just with extra steps. The People's Ledger paper (proposal?) simply outlines removing extra steps and barriers for the citizenry to have a better banking baseline, all told.

In essence, it makes the Central Bank, more....bank like. With some privileges, being a whole arm of the Government, its less focused on collecting fees and more interested in streamlining banking for the average citizen.

It has nothing in the paper about forgiving mortgages (or student loans, for that matter)

The paper is here, for anyone interested in this: https://scholarship.law.vanderbilt.edu/cgi/viewcontent.cgi?a...

Specific phrases many people will read as political allocation of capital:

“Most objections to allowing significant quantitative growth of central bank balance sheets, in fact, reflect the underlying concerns about the qualitative, compositional aspects of such growth. Ultimately, however, these concerns are rarely substantiated by reference to anything more specific than deeply internalized skepticism toward the government as an economic actor. By contrast, this Article views the proposed change in the Fed’s liabilities as an opportunity to augment both (1) its ability to modulate credit-money supply more effectively, and (2) its potential to facilitate the more efficient allocation of that supply to productive enterprise.”

“the NIA would transact directly in private financial markets, proactively channeling public and private financial resources into large-scale, transformative public infrastructure projects. Importantly, however, it would reverse the familiar pattern of “public capital, private management” typical of most modern “public-private partnerships” in favor of the “public management, mixed public-and-private capital” model.”

Transformative infrastructure projects!! Are there any of those we’ve embarked on recently where the government’s proven more skilled at identifying investment opportunities than the market? Like, say, California high speed rail? What kind of returns is that investment earning? … oh.

It’s true they didn’t get all the way to mortgage forgiveness in the paper, but, well, it doesn’t seem much of a stretch, particularly when Housing Is A Human Right (tm). We could call it infrastructure, in the same sense that “elder care is infrastructure” — I seem to recall recent legislative campaigns about that and other social spending.

In context, they're talking about removing inefficiencies and increasing transparency by transacting directly through the theoretical Public Ledger system. We already do all of this with extra steps currently. There is nothing new here. A big thing this brings is transparency, because its a lot harder to hide where tax dollars get spent when you also have introspection into how the money gets allocated, rather than just cutting checks, for instance, to maintain / build highways, this would allow for the government to have better oversight with how public highway funds are being spent. Thats one example. Another is more efficient handling of farming subsidies (this is to the tune of hundreds of billions of dollars). This is plainly spelled out in the paper when read as a whole.

These aren't bad things, and they already exist. There is nothing new here, other than streamlining operations to make them more auditable, transparent, and efficient. It cuts out the "extra steps" part, which more often than not, is where most of the waste is.

Yeah it seems obviously risky. A small bank gets a little insolvent and so it gets absorbed by a larger bank. This system works fine when there’s a larger bank to absorb them, but it’s obviously untenable. What happens when the largest bank needs saving?

It gets absorbed by the government?

Robin Williams had a fairly accurate depiction of what happens.

https://www.youtube.com/watch?v=etQeFJ2lbbo

Feels more like this Futurama bit: https://youtu.be/0SYpUSjSgFg?t=66

> Just like daddy puts in his drink every morning ... and then he gets mad.

People stop accepting dollars. It's about time for something new anyway.

But if theres only one bank left and theres a bank run, where would people panic-transfer their money? It cannot go anywhere else!

…see, the one big bank cannot fail.

> This is just going to make the banking system more concentrated

More concentrated.

More highly regulated.

Closer to being absorbed by the state.

I'm not saying that's necessarily going to happen someday. But that is the direction it is (and has been) moving.

Also closer to absorbing the state.

I'm not a tin foil hat person, but corporations growing larger than nation states just doesn't seem remotely far fetched. Which corporation will be first to sit at the UN table?

But who is creating the regulation?

The answer to that is funny. It is literally the state, which is to my point, but it is also shaped by the banks, which is to your point.

> But who is creating the regulation?

You know who writes our laws? Lobbyists. Politicians are not the ones drafting the bill. They merely take the drafts produced by lobbyists and then pass them.

Do you also know who runs various government agencies tasked with regulating different sectors? Again, it is a revolving door for private sector execs.

