I feel like we're getting to this one way or another. Either via local govts like the U.S. rolling this out, or through crypto-currency, if they solve adoption, ease of use, inflation, identity, and sybil attacks-BIG IF.
It'd be nice if you could for instance use notaries to tie your SSN to a coin wallet, then have a way to regain lost keys/passwords, and if they had some fraud protection (ability to rollback transactions without fees), or insurance at the least.
The government I think has too many special interests, but syndicalists/unionists working in tandem across country-lines could create a global currency without govt control.
I've thought a lot about this, researching different technologies on bitcoin. I'm no expert in crypto by far, but what I envision would be hard - with current chains being built as far as I can tell.
Adoption of anything is "easy," and not necessary through financial incentive that Bitcoin et al are inherently structured with, via government policy requiring adoption.
I think this article misses a valuable point: because they lend more than they keep in reserve, banks create money or credit, and thus expand the available money supply.
Removing banks, and giving all this power to the central government, amounts (in my view, at least) to a form of central planning.
The author of this article seems to espouse the "financial intermediation" view of banking. But, as Werner notes, this theory has been rejected (on empirical evidence; although, I haven't read the paper he cites in his talk).
I think a key point here is "productive lending". You still need banks to have vested interest in loaning out money that they think will be paid back. Thus banks need to verify the credit-worthiness of the borrower, the collateral and consider the economic outlook.
If you remove the banks and the government lends indiscriminately or with an agenda with no market interest, that's instantly a broken system for malinvestment and corruption.
And the more centralised the banking system is, the weirder the incentives become / banks are somewhat decoupled from the incentive to lend to credit-worthy / promising businesses (like here in the UK).
I’m not sure what you mean by that. It seems obvious that’s banks have become increasingly risk adverse in the last 12 years or so, but I’m not sure what that has to do with centralisation.
this one is only "micro credit" but its pretty "indiscriminate" in a sense that the poorest of roadside street vendors/hawkers who "do not" have a credit score even are getting a loan.
this one, everyone, like every business owner using a credit line or similar products from banks were given additional 20%, no checks, no nothing. take it.
while the second one is in somewhat organized sector because those are already bank customers, the first article, these people will have a lot of default because people see this as free money, not a "loan" and guess who will bear the expense. taxpayers.
Small and short term programs are still prudent because the value of the loan is a tiny fraction of the expected wages for the demographic. Every bank will lend to anybody some amount just because it's a virtual certainty that over their lifetime they will find some job and claim the earnings statistically speaking.
The problems start when the loans approach a lifetime of after-tax inflation-adjusted earnings. Then, there is no margin for error and the margin is padded with asset inflation/bubbles.
where i live specificaly, indian occupied kashmir, we have been in homes since 5 august 2019, no internet, no movement, no phones, no business, no schools till march, then corona happened and lockdown.
the thing is, i deal with asmall businesses all day, its my job but i have seen something like 90% drop in sales, many businesses folded and bank loans continued because credit sales arent getting paid and expectation is if i continue selling, some revenue will pass.
8 million people.
i personally dont own a credit card, dont have any loans and as a result, my income is spent on food, electricity and office staff salary, rent. i cannot imagine taking on a loan and repaying it back in these uncertain times but my clients are and its very difficult for the whole system.
i have a teacher relative who in his 50s has taken huge loans because he had no house for his family. today his salary is going to 60% bank, 30% school fees of children and rest is used at home. i can only imagine if he is let go or something happened to him. sad state of affairs
A good story would be "I have seen a 90% increase in sales," then it would make sense for you to borrow money from a bank to expand your business because something seems to be working well.
A bad story is "I have seen something like 90% drop in sales" and now you need a loan in order to delay bankruptcy in the hopes that sales will pick up before you can't afford your next bill or loan payment and default on a financial obligation. It is difficult to work out what the best solution is in this situation, often the answer is just to fold the business instead of taking on a personal liability as the owner of the business that could wipe out your personal savings along with a potentially already doomed business.
You see, the bank most strongly wants to lend money to people or businesses who are in the least need a loan. Put another way, the more desperate you are for money, the more reluctant anyone is to lending you that money. This is a fact of nature, no "app" can solve this problem.
I am sorry that you and 8 million other Kashmiris are struggling so badly. It is a humanitarian tragedy that doesn't get any attention due to the geopolitics of the situation, COVID, and the right wing nationalist tendencies of the current Indian administration.
