The book deal aspect was interesting also. So, the guy profits and has a potentially lucrative book deal with minimal jail time.
Deposits are an asset AND a liability
> This means banks in the modern sense can literally create money, so they don’t need your deposits
Not really. Banks still have to spend central banking money when doing interbank settlements, and deposits are an important source of funding to day-to-day operations.
Say you have an account within Chase and want to send money to your friend at JPMorgan, Chase can't simply "create dollars" - they need to have enough reserves in their Central Bank account.
As a thought experiment, if you started a bank from 0, how do you pay out the first loan?
Yes, they create money, but deposits are a requirement to do it. (Unless you are doing some interest rate arbitrage by getting a loan from another source)
Deposits, although an important source of funding are not a requirement, capital is. There are capital requirements that make starting and running a bank a fairly expensive enterprise - you need to put up a lot of your own money (equity) for use.
It's also what Sam Bankman-Fried and others did in exchanges that acted as unregulated banks.
The system is not perfect and there are many scandals but if you compare it to what happens in crypto exchanges, its a day and night difference.
Running a machine as intended and screwing up is different from pretending doing one thing and actually doing something else and screwing up. This is also why bankers and fund managers don't usually go to jail when they lose clients money. It's not illegal to suck at your job as long as you follow the rules.
"Moderating risk" = depending on the US federal government bail you out?
There really is no need for the charade of banks now that electronic databases are very solid technology. Their whole role in transmitting and keeping an account of money is surely reproducible by the federal government at very little cost (maybe even lower cost due to not needing FDIC and all that infrastructure) without having to pay a middleman.
It impossible for a bank for example to put all their money into Dogecoin because someone got a hunch that Musk will tweet about it. To do that they will need to create some kind of instrument that allows others to bet on Musks tweeting habits.
> There really is no need for the charade of banks now that electronic databases are very solid technology. Their whole role in transmitting and keeping an account of money is surely reproducible
That's not what banks do. You can do that without being a bank, like PayPal did. Most places will have different and much lightweight regulations than banks for this and you will go to jail if you do anything more than holding and transmitting customer money.
Except PayPal has no FDIC protection.
The part of the bank (or credit union) that required the US government to provide FDIC protection was due to dealing with cash. Imagine creating a country with just electronic money. What purpose would a bank with a FDIC protection serve if the government can just operate electronic money accounts itself? And if you want to take more risk and earn a higher return, you find a broker or investment fund or investor.
Investing customers money, create money.
Most money in the world is digital already, there are many banks that don't have physical presence and traditional banks are shutting down branches more than the open because branches are just the foot soldiers. There are also countries where cash is almost not used. Banks are not about cash, they are about credit.
I don't know what a "physical bank" means though, AFAIk there's no such thing and the buildings that banks own or operate would serve functions like hosting employees/clients/systems but they might choose not to have some of those.
And they can do this without a federal government backstop, just like an SP500 ETF does or a US Treasuries mutual fund, or an REIT, etc.
My point is the federal government need not provide a subsidy to these businesses that "invest" customer's money (or simply handle the underwriting of loans in many cases).
Right now in the US, via the Fed Funds rate, the federal government pays a business 5.5% just so the business then turns around and pays me 5.05%, all for keeping an entry in a database. And these businesses pay a lot of less discerning depositors a lot less. Surely the federal government can just give all 5.5% to people directly.
The problematic part starts when someone acts outside of this structure, like employees who take customers money and invest with it without explicitly having a right to do that.
Banks don't store money. They connect money to businesses in a structured way. No banks means businesses won't get created.
So what would you say you do here at the business factory?
[…]
I connect the money with the businesses because businesses are not good at dealing with money! I have people skills, can’t you see that?
Housing may be unaffordable, but people aren’t living in sod houses with dirt floors and no running water either.
Why not use banks for this as well?
Some wealthy investors would setup a lending operation using their own cash, based on historical examples of such. They would however need to charge higher interest rates than banks because they would be more capital constrained.
If the lender, such as a bank, is any good at their job of underwriting, then they won’t need the federal government’s assurance to bail them out and they will still be able to attract funds from people seeking returns (and risk).
Yes, but a big way small business loans happen is with people's deposited money. You're naming alternatives, but not replacements. If my money is deposited with the government, then I have to go and find someone to lend to myself, and actually have the money removed from my bank account?
> If my money is deposited with the government, then I have to go and find someone to lend to myself, and actually have the money removed from my bank account?
Also, you know the savings rate you earn at a bank is not because of the loans a bank makes, but because the government pays the bank. Why do you want your government to pay a middleman before paying you?
There was a time and purpose for this system, before instant communications and electronic databases. Now, those purposes have been automated away.
Banks' job isn't just keeping money safe and doing transactions. It includes maturity transformation as well.
I am not seeing the necessity of the federal government backstop to these businesses.
What does this have anything to do with maturity transformation? Are you simply trying to say that we don't need banks to do maturity transformation, and they should stick to handling transactions?
Money is electronic, the government can handle electronic money accounts directly, and skip paying businesses for no reason.
Banks or whatever other financial businesses can continue to sell maturity transformation services, without FDIC insurance.
That are guaranteed by the US Government up to $250,000. While the average person may not know the details, the average person’s faith in the banking system is well founded. That’s why these “alt-banks”, which avoid FDIC or NCUA coverages, are so problematic.
Saying the money appears to be there is very different from the reality of it, and in the context of whether customers consent to how the system works its also feels disingenuous IMO.
Can people spend the money as though it were there? Sure. Is the money they deposited there or are they aware that 90-100% of the money was immediately allocated to something else? Almost certainly no.