> It is literally the state

True, but the state is, to a large extent, influenced by corporations.

Or there is a new term that subsumes them both: the "regime." And with this small substitution, and a slight modification to the source material we see that the "absorption" may already be complete.

When corporations write the laws that regulate them, and they buy the politicians who will enact those laws, the line around what defines "the state" is a bit fuzzy. (And that's not speculative, it happens all the time.)

A corporation and a monarchy aren't all that different. I dunno why people think the idea of a corporation being the state is so wild.

Ever heard the term "CorpoNation"?

I did, in a old RTS game called Metal Fatigue. Was pretty fun for a while.

Obviously either ComStar or the Spacing Guild. But don't worry that doesn't happen until after we have a butlerian jihad.

> Closer to being absorbed by the state.

Or the opposite.

Fed accounts for everyone.

So many people in this thread want a narrow bank and so few of them have treasurydirect accounts. It makes me wonder if maybe I’m the one who is missing something?

Remember circa 2008 how "leader" after "leader" said that eight big banks was too few and that seven was a step in the wrong direction?

Remember that? Apparently, no one remembers. Or it was simply more political / leadership theatre of tell the proles one thing while doing the opposite. Perhaps both.

People complain about "the democracy" and they often falsely name names. It easy to blame a symptom when you don't understand the problem. And yet those same people are silent about the banks, power, cronie capitalism, etc.

Many are in denial. Others are able to control the narrative. In either case you can't solve root problems when you're not even willing to address them.

When considering a statement from someone, you have to consider the valid range of their statements, which I mean in much the same sense that math functions have ranges. The State of the Union address will always start with the President saying the state of the union is strong. Our economic leaders will never tell us anything other than that our economy is strong, all its strength is permanent and intrinsic while the weaknesses are temporary and external. No leader will ever tell you how badly the war is going even as their speech is being interrupted by the sound of detonating shells.

It doesn't mean they're wrong... what it means is those statements carry no information. Or, if they carry any information at all, it is in the fact that they think that they have to make the statements at all. Today, President Biden isn't going to be making any speeches about how safe the capital city is. If he does, well, clearly something has changed.

Kinda makes sense for the government open a commonwealth bank of sorts and allow people to hold deposits against the government directly. Cut's out a layer of rent seeking markets.

No no no no no it'll run it to the ground like the USPS, or, gasp, the Israeli postal service (which, coincidentally, also lets you open bank accounts). (We actually have it super good in the states with door to door package delivery. It could get so much worse.)

Hard disagree, the federal government already has too much power. Giving them that sort of access and direct control over personal financial assets would be widely abused.

The government and those who work for them are not your friends. The power you give them can and will be abused and will never be returned to the people without great difficulty and probably bloodshed.

Thing is neither are the oligarchs who run the financial system. Take a look at the labor struggles of the early 1900s in the US - that wasn't people struggling against a government using their army, it was people struggling against private ownership turning hired militias against their employees.

The problem is concentrated power. Whether it's government or private, concentrated power in anything is bad

Yes but in theory the banks are under the pressure of competition. Anything that is moved under the umbrella of the federal government essentially becomes a monopoly.

I can switch banks in less than an hour, it takes months to years to switch countries.

Like in theory Google and Microsoft are competing? Or CVS and Walgreens? Or Boeing and Lockheed? Or Visa and MasterCard?

Oligopolies are arranged monopolies with the further disadvantage of not being subject to the freedoms and rights set out by the constitution. Unless they are broken up, we'll eventually be in a place where things are worse than under government control

All of those businesses you mentioned do largely compete with each other, in addition to other smaller players in their respective spaces.

Could you give an example of them not competing?

A government run bank seems particularly scary in this highly polarized political climate. What if this administration decided not to give out loans to buy ICE cars, but the next administration swings to the right and decides to not give out loans to buy EVs?

The federal government having direct access to your checking account is scary as well. What if they had the ability to freeze the bank accounts of those who refused to get the COVID vaccine or asked the wrong questions on social media?

The government running our entire banking system directly is one of the most dystopian things I can imagine.

How does that theory outweigh the theory that government is under the pressure to bow to the will of the people?