Yeah. The bigger problem is in the past 30 odd years, according to some reports, this place has remained shut for over 7 years. 7 years of no business, no schools.
Granted it was usually for weeks at end with respites and all but the fact remains I live in a very uncertain place.
Funny that you mention banks lending to those who dont need it. I have a client who is paying a 20% interest on a mortgage backed loan. Mind=blown. Why? Because the particular bank has made it easy to get a loan, you call them and they give you the money in a couple of hours. That is a selling point here, not total interest outlay or processing fees.
Yes. You are right. Businesses do take a loan to delay "folding" in hopes of better days. Its just really bad.
For me, the issue is my clients get more sales, that is more fees for me. Once that falls, it affects my bottom line directly and the stuff follows down.
Sad
You're right - the article goes wrong almost immediately when it claims that banks lend out their savers deposits. Banks are statistical multiplexers, and effectively function as hubs in a network of loans and monetary transfer. So the same arguments can be made for the centralisation of banking as for the centralisation of network systems. It should also be mentioned that the central banks aren't really central in any functional sense outside supervision, and backstopping. At least not at the moment.
At some basic level, banks do lend out their savers deposits.
The multiplier effect comes about because after the loan the bank's debtors obviously have money, but also the depositors treat their (loaned out!) deposits as if they were money. (And the depositors usually don't take out the loans as cash, but as deposits with some bank or another.)
There's some complications with regulation, central bank reserves etc. But fundamentally, banks lend out deposits.
No, they don't. Banks lend when it makes business sense, then, because of legal requirements, they search for reserves in the inter-bank system.
If the inter-bank system doesn't have spare reserves, the interest rate goes up. If the central bank doesn't want the interest rate to go up, it will add reserves to the system, independently of the quantity of deposits in the system.
For instance, the reason the interest rate is so low now in most of the world, it's not because there are a lot of deposits, but because there are a lot of reserves coming from the central banks.
'Banks lend out deposits' is a useful approximation, and more true than its opposite.
To be more complete:
In the absence of legal requirement, yes, a bank could just create a deposit and a loan out of thin air. That's basically how all loans work in the first place:
When Alice gets a loan from ACME bank, roughly the following happens: the bank adds one million dollars to Alice's current account, and also adds an entry to their books that Alice owes them one million dollars.
So far so good, and no new deposits required, or any kind of funding at all, really.
If that was all that was happening, the bank would sit there and happily collect the interest differential between the loan and the current account.
And in this version of the world, you are right: the only thing keeping the bank from creating endless loans would be legal requirements.
Alas, our bank's life ain't so easy.
Alice won't just let the money he borrowed sit in her bank account. She will spend it.
Assume she spends it via a bank transfer to Bob who has an account with a Badger bank.
Unlike Alice or even Bob, Badger won't settle for just an entry in ACME's books. They demand reserves in interbank settling.
(Similar logic applies when Alice withdraws cash.)
The bank can get reserves from their own equity, or via loans (ie deposits, the interbank system, issuing bonds, etc).
Usually banks have a bit of a cushion, so on the margin they can make a few extra loans first, and look for extra funding afterwards.
This story from the perspective of a single bank does not change when a central bank messes with the amount of total reserves. The bank will still have to acquire reserves to fund lending.
(For the sake of our explanation, we need to differentiate between the central bank adding reserves via eg open market purchases of assets, and the central bank directly lending to banks.
For the former, really nothing changes from the bank's point of view: in order to sell a T-bill to the Fed, they first need to have a T-Bill already on their balance sheet and that assets needs to be funded by liability of either equity or loans, ie deposits in the wider sense.
For the latter, things get a bit more complicated from the bank's point of view.
However, from a perspective of the system as a whole, it doesn't matter too much how the Fed injects extra resources.
And yes, legal reserve requirements are sometimes a binding constraint. Then your original story is all there is to it. But that's a rather special and pathological situation.
For historic comparison, in the heyday of Scottish banking around the time of the Industrial Revolution, banks usually ran with about 2% reserves but about 30% capital. Neither of which was mandated by law, but emerged in competition.
Crucially, Scottish banks were allowed to print their own bank notes, so a customer withdrawing cash didn't affect a bank's reserves. Unless they asked for gold coins, which famously almost no-one ever did in Scotland at the time.
No one was forced to accept a bank's notes, but competitors readily took them at face value, and presented them in interbank settling to get reserves.)