Can you clarify what you mean by "covering the failure of a moderately sized bank"? Bank is almost never "all the money is missing". Instead, it's usually something like "we have assets > deposits, but they're long term assets that can't be liquidated immediately so we can't pay all the depositors right this second", or "we have assets < deposits, but the gap isn't big enough that FDIC can't handle it".
At the end of 2022 the fund had $128.2 billion. I can't find a solid number on domestic deposits that are covered by FDIC based on the maximum deposit amount, but their Q2 2023 report showed $17.2 trillion in total domestic deposits across all FDIC institutions.
I'd expect that more than 0.7% of all deposits are under the $250k deposit limit. Let's just say 30% is actually covered, SVB had 89% of deposits above the limit when it failed, the insurance fund couldn't cover the failure of a bank with more than 3% of the market share of deposits.
The caveat there is that bank assets can be liquidated, but if the failure is fast enough that becomes really hairy. I haven't yet seen clear details on what strings they pulled and what sweetheart deals they gave when SVB was sold at the last minute, but that really means the fund isn't funded to cover enough and the hope really lies in market manipulation and a forced sale (likely funded in part by tax payers).
Last year a few banks went tits up, all the deposits were paid.
Is it consent if you aren't made aware or given reasonable access to information that the average person could be expected to understand?
https://www.spglobal.com/marketintelligence/en/news-insights...
Yes, this is correct. The bank does it in a somewhat government controlled fashion, with checks and balances, which the world has been fighting for a millennia, if not more. And the guy inside does it with stolen money, for personal gain.
Consent, for one, is a difference between the two actions, if we're talking morality.
When half[1] the population refuses to participate (perhaps they're tired of being lied to, or the candidates are slime, or there are too many selectively-interpreted, arbitrarily-enforced "laws" to count[2], or the idea one person should represent 617,000 is absurd, or they just don't like bossing their neighbors around)...
Maybe the government doesn't have consent.
[1] https://www.politico.com/news/magazine/2020/02/19/knight-non... [2] https://en.wikipedia.org/wiki/United_States_Code#Number_and_...
Consent is a difficult topic though, I agree. For example, what choice does a person have, not use banks at all? I don't think that's realistic.
$10 says they won't give a straight answer unless you ask just the right question. Eventually you'll find that there isn't a share you own directly, its effectively an IOU claim to a share. People can technically learn how the system works, but that leaves a lot of gray area there.
We could also technically read medical journals and learn how our medications work, but its unreasonable to expect everyone will and recent history has shown that in a pinch you'll be called out for doing your own research and thinking critically.
The point is that in OP's scenario, there's a bank doing investments, and a person doing investments. The bank had their funds in their usual way, and the person outright stole the funds. That makes a big difference, when talking morality, but not because of the investments, but because of the source of the funds for the investments.
If the bank came into your home, took money without your consent, gambled it on high-risk activities, then tried to replace it before you noticed that would also be bad.
But that’s not what banks do. People deposit their money at the bank consensually and with an understanding that the bank’s activities are regulated within relatively strict frameworks.
I don’t understand if you are trying to downplay the severity of criminal embezzlement by bank employees or trying to demonize banks, but the two scenarios you’re equating are nothing alike in terms of consent, regulation, risk, and criminality.
Retail banks hold their assets in various forms (central bank reserves, bonds etc.) but can’t really ‘invest’ because they can’t accept the risk.
They make most of their money on lending, but can’t actually “lend deposits” because they are on the wrong side of the balance sheet. The bank levers up capital (money that shareholders have put in as well as retained earnings from previous years) to lend from.
Deposits do count as liquidity and are a fairly inexpensive form of it, which is why banks want you to move money into them and pay interest to encourage you to not transfer them out.
https://www.codulmuncii.ro/titlul_3/capitolul_3_1.html
> (5) In cazul in care programarea concediilor se face fractionat, angajatorul este obligat sa stabileasca programarea astfel incat fiecare salariat sa efectueze intr-un an calendaristic cel putin 10 zile lucratoare de concediu neintrerupt.
"at least 10 working days of non-interrupted leave"
Of course, this is not always enforced, but many countries to have it as part of the labor code.
Plus the individual being aware of the requirement could easily circumvent by only stealing every quarter or every month :-)
"Required Absences from Sensitive Positions" - https://www.newyorkfed.org/banking/circulars/10923.html
IIRC, there were mandatory PTO/vacations required as well, so that everyone's job was done by at least 2 different people during the year.
This was not a legal thing, but required for the firm I worked at. My manager at the time said this was pretty common practice on the street, then. (Early/mid 90's.)
While individuals could ask for their vacation time to just be paid out, a lot of employers don’t like that because they budgeted to pay you 100% of your salary per year, not 104% or 106% (ie: paying you for both 52 weeks of work plus whatever weeks of holiday per 52 weeks).
Obviously I won't be naming Banks here but what usually happens is:
1) If they succeed in their investment they put the money back and walk out rich. Their venture can be detected during an audit some time later but if there's no money missing the worst that will happen is that they will be fired because banks are very sensitive on their reputation and they don't want people to hear that its possible for a such thing to happen. They also don't want the insurance and other regulatory bodies to hear about this.
2) If they are caught before returning the money(this could be audit, customer complaint or a whistleblower) they will be given the option to return the money and get fired. If they can't return the money, then a formal investigation and criminal case is initiated.
3) If they lose their investment, they will flee and trigger an audit. They won't be able to resign and leave gracefully because the process of using this money involves periodically putting it back at strategic times to avoid trigger an audit due to discrepancies, therefore it's very risky to keep coming back to work if you don't have the ability to put the money back at short notice.
This is one of the reason for people in banking having mandatory 2 weeks time off at a time in many jurisdictions. Stealing needs maintenance and maintenance needs access.
I also wouldn't call it "repay his debt to society" because due to money that he stole, he made the public transport more expensive and housing less affordable.