Particularly when even with healthy competition, the only thing that incentivizes a given bank to do is be slightly better than their nearest competitor in some way—whereas while your specific vote may be one among many to the government, it must follow the will of the people when enough of them agree that something needs to change.

I can switch banks until my face turns blue, but if they've all decided that the thing I want isn't worth their money, and are happy to ignore the option to compete by offering it because they've achieved a local maximum of profit-to-effort, it's not going to do me any good.

> The government and those who work for them are not your friends.

Neither are corporations. Both will abuse you. The difference between the two is that you have at least a chance of altering how government works, but you have no chance with a corporation.

They both have highly imperfect avenues with which we can exert influence, but one has more power to compel you to support them legally “or else”.

> one has more power to compel you to support them legally “or else”.

I think that they both have approximately equal power to do that.

That same one also has far more mechanisms and legal avenues for accountability, vs the other that tries to shuffle people off into arbitration and the like, while at the same time spending money to lobby against legislation that might impact its business model.

... Except that the too-big-to-fail banks are under more stricter capitalization rules than the banks that are failing right now, which is why the small-medium capitalization banks are going through a bloodbath.

I listened to an interview with an expert who explained that the US specifically lobbied that small banks are exempt from Basel 3 regulations.

Europe doesn't have 5000 banks they all merged decades ago.

EU has about 5000 banks as well, I think

Banking is fundamentally broken. People want zero risk, demand deposits that pay interest. There’s no business model that can provide that.

It would be perfectly possible for a business to provide zero risk demand deposits—-but the business would have to charge customers for its custodial operations rather than making money by writing loans.

Of course because we live in times where no one can tell the people that what they want is impossible and ridiculous, we instead have a house of cards with various parts of the government (including parts we pretend aren’t the government) eating the risks.

People aren’t demanding deposit accounts that pay interest. The banks with the most deposits are providing 0.01% interest. People are still sticking their money there more than they put in banks which are offering >3% APR.

That's because high yield bank accounts are a phenomenon of the last 6 months and retail by and large hasn't got the message yet. 0.01 is not likely to last forever, and the TBTF banks are losing deposits.

Walked by a chase branch, they had some advertisement for a 4% cd.

So Apparently the big banks are starting to feel the account drain.

Also brokered cds from the likes of Wells Fargo and similar can be 5%.

Big banks definitely are starting to feel it

CD’s are not the same thing as demand deposit accounts. They’re less liquid than treasuries.

My credit onion is offering 3.1% on the savings act which is lower but isn't insane.

That's the problem, you need to open an account with a credit shallot instead.

High yield bank accounts was also something that suddenly appeared before the 2008 financial melt down. Now that they are appearing again I can be completely confident that we will see a huge economic depression. All man made of course - this could go away if it wasn't for the evil side of human nature.

Exactly right. People want reliability and stability from "household names" and they're go to banks that are offering fundamentally worse products[1] in order to get it.

1: At least in savings. The larger companies have insane credit card deals.

That’s still positive. If they want no risk, that number needs to be negative to cover the costs of holding and moving money around.

It really doesn’t. They charge plenty of fees to plenty of customers. They also use daily banking as a loss-leader for profitable services like loans.

Chase collected $1.25 billion in overdraft fees alone last year. My “Chase College” account currently gets charged $6/month for some reason I haven’t bothered figuring out, maybe a newly instated minimum balance or direct deposit requirement that wasn’t there years ago.

Great, so if it really doesn’t already, let’s just get rid of the pretense. Make it illegal to offer demand deposits while taking risks with depositors’ funds. No more need to worry about bank runs.

It's almost like the glass-steagal act had a good approach for the average person.

Eh, this really seems like moving the goal posts.

The problem with SVB &other is not that they fundamentally were losing money. They just weren't making _enough_ money so they took on additional risk. If SVB hedged the IRR they wouldn't have gone bankrupt; they just would've had less profit.

The banks people want are technically feasible.

There’s no way to provide risk free returns on demand deposits, other than the government just deciding to give away money. Hedging doesn’t magically eliminate risk at zero cost.

Sure, in the technically true way.