"Banks lend deposits" it's just another way to say that the causality is:
"banks have reserves" -> "banks lend the reserves that they have"
instead of:
"banks lend when make business sense" -> "then they search for reserves"
If a bank can do the second option, it doesn't make sense to say that a bank is lending deposits. In fact, saying that is mudding the issue.
There is an empirical way to know: going to a credit department in a bank, ask the person in charge if they know how much they can lend or only in what conditions they can lend. I have heard from several sources that it's the second.
As a simple analogy: on a basic level, I eat what I buy in the grocery store.
And with more details: I keep some food in the fridge. I always just eat when it makes business sense to do so. But when my fridge is running low, I get more food from the grocery store.
In your analogy, the food is the reserves the bank has.
You eat your food (lend), check if you have enough food in your fridge and if you don't you go to the grocery store and get more. Never mind how much food you eat, for the purposes of your fridge, the grocery store has an infinite supply.
So, independently of how much you eat, you can always fill your fridge. You don't stop eating because you are afraid you can't fill the fridge again.
Well, if food prices go up too much, I will moderate my eating. Or change from meat to oatmeal.
Similar for a bank. If deposits or interbank funds become to hard to come by, they'll curtail lending.
In any case, it seems like we mostly agree on what's actually happening.
(Though just to make sure, do you understand and/or agree on the scenario where there are no legal reserve requirements?)
Our main difference is in whether we treat 'banks lend deposits' as a valid description.
Btw, you are right that strictly speaking banks don't have to have reserves on hand in the logical second when they make the loan. But they do almost immediately need the reserves (eg deposits) when the debtor starts spending.
Whether or not there is an intermediate party, the situation is already one of central planning. The central bank has a target interest rate, and the government gives them tools to achieve it. Having a target is pretty characteristic of central planning - the Fed is manipulating parts of the market to achieve policy aims.
It is highly debatable whether the the elected government is a better planner than the appointed bankers. At least the handing out of the money would be more transparent.
The Fed, like many other central banks, have an inflation target. Thanks to TIPS spreads, they get a market forecast of inflation.
Thus the Fed could just buy and sell treasuries in the open market until the TIPS spread is at their inflation target.
As a by-product those open market transactions will increase or decrease the quantity of reserves. Without any need for the Fed to even think about interest rates.
Practical example next: Singapore's central bank also cares about inflation. Instead of mucking around with interest rates on bonds, they muck around with foreign exchange rates by buying and selling forex on the open market.
Interest rates on government debt are left to the market. (Just like in the Fed system, foreign exchange rates are left to the market.)
For a big country, directly buying and selling forex might be seen as 'evil currency manipulation'. But the system would be just as workable if they used eg a basket of commodities or even some broad ETFs instead.
(Historically, a basket consisting of a single commodity, gold, used to be rather popular. But that's a different story.)
>>"As a by-product those open market transactions will increase or decrease the quantity of reserves. Without any need for the Fed to even think about interest rates"
But changing the interest rate in the process.
You are implying that the TIPS spread is a better indicator of inflation that the interest rate. That doesn't make a lot of sense to me. More important, doesn't make sense to the central bankers, because they target the interest rate not the TIPS spread.
Huh? TIPS spreads are literally market inflation expectations. Obviously they are amongst the best indicator of future inflation we have.
(Other indicators the Fed uses include internal forecasts.)
Nobody thinks that interest rates are a good indicator of inflation. Certainly no one at the Fed. Or, what do you mean by 'indicator'?
The Fed wants to keep the price level on a stable trajectory, and they use an interest rate target as an intermediate instrument to do so.
An instrument is a very different concept from an indicator, in my understanding. It's like the accelerator pedal vs the speedometer. Do you use the two terms in a different way?
> But changing the interest rate in the process.
Yes, but as a side effect. Just like the Fed actions also influence the exchange rate or the price of gold, but neither of the two is their target nor instrument.
>> "An instrument is a very different concept from an indicator"
You are right there.
>>"The Fed wants to keep the price level on a stable trajectory, and they use an interest rate target as an intermediate instrument to do so."
Yes, they use it like the main instrument to do so. And that's the reason why they can't just allow the interest rate to float freely. And because they can't allow the interest rate to float freely they have to add reserves when the inter-bank market is going up. So, reserves will be added to the system when banks need them.
Using interest rates as a policy instrument is a decision they make. Technically, It would be rather easy for them to change that decision and eg just buy and sell t-bills directly without any reference to interest rates.
