Banks have been consolidating for a century. This is by design.
> The commercial-bank population reached 14,496 in 1984. It turns out this was a post-1940 peak that may never be reached again. Between 1984 and 2020, the number of banks decreased by 70%.
The government is consolidating banks. All banks have had ever more rules and regulations in the last 30 years, but the end result is fewer, larger banks that are more tied in with the state.
Is this good or bad? Opinions differ. What is perplexing is the government has not allowed a “narrow bank” that simply passes deposits into treasuries, which would be much safer. You would also think that with the rapid change in technology and innovation over the past 30 years there would be more banks rather than less - freedom of choice and innovation and whatnot - but that is not the case.
I believe that fractional reserve banking based on fiat currency is inherently risky. However the state does not make it easy for me to avoid this. However it is possible for even the moderately wealthy person to take safe action to reduce such risk.
It just exposes how messed up the fiat system is. You have to disallow full reserve banks because they would be better (safer) and would suck in most of the deposits. It is really disgusting how this highly leveraged system is kept alive by the state benefiting everyone who takes unreasonable risks on behalf of others
Fractional reserve isn't some scam, it's where money comes from. Not only that, all the bank failures had their entire equity value zeroed out so no, the people who mismanaged the bank didn't walk out like bandits. It's not 'highly leveraged.'
It‘s not a secret that bank equity does not yield the best returns because most of the excess returns that come from the risks taken are siphoned off in form of inflated salaries and „prestige“ (e.g. the most pristine office real estate). I agree that fractional reserve banking can be efficient but only if the incentives are aligned. And this is only the case if the depositors are at risk and forced to choose banks with good track records for their savings to be invested profitably, yet safely (risk/return profile).
> And this is only the case if the depositors are at risk and forced to choose banks with good track records for their savings to be invested profitably, yet safely (risk/return profile).
Barely anyone is qualified to assess the quality of a bank. It's difficult even for auditors. It shouldn't be your uncle's responsibility, it should be the responsibility of regulators.
That's really nothing to do with fractional reserve and more of an assessment of the US banking system.
You have a presumption that experts should be believed. However the roots of my own success are based on ignoring “experts”, from my college professors to my bosses, until I was so successful that I became the “expert”, and others started listening to me. The concept of “expertise” is bullshit.
If something is difficult to understand, even for so-called “experts”, that is a sign of severe dysfunction. All topics can be distilled into simplistic understanding. Once you speak in academic gobble-dee-gook you are done for.
> You have a presumption that experts should be believed.
Yes, my guy, I happen to believe that people who know what they're talking about should be listened to. I suspect most won't find this controversial. The world is far too complex for anyone to be sufficiently competent in every field, and yes spending time working in a field gives you more expertise than an average rando you pull off the street.
Experts aren't always right, and the consensus isn't always right, which is why we have the scientific method. It's totally fair to question these folks but to blanket dismiss them is silly.
> All topics can be distilled into simplistic understanding.
Simply false.
> Once you speak in academic gobble-dee-gook you are done for.
lol.
This would be a good candidate for a Reddit-like 'flair' concept so I wouldn't waste my time responding to someone who doesn't believe in the concept of people who know what they're talking about. It's fine, I'll make a note of your screen name for next time.
Its not fractional. Its 0%, see FDIC website on monetary policy.
Also, the executives from those banks received compensation packages and structured equity sales prior to the banks failing. They did make out like bandits, and congress was looking at options to claw it back, but nothing was ever finalized.
Retirement funds which were invested heavily in index weighted stocks took the biggest hit net worth wise.
> Its not fractional. It’s 0%, see FDIC website on monetary policy.
This is nonsense. Reserve requirements were deprecated in favour of finer-grained capital and liquidity requirements [1].
They serve the same purpose, but with a broader consideration than reserve requirements’ “is it a reserve” binary test. Banks’ ability to create money is still constrained by their capital requirements. We are on a fractional reserve system.
What's nonsense is Basel III using market capitalization as fulfilling capital reserves.
Those asset classes are heavily collateralized. If you want to get technical, what really happens when you convert the same underlying asset to be collaterilized multiple times and aggregate it in a single security or several steps removed so no one is the wiser?