However, in practical terms banks have done a great job of making loans that get repaid more often than not. People are ok with having a bank that pays 0% interest and uses the difference between loan's rate and the real rate to operate successfully; bankers are not ok with leaving money on the table.

and they're not even making that fractional interest after they pay fees and buy addons.

This! I want my bank to be a place where I can place money to use for transactions. For returns I have my Vanguard account where I can pick investments for the risk/reward profile I want

> People want zero risk, demand deposits that pay interest. There’s no business model that can provide that.

> It would be perfectly possible for a business to provide zero risk demand deposits—-but the business would have to charge customers for its custodial operations rather than making money by writing loans

That was true when we lived with 0% interest rates. Now, there’s no reason why a narrow bank couldn’t take deposits, stick them in with the fed providing 4% interest, and keep 25% of that for itself to cover its costs, passing 3% onto the customer.

Except they wont get a banking license issued if they state thats what they intend to do, because the system depends on people depositing money with banks that make risky loans, so that the risk is spread across lots of people.

> there’s no reason why a narrow bank couldn’t take deposits, stick them in with the fed providing 4% interest, and keep 25% of that for itself to cover its costs, passing 3% onto the customer.

The problem with this business model is that this 4% interest either (A) requires a certain hold period or (B) allows on-demand withdrawal.

(A) is exactly the model used today. It did not stop the collapse SVB and FRC. Assets that require a certain hold, such as Treasuries held by SVB and mortgages held by FRC, fluctuate in price. If those assets drop in price (as recently) and bank's customers withdraw money, the bank is in a pickle.

(B) moves banking into one real bank -- the government. This can be done (e.g. in the Soviet Union), but comes with a lot of limitations and challenges. It is also not something you can morph the current system into; this is a "break, then rebuild" path and is very painful. I would personally move money away if I see a whiff of this in the air. My 2c.

The 100% reserve bank people will at some point discover why Silvio Gesell imagined the concept of demurrage currencies.

Because at some point the market interest rate is 0% and the cash rate is 0%. There is no reason to lend money via longer term deposits. The amount of deposits available to banks dries up. The circulation of money stagnates and ultimately causes a recession with high unemployment.

The demurrage fee doesn't change the market interest rate, it just moves the guaranteed interest rate into the negative range so that the market interest rate can be negative, if it has to be, instead of being stuck at 0%.

That's exactly what Silicon Valley Bank did. While federal bonds are nearly risk free in terms of default, they still suffer from interest rate risk -- that is, they may lose significant value if interest rates rise. In the case of SVB, US treasury bonds lost enough value to make the bank insolvent.

Yes, but because this poster thought this arbitrage was obvious and would solve all our problems, the political issue of banking regulation remains. It is a Dunning Kruger trap.

Money market accounts use the same vehicle (treasuries) and still manage to be ostensibly safer than smaller banks at the moment. These funds manage their investments by continuously buying new bonds and selling off old thus limiting the risk exposure to all but the most sudden interest hikes.

I think money market accounts don’t sell off old, but rather they hold short dated stuff to maturity. And constantly reset the rate they pay holders.

Of course, they can have counterparty risks. The counterparty is usually unprepared to actually pay up and expects to rollover its debt.

Sometimes that melts down and doesn’t happen:

https://globalnews.ca/news/160176/coventree-executives-faile...

(Scroll down to Canada in 08-09 here):

https://en.m.wikipedia.org/wiki/Asset-backed_commercial_pape...

They also, AFAIK, don’t make loans like mortgages, auto loans, credit card lines, etc. All those loans are subject to the same interest rate risk. They’re not nearly as liquid, either.

> stick them in with the fed providing 4% interest

Where is this risk free return coming from? You are just saying in more words that the government should give the people what they want.

That article says that the Fed chooses interest on reserves to be below the market rate of interest...

You left out “zero risk”

Banks have always been able to fail, then you lose the deposits. What people are now asking for is unlimited insurance, which encourages risk takings amongst banks

> What people are now asking for is unlimited insurance, which encourages risk takings amongst banks

Except that when a bank is liquidated, the shareholders get zeroed out, and the executives get their money clawed back, which encourages banks to not risk-take.