They can easily choose to let interest rates float freely.
Of course, even if they directed targeted eg the TIPS spread without worrying about interest rates, in the end they would still add reserves when banks lend. (Ceteris paribus.)
The way it works where I live is that if the tax office has to refund you some money (or the government wants to give you stimulus money, or whatever) is that by default it gets deposited to the bank account that was last used to pay any tax that was owed. There are always going to be oddities (e.g. a refund needs to be given to a person who has never paid tax, or you have changed bank accounts since then), but the vast majority of the time this will be the right account to send it to, and it's OK to have manual intervention to handle the rest.
I'm not sure I understand why the USA can't do this, to solve the first problem listed (paying people directly). I'm not sure it requires government intervention to solve the other problems (instant payments from one person to another are common outside the USA, for example). What other advantages does SSN-as-bank-account have?
yeah. in india its the similar thing. if talking about income tax, you have to get your bank account "prevalidated" meaning it has your tax id and your mobile number linked. also, your national identity card needs to be linked to your income tax account as well as that bank account.
once you have that, only then the refund is processed. i know people who have had issues with their name spelling and refunds were stuck for months.
Yup, I think everywhere except USA bank accounts are like email addresses. Government just needs to know your bank account number to pay stimulus. Taxes are paid to the government bank account. In Europe it has been this way since 80's. This solves the practical issue of moving money, I don't know about the other points. So called "wire" transfers are possible, but it's not used because it's scary or something?
I live in the US. I've mailed, through the US Post Office, my federal tax forms for the past few years as I don't pay for software to file my taxes. I have always gotten my tax refunds or other stimulus money directly deposited into my bank account by the IRS without any issues, including the past 2 stimulus payments. I believe every time the government is using ACH transfers to do this.
Do most people in the US not do this when they file their taxes?
Do businesses not have the ability to do this like people do?
I mean, I know a lot of people in the US don't have bank accounts, so the only way for the government to send them money is via a check in the mail. This should (hopefully) be the exception and not the standard procedure.
It’s true, we could let consumers open accounts at the Federal Reserve and turn it into a retail bank. But that doesn’t benefit the average American, since checking is already free.
And for retail loans, interest wouldn’t be cheaper if the Fed gave bank loans, because interest on bank loans is based on rates of default and a bank’s lending history. It’s not just some rent seeking fee on top of the federal funds rate. Turning the Fed into the only retail bank would reduce options for lending and the availability of credit.
>Before the internet, consumers who wanted to buy an airplane ticket would talk to a travel agent, who would type into a “green screen” terminal, which would “talk” to a mainframe computer, which would procure said airplane ticket.
Sorry but what? Before the internet you went to a travel agent. Now you go to... expedia (a travel agent). The only difference between then and now is your human travel agent has been replaced by an algorithm designed to efficiently fleece you.
This isn't disintermediation. There is intermediation of 500 silicon valley engineers between you and your flight instead of 1 local travel agent.
Naturally this is A16Z's business model, go from a state where 100,000 travel agents are getting $50,000 a year for sales and move to a state where their start up is making $5Bn a year capturing that same value.
What's bizarre though, is A16Z trying to explain to you that actually that $5Bn they're trying to capture actually doesn't exist. Expedia isn't a middle man making money, no according to A16Z there's no longer a middle man. Pay no attention to the $20Bn market cap.
I think the basis for that pretense is that every digital intermediary can compete with every other digital intermediary, unlike a human intermediary who can only effectively compete with other human intermediaries in the same geographic area. This causes very different effects on pricing. It's probably premature to say that it will drive the profit margins of the intermediaries almost to zero, but that is one possible outcome.
Computers can help bring down costs. Competition can help force companies to pass on those savings.
(Though even in the absence of competition, there is some incentive to lower prices in order to increase volume. But it's much weaker. See eg https://en.wikipedia.org/wiki/Monopoly_profit)
If 500 silicon valley engineers can replace 100,000 travel agents earning $50,000, then you have 500 silicon valley engineers earning $10m and 100,000 unemployed travel agents.
The crucial side-effect of most productivity-increasing inventions is marginalization of most of the work force (barring the few lucky ones - the SV engineers in the case of XXI century), destruction of communities and concentration of wealth and power in fewer hands. The luddites were definitely onto something. Wendell Bell explored these ideas in detail in his writing, if anyone is interested in learning more.