Yes, that is insufficient, reporting is opaque, and creates many more additional threats to the health of the banking sector. Bank of International Settlements has a more accurate rundown.
Most of the requirements are only applied to G-Sibs, which are only classified as such if they hold over 200 or 250B in assets (off the top of my head).
If you were paying attention to what happened with FRC, that was a trial run of things to come. There's an option's mechanism to cause the market maker to create synthetic shares. In volatility spikes they have two options to recoup losses, write/sell options and receive preferential treatment for clearing in receivership, or purchase shares. The latter in the face of significant shorting in addition to gamma squeeze causes a short squeeze (Gamestop), the former causes aggregate indebtness violations forcing delisting within 30-60 days which aren't usually announced (FRC).
Market mechanics say when there are more sellers than buyers the price goes down. If you can indirectly trigger more shares than are in existence being sold, the market can be tanked at a profit with sufficiently obfuscated capital.
Anytime you have over a 100% leverage ratio, its no longer fractional. Given the complexity of collateralization and the lack of any single clearing house for collateralized debt. You have no way of proving that the underlying capital reserve won't suddenly vanish in a contagion crisis. At any time there are tens of thousands of floating contracts that influence the market capitalization/stock price.
> Most of the requirements are only applied to G-Sibs
All banks are subject to capital requirements. Large banks have extra testing; that doesn’t mean “most” capital requirements are waived for small banks.
> an option's mechanism to cause the market maker to create synthetic shares
Former options market maker. All market makers can do this, it’s called naked shorting, and it has little to nothing to do with capital requirements in general.
> you have no way of proving that the underlying capital reserve won't suddenly vanish in a contagion crisis
Capital isn’t cash in a vault. It’s risk-weighted assets minus liabilities. Public equities are heavily weighted; that disincentivises using them significantly for capital. The only proof one needs that capital won’t vanish is the Fed’s discount window.
> Anytime you have over a 100% leverage ratio, its no longer fractional
This is the definition of fractional reserve. 10% reserve requirement means 9 parts debt to 1 part reserves, a 900% debt ratio.
> Has nothing to do with bank capital requirements in general.
We'll have to disagree. The moment the framework allowed market exposure in lieu of a capital reserve (in whole or part) it became inseparably linked as it impacts the basis of the capital reserve asset potentially misclassifying the asset as reserve instead of debt.
> This is the definition of fractional reserve.
It is the definition so long as all debt and reserve are segmented correctly into debt and reserve. The moment you have obfuscation such as multiple separate levels of collateralization or leverage being misclassified as assets; this definition fails, and the only time you'd find out about it given current frameworks is in a deleveraging (after the money is suddenly gone).
You have the same exact characteristics in a ponzi scheme.
I'm aware you think this is a simple double-entry accounting misunderstanding. Its not. The moment assets change hands between a third party it becomes an exponential expansion issue with regards to fraud. Double-entry accounting is limited to within a single organization. Boundaries are where things slip past, that and footnotes. Unfortunately its not letting me respond to your latest response so here's an example.
You (Bank A) loan out 9 parts per 1 of reserves. That's a 9x expansion. The person you loaned 9 out to goes to multiple banks, secures the loans with the same 9$ it just received multiple times (fraudulently, we'll say 9x), he/she receives 81 dollars back. Then they take those 81 dollars in deposits into their bank account at bank A. That 81 dollars is counted as reserves. The bank loans out 723 more dollars. You see where this is going?
Eventually this fails, but not before a large chunk that which was created out of thin air simply ceases to exist (when this is discovered as being the equivalent of a naked contract). The main problem is, the person doing this has the control because only they know what's going on.
The point is, market exposure provides the attack surface to allow this, the capitalization is an aggregate that counts as reserves which impacts what you can loan out, because debt/leverage is commingled with its asset value indeterminably and it changes with the whims of the market where many bad actors play, this previous example is possible right up until a precipitating event. When something is possible but bad, particularly in finance and banking, and there are profit incentives, this will happen as it has many times before only on a grander scale with more systemic risk. Imagine a top 4 bank with this exposure doing a Madoff through an intermediary via the stock market. Who is left holding the bag. Payouts from FDIC/Fed don't come out of thin air, the value is unwound in inflation as all fraud in aggregate are at the upper levels of the banking system. The game is bail-out.