As a depositor, this sounds fine to me. I don't benefit from banks doing stupid, risky things, and I shouldn't suffer from it either. Raise the capital requirements. Zero out the shareholders when things go pear-shaped.

The problem is not what happens to the shareholders (they get zeroed out the same way that shareholders of other failing companies would be), but what happens to the depositors. The rules, as written, say that deposits above $250k can be wiped out. The rules, as the government applied to the SVB, made large depositors whole.

So we have the worst of both worlds: no depositor guarantee de jure (so depositors bailed and brought SVB down), but a de facto bailout which has significant actual costs and encourages risky depositor behavior. My 2c.

I think the priority at the federal level is still in at least maintaining a facade of banking system stability. It’s very rare that the bank not only becomes insolvent but also loses all its value. Risky investments to a bank are not really considered super risky elsewhere and the investments still hold value, albeit less if they are trying to liquidate. The problem is when banks are unable to maintain enough cash which happens when they over-invest or when their returns just barely keep up with inflation. There is usually plenty of money that is recoverable, with time, to make depositors whole. The “bail out” concern is a red herring for the actual problem: market consolidation. Larger banks effectively write IOUs to each other depending on who owns who after each day of ACH, wires, deposits, and withdrawals, while smaller banks pay in cash. There is additional burden on, usually, medium-sized banks who need to both maintain large cash reserves but also cover the cost of operations.

You’re conflating liquidity with solvency. The problem isn’t a lack of cash on hand, it’s assets that have fallen in value. Saying that they money will be there, it just takes a bunch of time, denies the reality of the time value of money. A stream of payments of $10/year for ten years is not worth $100. Never has been.

Shareholders are routinely zero’d out in bank failures. Are you proposing some other mechanism?

No, because the mechanism we currently have seems to be working. SMBs are currently scared shitless that they will be reaping the consequences of their actions. Depositors are not.

We have that, that's called a (federal) money market mutual fund.

Edit: sorry, you said the Fed, which MMMFs don't put money in. But they buy short-term Treasurys at comparable or better yields, which is ultimately what you want, modulo the risk of US government default, which is minimal.

You are exactly describing what all of these banks did.

What happens to the value of 4% bonds if interest rates go to 6%? What about if people want their money back before the bond duration is up, so you have to sell the 4% bonds in a 6% environment?

Note that in this interest rate environment banks don’t need to buy bonds in order to get 4%. Currently the Fed’s reverse repo facility provides more than that.

The issue is it takes years (decades) to stand up a new bank due to the extensive regulations, processes, etc. that need to happen - and who knows what is going to happen next year - let alone in that timeframe.

The reason why we have such consolidation is that merely existing in the Byzantine world of banking regulations is nearly impossible, and only the largest entities can afford the legal, IT, trading/financial mojo, capital, etc. resources necessary for it to occur.

The big 5 have not only such resources, but enough economic impact if they fail that they can force regulators to stop doing a regulation that would kill them.

Which is ultimately where this is all going. Either nationalization (unlikely) or the big banks writing their own regs (in practice).

The answer to your question is prices would go down until the yield on the bonds equals the market rate.

Separate nerd note: I think you mean maturity not duration.

The maturity of a bond is the point in the future when holders get back the principal.

The duration of a bond is pretty much the first derivative of price with respect to rates expressed in years. Intuitively it's the number of years (on average) an investor in that bond would need to remain invested for the future value of cashflows from the bond to be equal to their investment in the bond.

https://www.investopedia.com/terms/m/macaulayduration.asp

That’s not how the Fed interest rate works. Yo can’t just “deposit” your money with the Fed and have it pay you interest. What you can do is buy bonds. These bonds have a price and maturity date. When the interest rates keep increasing the bonds which pay less interest become cheaper. So you can’t just “withdraw” what you deposited. You have to sell what you “bought” but for much less than you paid, so you go under.

You can't. Banks can.

https://www.newyorkfed.org/markets/reference-rates/obfr and things like that.

The OBFR is the rate banks pay to borrow reserves from each other. You’re thinking of interest on reserves (IORB) [1], which is interest the Fed pays to interfere in that market.

[1] https://www.federalreserve.gov/monetarypolicy/reserve-balanc...