Yeah which is why it's stated as a problem to be solved, not some immutable fact of life. The issue is that we've seen incredibly little progress in this area. There have been studies on the British coal mines that shuttered under Thatcher - the areas are still not back to the level of employment they had before the mines were shut. It's fine to say that shuttering those mines was a good thing - it probably was. It's also factual to say that those who felt the negative effects didn't benefit from the advantages of government policy, and ina human sense beyond employment numbers it means a lot of those people never worked again.
If you mean force others to take care of the stable boy, then no, it can not be moral.
What is moral and also efficient and kind is not standing in the way of him finding another occupation - to remove all regulation that hinders someone from providing value
You nailed it - statist democracy is having control over vast amounts of weapons, and forcing your way into the wallet of your neighbour, rather than competing and providing value to others.
The whole point is that the engineers all taken together would make less than the travel agents all taken together.
That's where the consumer surplus and company profit come from.
Second: freeing up the work of 99,500 people would be awesome! You know that nearly everyone used to be a farmer back in the day? Surprisingly, the world today is not made up of 70%+ unemployed farmers?
That's not true in any way, shape, or form. Maybe it's true for you, but don't assume it's true for others or for the the rest of the world.
When I book a flight ticket, I go to the airline directly, which is true for more or less all people I know. For me this will typically be KLM, AirFrance, or SAS. These companies are Dutch, French, and Swedish.
There are no "500 silicon valley engineers" between me and them.
The world is bigger than your little world. I didn't even know what Expedia was until I looked it up.
It works well for popular flights within Europe, but if you want to fly to bit less mainstream destination given your starting point (even something like Katowice -> Las Vegas, and back), you may end up on transfers between different airlines, or the return part of the journey may be via a different airline. Booking through Expedia, Kayak etc. is basically the only way (I know) to handle this with zero hassle.
I'm not sure what the whole article is about. Bitcoin is here and can scale to store hundreds of trillions of dollars of value. Instead of ,,time to build'' I would say it's time to save.
"Every consumer will access his or her savings, loans, and investments via a mobile app."
Translation: want to access your money? be careful of what you say or we'll deprive you of access to your money. We own and control "your" mobile access point, so wise up.
the idea of a personal "Fed" account for citizens isnt new...basically everyone talking about central bank digital currencies is describing this
the basic "innovation" is the ability to coerce the masses by threatening to destroy money if not spent in accordance with central planners....here's $5k, spend it by Friday or its gone
> if the recipient of money is the government, it makes no sense for that to be filtered through legacy financial institutions
OP seems to be proposing a redesign of the US Treasuries market that amounts to eliminating the primary dealer system and replacing it with ... an "app"? It's not necessarily a bad idea, it's just completely devoid of any alternative proposal, let alone actual details. And as they say, the devil is in the details. I guess that's the norm in the VC world, float a rough sketch of a very vague idea that sounds lucrative and hope that someone comes to them with an idea that fills in an actual proposal and enough details for them to be willing to take a real bet on a real idea. It's a mix of PR and blue sky thinking, I suppose.
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[ 2.7 ms ] story [ 114 ms ] threadBuilding it from bottom up it's difficult because it means a private company who deals directly with government, and it manages all they money.
It'd be nice if you could for instance use notaries to tie your SSN to a coin wallet, then have a way to regain lost keys/passwords, and if they had some fraud protection (ability to rollback transactions without fees), or insurance at the least.
The government I think has too many special interests, but syndicalists/unionists working in tandem across country-lines could create a global currency without govt control.
I've thought a lot about this, researching different technologies on bitcoin. I'm no expert in crypto by far, but what I envision would be hard - with current chains being built as far as I can tell.
Maybe in 5-10 years though.
Removing banks, and giving all this power to the central government, amounts (in my view, at least) to a form of central planning.
There's a good talk about this, here: https://www.youtube.com/watch?v=IzE038REw2k
The author of this article seems to espouse the "financial intermediation" view of banking. But, as Werner notes, this theory has been rejected (on empirical evidence; although, I haven't read the paper he cites in his talk).
If you remove the banks and the government lends indiscriminately or with an agenda with no market interest, that's instantly a broken system for malinvestment and corruption.
And the more centralised the banking system is, the weirder the incentives become / banks are somewhat decoupled from the incentive to lend to credit-worthy / promising businesses (like here in the UK).
https://indianexpress.com/article/cities/delhi/centre-launch...
this one is only "micro credit" but its pretty "indiscriminate" in a sense that the poorest of roadside street vendors/hawkers who "do not" have a credit score even are getting a loan.
https://www.financialexpress.com/industry/banking-finance/ps...
this one, everyone, like every business owner using a credit line or similar products from banks were given additional 20%, no checks, no nothing. take it.
while the second one is in somewhat organized sector because those are already bank customers, the first article, these people will have a lot of default because people see this as free money, not a "loan" and guess who will bear the expense. taxpayers.
The problems start when the loans approach a lifetime of after-tax inflation-adjusted earnings. Then, there is no margin for error and the margin is padded with asset inflation/bubbles.
the thing is, i deal with asmall businesses all day, its my job but i have seen something like 90% drop in sales, many businesses folded and bank loans continued because credit sales arent getting paid and expectation is if i continue selling, some revenue will pass.
8 million people.
i personally dont own a credit card, dont have any loans and as a result, my income is spent on food, electricity and office staff salary, rent. i cannot imagine taking on a loan and repaying it back in these uncertain times but my clients are and its very difficult for the whole system.
i have a teacher relative who in his 50s has taken huge loans because he had no house for his family. today his salary is going to 60% bank, 30% school fees of children and rest is used at home. i can only imagine if he is let go or something happened to him. sad state of affairs
A good story would be "I have seen a 90% increase in sales," then it would make sense for you to borrow money from a bank to expand your business because something seems to be working well.
A bad story is "I have seen something like 90% drop in sales" and now you need a loan in order to delay bankruptcy in the hopes that sales will pick up before you can't afford your next bill or loan payment and default on a financial obligation. It is difficult to work out what the best solution is in this situation, often the answer is just to fold the business instead of taking on a personal liability as the owner of the business that could wipe out your personal savings along with a potentially already doomed business.
You see, the bank most strongly wants to lend money to people or businesses who are in the least need a loan. Put another way, the more desperate you are for money, the more reluctant anyone is to lending you that money. This is a fact of nature, no "app" can solve this problem.
I am sorry that you and 8 million other Kashmiris are struggling so badly. It is a humanitarian tragedy that doesn't get any attention due to the geopolitics of the situation, COVID, and the right wing nationalist tendencies of the current Indian administration.
Granted it was usually for weeks at end with respites and all but the fact remains I live in a very uncertain place.
Funny that you mention banks lending to those who dont need it. I have a client who is paying a 20% interest on a mortgage backed loan. Mind=blown. Why? Because the particular bank has made it easy to get a loan, you call them and they give you the money in a couple of hours. That is a selling point here, not total interest outlay or processing fees.
Yes. You are right. Businesses do take a loan to delay "folding" in hopes of better days. Its just really bad. For me, the issue is my clients get more sales, that is more fees for me. Once that falls, it affects my bottom line directly and the stuff follows down. Sad
The multiplier effect comes about because after the loan the bank's debtors obviously have money, but also the depositors treat their (loaned out!) deposits as if they were money. (And the depositors usually don't take out the loans as cash, but as deposits with some bank or another.)
There's some complications with regulation, central bank reserves etc. But fundamentally, banks lend out deposits.
If the inter-bank system doesn't have spare reserves, the interest rate goes up. If the central bank doesn't want the interest rate to go up, it will add reserves to the system, independently of the quantity of deposits in the system.
For instance, the reason the interest rate is so low now in most of the world, it's not because there are a lot of deposits, but because there are a lot of reserves coming from the central banks.
'Banks lend out deposits' is a useful approximation, and more true than its opposite.
To be more complete:
In the absence of legal requirement, yes, a bank could just create a deposit and a loan out of thin air. That's basically how all loans work in the first place:
When Alice gets a loan from ACME bank, roughly the following happens: the bank adds one million dollars to Alice's current account, and also adds an entry to their books that Alice owes them one million dollars.
So far so good, and no new deposits required, or any kind of funding at all, really.
If that was all that was happening, the bank would sit there and happily collect the interest differential between the loan and the current account.
And in this version of the world, you are right: the only thing keeping the bank from creating endless loans would be legal requirements.
Alas, our bank's life ain't so easy.
Alice won't just let the money he borrowed sit in her bank account. She will spend it.
Assume she spends it via a bank transfer to Bob who has an account with a Badger bank.
Unlike Alice or even Bob, Badger won't settle for just an entry in ACME's books. They demand reserves in interbank settling.
(Similar logic applies when Alice withdraws cash.)