> stick them in with the fed providing 4% interest

The Fed pays interest on those reserves to keep them from being lent. A narrow bank wouldn’t be able to lend its reserves. As such, it makes no sense for the Fed to pay interest on them.

Increasingly banks are only lending to a different parts of the federal government anyway-—deploying their cash on treasuries and agency debt. They are being driven to this by the risk weighted capital adequacy requirements.

The whole thing resembles an ever more intricate Rube Goldberg machine.

> increasingly banks are only lending to a different parts of the federal government anyway-—deploying their cash on treasuries and agency debt

This is incorrect. In 2022, the largest increases were in credit cards (+17.4%), commercial and industrial loans (+14.5%), consumer loans (+11.6%), commercial real estate loans (+11.3%) and real estate loans (+10.1%) [1]. Treasury and agency security holdings across American banks were majorly added between 2019 and 2021, and then spent down as balance sheets swapped. (They remain, of course, a commanding fraction of bank assets for obvious reasons.)

[1] https://www.federalreserve.gov/releases/h8/current/

What‘s the decade by decade trend?

The problem is that bank lending is the main form of money creation in the economy.

If retail banks switched en mass to backing deposits 1-to-1 with Fed reserves then the Fed would quickly take strong action to disincentivise this strongly contractionary effect.

They have plenty of legal tools to do this (e.g. IORB rate). They don’t need to resort to not giving out licenses.

Like Richard Pryor said as Montgomery Brewster in Brewster's Millions[0]:

"I don't want the interest. It's your vault. I should be paying YOU rent!"

[0] https://www.imdb.com/title/tt0088850/

> Banking is fundamentally broken. People want zero risk, demand deposits that pay interest. There’s no business model that can provide that.

Given that many people bank at gigantic banks that pay 0.00001% interest...I don't think that's true.

Many people barely have savings so it doesn't really matter if interest is 1% or 6%.

Personally I judge banks on their app and IT reliability.

> There’s no business model that can provide that.

They used to. So.. what changed?

They never did. Since we’ve had banks, we’ve had banking crises. Either people need to accept that there’s risk or we need to scrap the model.

> I'm not sure what the best solution is here

Stop letting banks write the regulations?

Well you now have JP Morgan Chase with almost 2.5 TRILLION dollars in deposits, and the current regulators have essentially punted on this issue to the next administration. If they have a liquidity crisis the western world will essentially end.

Ain't that too dramatic?

Yes, I can imagine such a huge bank to cause deep troubles in financial markets and real economy and this impacting the livelihood of people all around the globe.

But saying that "western world" will essentially end when it didn't in face of world wars, grave epidemics and plagues, etc seems definitely too dramatic.

It's hard to know if that's too dramatic. Wars have happened before. Global financial system collapse has not. Large scale regional ones have happened, and they arguably do hurt more than war. While I'm not saying it is going to be that bad, you don't actually know any more than I do, and that's a legitimate concern. As an engineer, on the risk * impact metric, it's something I'm paying attention to. I'm not planning on it as if the risk is 100%, but at the moment I certainly judge this on the risk * impact as larger than the direct threat of a war because the impact side of the terms are pretty significant, and the risk is certainly non-trivial.

(At least, the conventional definition of "war". Certainly if I were looking at the East vs. West dynamic currently in play, and I were in charge of the East with the goal of winning, I'd be playing to knock over the Western-styled economy rather than a direct military conflict. From a certain point of view, a military conflict is just an economic conflict anyhow. A global financial crisis may well be the direct threat of war.)

> If they have a liquidity crisis the western world will essentially end.

Already had one in 2008. Thankfully, our currency’s value is notional and the fed can print more until such time as the bank run ends.

Are we still waiting for the 2008 bank run to end then?

> Thankfully, our currency’s value is notional and the fed can print more until such time as the bank run ends.

It's value is not notional. If you make more currency then all currency in circulation now has less value. "Quantitative Easing" is simply a way of taxing you after the fact.

Worse still if bonds are involved. Now it's a way of taxing your children before they're even born.

> It's value is not notional. If you make more currency then all currency in circulation now has less value.