The bank can get reserves from their own equity, or via loans (ie deposits, the interbank system, issuing bonds, etc).
Usually banks have a bit of a cushion, so on the margin they can make a few extra loans first, and look for extra funding afterwards.
This story from the perspective of a single bank does not change when a central bank messes with the amount of total reserves. The bank will still have to acquire reserves to fund lending.
(For the sake of our explanation, we need to differentiate between the central bank adding reserves via eg open market purchases of assets, and the central bank directly lending to banks.
For the former, really nothing changes from the bank's point of view: in order to sell a T-bill to the Fed, they first need to have a T-Bill already on their balance sheet and that assets needs to be funded by liability of either equity or loans, ie deposits in the wider sense.
For the latter, things get a bit more complicated from the bank's point of view.
However, from a perspective of the system as a whole, it doesn't matter too much how the Fed injects extra resources.
And yes, legal reserve requirements are sometimes a binding constraint. Then your original story is all there is to it. But that's a rather special and pathological situation.
For historic comparison, in the heyday of Scottish banking around the time of the Industrial Revolution, banks usually ran with about 2% reserves but about 30% capital. Neither of which was mandated by law, but emerged in competition.
Crucially, Scottish banks were allowed to print their own bank notes, so a customer withdrawing cash didn't affect a bank's reserves. Unless they asked for gold coins, which famously almost no-one ever did in Scotland at the time.
No one was forced to accept a bank's notes, but competitors readily took them at face value, and presented them in interbank settling to get reserves.)
"banks have reserves" -> "banks lend the reserves that they have"
instead of:
"banks lend when make business sense" -> "then they search for reserves"
If a bank can do the second option, it doesn't make sense to say that a bank is lending deposits. In fact, saying that is mudding the issue.
There is an empirical way to know: going to a credit department in a bank, ask the person in charge if they know how much they can lend or only in what conditions they can lend. I have heard from several sources that it's the second.
Here is an interesting paper about the issue:
https://www.sciencedirect.com/science/article/pii/S105752191...
As a simple analogy: on a basic level, I eat what I buy in the grocery store.
And with more details: I keep some food in the fridge. I always just eat when it makes business sense to do so. But when my fridge is running low, I get more food from the grocery store.
You eat your food (lend), check if you have enough food in your fridge and if you don't you go to the grocery store and get more. Never mind how much food you eat, for the purposes of your fridge, the grocery store has an infinite supply.
So, independently of how much you eat, you can always fill your fridge. You don't stop eating because you are afraid you can't fill the fridge again.
Similar for a bank. If deposits or interbank funds become to hard to come by, they'll curtail lending.
In any case, it seems like we mostly agree on what's actually happening.
(Though just to make sure, do you understand and/or agree on the scenario where there are no legal reserve requirements?)
Our main difference is in whether we treat 'banks lend deposits' as a valid description.
Btw, you are right that strictly speaking banks don't have to have reserves on hand in the logical second when they make the loan. But they do almost immediately need the reserves (eg deposits) when the debtor starts spending.
It is highly debatable whether the the elected government is a better planner than the appointed bankers. At least the handing out of the money would be more transparent.
The one in my country of residence doesn't.
In any case, it's not black and white. Just because there is one target doesn't mean you live the Soviet Union.
There are lots of shades.
The Fed, like many other central banks, have an inflation target. Thanks to TIPS spreads, they get a market forecast of inflation.
Thus the Fed could just buy and sell treasuries in the open market until the TIPS spread is at their inflation target.
As a by-product those open market transactions will increase or decrease the quantity of reserves. Without any need for the Fed to even think about interest rates.
Practical example next: Singapore's central bank also cares about inflation. Instead of mucking around with interest rates on bonds, they muck around with foreign exchange rates by buying and selling forex on the open market.
Interest rates on government debt are left to the market. (Just like in the Fed system, foreign exchange rates are left to the market.)
For a big country, directly buying and selling forex might be seen as 'evil currency manipulation'. But the system would be just as workable if they used eg a basket of commodities or even some broad ETFs instead.
(Historically, a basket consisting of a single commodity, gold, used to be rather popular. But that's a different story.)
But changing the interest rate in the process.
You are implying that the TIPS spread is a better indicator of inflation that the interest rate. That doesn't make a lot of sense to me. More important, doesn't make sense to the central bankers, because they target the interest rate not the TIPS spread.
(Other indicators the Fed uses include internal forecasts.)
Nobody thinks that interest rates are a good indicator of inflation. Certainly no one at the Fed. Or, what do you mean by 'indicator'?
The Fed wants to keep the price level on a stable trajectory, and they use an interest rate target as an intermediate instrument to do so.
An instrument is a very different concept from an indicator, in my understanding. It's like the accelerator pedal vs the speedometer. Do you use the two terms in a different way?
> But changing the interest rate in the process.
Yes, but as a side effect. Just like the Fed actions also influence the exchange rate or the price of gold, but neither of the two is their target nor instrument.
You are right there.
>>"The Fed wants to keep the price level on a stable trajectory, and they use an interest rate target as an intermediate instrument to do so."
Yes, they use it like the main instrument to do so. And that's the reason why they can't just allow the interest rate to float freely. And because they can't allow the interest rate to float freely they have to add reserves when the inter-bank market is going up. So, reserves will be added to the system when banks need them.
Causality: banks lend -> reserves are added
They can easily choose to let interest rates float freely.
Of course, even if they directed targeted eg the TIPS spread without worrying about interest rates, in the end they would still add reserves when banks lend. (Ceteris paribus.)
I'm not sure I understand why the USA can't do this, to solve the first problem listed (paying people directly). I'm not sure it requires government intervention to solve the other problems (instant payments from one person to another are common outside the USA, for example). What other advantages does SSN-as-bank-account have?
Do most people in the US not do this when they file their taxes?
Do businesses not have the ability to do this like people do?
I mean, I know a lot of people in the US don't have bank accounts, so the only way for the government to send them money is via a check in the mail. This should (hopefully) be the exception and not the standard procedure.
And for retail loans, interest wouldn’t be cheaper if the Fed gave bank loans, because interest on bank loans is based on rates of default and a bank’s lending history. It’s not just some rent seeking fee on top of the federal funds rate. Turning the Fed into the only retail bank would reduce options for lending and the availability of credit.
Sorry but what? Before the internet you went to a travel agent. Now you go to... expedia (a travel agent). The only difference between then and now is your human travel agent has been replaced by an algorithm designed to efficiently fleece you.
This isn't disintermediation. There is intermediation of 500 silicon valley engineers between you and your flight instead of 1 local travel agent.
Naturally this is A16Z's business model, go from a state where 100,000 travel agents are getting $50,000 a year for sales and move to a state where their start up is making $5Bn a year capturing that same value.
What's bizarre though, is A16Z trying to explain to you that actually that $5Bn they're trying to capture actually doesn't exist. Expedia isn't a middle man making money, no according to A16Z there's no longer a middle man. Pay no attention to the $20Bn market cap.
Computers can help bring down costs. Competition can help force companies to pass on those savings.
(Though even in the absence of competition, there is some incentive to lower prices in order to increase volume. But it's much weaker. See eg https://en.wikipedia.org/wiki/Monopoly_profit)
What is moral and also efficient and kind is not standing in the way of him finding another occupation - to remove all regulation that hinders someone from providing value
That's where the consumer surplus and company profit come from.
Second: freeing up the work of 99,500 people would be awesome! You know that nearly everyone used to be a farmer back in the day? Surprisingly, the world today is not made up of 70%+ unemployed farmers?
When I book a flight ticket, I go to the airline directly, which is true for more or less all people I know. For me this will typically be KLM, AirFrance, or SAS. These companies are Dutch, French, and Swedish.
There are no "500 silicon valley engineers" between me and them.
The world is bigger than your little world. I didn't even know what Expedia was until I looked it up.
Translation: want to access your money? be careful of what you say or we'll deprive you of access to your money. We own and control "your" mobile access point, so wise up.
the basic "innovation" is the ability to coerce the masses by threatening to destroy money if not spent in accordance with central planners....here's $5k, spend it by Friday or its gone
For comparison, the Danish government - in no way a fast mover - introduced a similar scheme, “Nemkonto” (Easy account), by legislation in 2003.
OP seems to be proposing a redesign of the US Treasuries market that amounts to eliminating the primary dealer system and replacing it with ... an "app"? It's not necessarily a bad idea, it's just completely devoid of any alternative proposal, let alone actual details. And as they say, the devil is in the details. I guess that's the norm in the VC world, float a rough sketch of a very vague idea that sounds lucrative and hope that someone comes to them with an idea that fills in an actual proposal and enough details for them to be willing to take a real bet on a real idea. It's a mix of PR and blue sky thinking, I suppose.