That's not how pricing works. It's easy to see. Consider the following. Treasury could mint a 10^33 dollar platinum coin[1], stick it in a vault at Fort Knox, and forget about it. At that point the money supply would nominally be almost all in that vault. Yet prices not only wouldn't go asymptotic, they wouldn't even budge. But wait, you say, that's not in circulation. Treasury could easily swap that coin with the Fed for an equal number of reserves. Now Treasury's reserve account is flush, which is surely circulating money. And yet prices still wouldn't budge. Not until Congress appropriated that money to be spent would we start seeing it moving prices, and even then only if Congress designed their spending to do so[2]. It's pretty easy to imagine ways that could be done, so I won't belabor the obvious unless asked to.

The point of all this is that price inflation is everywhere and always caused by an increase of the ratio of money-being-spent:things-being-bought. This is why hyperinflation is always kicked off not by money printing, but rather by a productivity collapse. The money printing only comes afterwards, because it's an effect not a cause. This is also true for wage inflation, which is why US wages have remained flat in real terms since the mid 60s immigration reforms: the labor supply has been grown as fast as the demand for labor.

[1] This authority exists under current law.

[2] For a counter-example, if Congress passed a law appropriating 10^33 dollars for the Social Security Administration to buy gold from citizens in any amount they desired at a price of $20 per ounce, the price of gold wouldn't budge a cent on account of it, despite an absurd amount of money on the buy side of the gold order book.

> The point of all this is that price inflation is everywhere and always caused by an increase of the ratio of money-being-spent:things-being-bought.

Yes.. and if you increase the amount of money in circulation this impacts the amount of money being spent. You can imagine all sorts of ways that money can be minted without being circulated, but as soon as you do, this becomes a factor in this ratio, does it not?

> This is why hyperinflation is always kicked off not by money printing, but rather by a productivity collapse.

Has this occured in the US before? Are the examples you are using to draw this inference something that applies to the US?

> This is also true for wage inflation, which is why US wages have remained flat in real terms since the mid 60s immigration reforms: the labor supply has been grown as fast as the demand for labor.

The labor market has changed _drastically_ in this time. You're really willing to assume such a simplistic explanation for these facts?

> You can imagine all sorts of ways that money can be minted without being circulated, but as soon as you do, this becomes a factor in this ratio, does it not?

Yes, I think you're starting to get the point. It's not the money stock that causes inflation, but rather the money flow. Back to the original point that started this thread, increasing the money stock alone, that is to say growing the notional money supply, doesn't move prices. What moves prices is changes in the money flow, for which growing the money stock is neither necessary nor sufficient.

> Has this occured in the US before?

No, the USA has never experienced hyperinflation. Thankfully the principles involved are not specific to the USA. They apply generally. The operational particulars do change depending on whether or not the foreign exchange rate is floating or not. That's not really relevant here though. It all adds up to a collapse in the value of a currency being caused by a collapse in the goods and services that can be bought in that currency. That's why back when the world was more or less on the gold standard a single economy's collapse couldn't cause hyperinflation. However if, somehow, there were a collapse in global productivity then even gold would see hyperinflation, because you can't eat it and there'd be too much gold chasing too little food, fuel, and other essentials.

> The labor market has changed _drastically_ in this time. You're really willing to assume such a simplistic explanation for these facts?

At the aggregate level? Yes absolutely the law of supply and demand holds. It's the same as how I'm willing to apply the laws of thermodynamics to monstrously complex systems that I don't full understand. I might not know how the parts all add up, but I do know that the equations will hold.

A lot of hyperinflations follow this simple pattern.

The government is bankrupt for whatever reason. It has to create new money. Then inflationgets worse and the government introduces price controls. Businesses quit (or are shut down by the government for violating price controls) because they have to pay inflated prices but sell at regulated prices, ending up with a loss, inflation gets worse because of a lack of supply, more businesses quit as they start making losses.

I submit that the first step of the hyperinflation is everywhere and always the collapse in productivity AKA supply. Then the cycle you describe takes effect and you are correct.

I've done some research on the subject and I've never found an historical counterexample, so if you have one I'd be very interested.

It's a fuzzy boundary. I agree in theory but where is the line where something is too big? We encourage companies to grow as large as possible and hope that competition will provide the counter friction. The only fail-safe is the government trust busting on a case by case basis which might not be optimal.

Are there any regulations that could provide economic incentives to small businesses and make it increasingly difficult for large companies to grow larger? Wealth going in one direction is not a very stable system.

The regulations already exist - don't buy the competition and don't use your market power to undercut the competition. Simple and worked excellently in the post-WW2 boom years.

But regulators stopped enforcing those regulations in the 1980s because of "efficiency" and each administration after Reagan doubled down. Luckily some politicians are starting to see the error of their ways and listening to thinkers like Matt Stoller:

https://mattstoller.substack.com/

That's my point. The govt can choose to not do anything which is how we got here which makes it not a great fail-safe. Perhaps strengthen the laws we have and make it more imperative and easy for the government to act?

While I fully support this, I think it's important to bear in mind that

a) what constitutes anticompetitive activity or otherwise warrants antitrust action is likely to always be at least somewhat subjective, and require human judgement, meaning that motivated humans can choose not to do it in many cases, and

b) depending on the degree to which the government is captured by a party that actively works against antitrust laws and believes that bigger[0] is always better, and on how long said capture lasts, it doesn't matter what laws we put in place now. Laws can be changed by the government.

We're not going to be able to make a foolproof system just by making better laws on this one issue. If we believe strongly in antitrust with teeth, we also need to be committed to supporting politicians who favor it, and political and governmental systems that prevent a vocal minority from seizing control of the engines of power, consistently for the rest of our lives.

[0] Bigger payouts for their friends, that is, which means bigger kickbacks now and bigger paychecks later when they go to work for said friends

As if the entire end goal of capitalism wasn't monopolization of every single product and service.

Welcome to reality where "competition" and "free market" are just buzz words meant to fool the naive populace.

If banks are going to be private then the regulation of them needs to be the inverse of what it is now. Regulation now is: You can do anything you want except X,Y, and Z.

It should really be: You can only do A, B, and C and in the ways we tell you.

> "too big to fail" should be recast as "too big to exist"

Was SVB too big to fail? Signature? Apparently!

TBTF is now a popular concept more than a legal one. We need explicit universal deposit insurance along with the rules that make that guarantee tenable. I also think experiments in narrow banking, e.g. permitting each state to charter a narrow bank open to its residents and guaranteed against losses (e.g. due to fraud) by its own treasury to access a special type of reserve account, need to commence.

SVB did fail, with basically no repercussions to the economy as a whole. Under what interpretation was it too big to fail?

Ya but the uninsured depositors were still bailed out, so I think it's a little more complicated than that.

The FDIC insurance fund is predicated on any one bank (and their customers) being small enough that if you wipe out the uninsured deposits, the system as a whole will be ok. That was arguably not the case, or at least regulators didn't want to take that risk for SVB or Signature.

The solution is simple, the implications are not:

Eliminate the Fed.

Banks eliminate inherent risk by being backstopped by the fed. A simple example of how this works is FDIC insurance. If a bank had all of its depositors holding $250k or less, it could essentially lend out all of that money with very little risk of getting sued by their depositors.

End the Fed people seem to think a catchy bumper sticker is an argument. Why was the Fed established in the first place? Because people were sick of bank runs and periodic financial panics.

Do incumbents in such a system leverage their status, leading to new kinds of abuses? Arguably yes. That said, SVB was a member bank of the Federal Reserve and it didn't help their shareholders when the market decided that they were over-exposed.

Looking at your assertion from the opposite direction, if you don't trust the Federal Reserve, why would you trust a smaller bank to do a better job? Sure, it's in their long-term interest to self-regulate and operate prudently, but history is full of people acting irrationally because of greed, myopia, confirmation bias etc. The fed at least exhibits moderate transparency of structure and operation - risk is distributed across a set of reserve banks, and the membership and balance sheets of the regional reserve banks are open to scrutiny.

I don't disagree with anything you said. People want an answer to "I'm not sure what the best solution is here, but making the big banks even bigger is not it."

And that's what it basically boils down to. You don't want big banks? Eliminate the Fed.