Regarding gold, take a close look at the COMEX, its never been independently audited. Compare the eligible contracts vs. Registered. What percentage are they. COMEX disclaims responsibility for eligible contract reporting but that in large part dictates spot for the future month given percentages. If they were collusive the fix would be in right? What would you see if in addition to Dealer A's selling a gold contract to Dealer B, and back again the following month, they have a private repurchase agreement and vice versa to guarantee and deviations in the market can be capitalized on by either side at a profit (as a strangle). Its all paper (a warrant) after all until you have a load-out policy.
> moment the framework allowed market exposure in lieu of a capital reserve (in whole or part)
Assets minus liabilities. What alternate valuation do you want for assets other than the price at which they can be sold?
Again, in a crisis, the Fed’s discount window turns quality assets into reserves. And in practice, reserves are always part of banks’ assets; without them they couldn’t clear a single cheque or wire.
You’re letting yourself get confused with naked shorting, which doesn’t apply to most of a bank’s assets. (You can’t count a borrowed Treasury as net capital. And banks could always borrow reserves, though that doesn’t change their net capital position.)
> it impacts the basis of the capital reserve asset potentially misclassifying the asset as reserve instead of debt
This is double-entry accounting. Your bank deposit is your asset and the bank’s debt. A central bank reserve is a commercial bank’s asset and the central bank’s debt.
> as all debt and reserve are segmented correctly into debt and reserve
This isn’t even on the level of finance or economics. It’s a fundamental misunderstanding of accounting. Debt versus reserve is an inchoate ontology; they’re parts of opposite sides of the balance sheet. It’s like asking if your car is cash or a credit card.
Reserves are a component of capital, and both are assets and liabilities of someone’s. This is what fractional-reserve banking is all about. You’re seemingly upset there isn’t gold backing the central bank’s reserves, though even then, your requirements wouldn’t be met since the market price of gold varies with respect to other assets.
Now it lets me respond... anyway, I ran into a character cap earlier on my edit or the time ran out.
Regarding your Assets minus liabilities that's not strictly true. Its my understanding that bond assets are considered statically valued and not at market value when they have elected to hold it to maturity, I'm sure those aren't the only asset classes with alternate valuations/reporting.
See my edit in my last post addressing double-entry accounting, and how its not relevant to the discussion since the fraud and counterparty risk I'm talking about occurs outside the boundaries of double-entry accounting.
You seem to have mistaken the context.
Issued debt is not counted as reserve, its considered leverage and a liability, as a result you cannot issue more debt to increase your reserve. The ratio of reserve to issued debt must be below or equal to the set rate.
When you count debt as reserve unintentionally you have exponential debt being issued exceeding the ratio which ultimately collapses in the form of a Ponzi as environment and conditions change. Any ponzi eventually has a deleveraging, this often occurs when clearing any company whose assets have been collateralized potentially multiple times. The payout has already been made at origination, the value of the loan asset with backed secured collateral suddenly becomes 1/X depending on the number of X times it was loaned against; in reality it always was but the bankers didn't know it. The same asset is claimed in its entirety among X number of loan originators in clearing bankruptcy/receivership.
At the individual level people who invest in a Ponzi take losses. Risk of investing.
At the primary bank level, this is a systemic risk, bailout provided by FDIC/Fed is unwound as all aggregate fraud is unwound over time as inflation for troubled assets. Creating these plausible unforeseeable situations is incentivized.
It creates perverse incentives which is why bailout has been a recurring issue at least once every decade since the 70s. Concentrated banking means so big it will certainly fail.
When that inevitably happens, everyone holding USD or working for USD pays without their consent or knowledge via inflation. That is upsetting especially when it is easily foreseeable.
I'm not upset that it isn't gold backed. I simply do not believe it is a good idea to enable foreseeable fraud that will go undetected until its too late and encourage it to keep happening.
The risk by far outweighs any potential benefit. I'm all to aware what happens when hyper-inflation occurs. Ray Dalio wrote some nice case studies on those if you haven't already reviewed ("Bridegwater/Ray Dalio - Big Debt Crises").
In my opinion, most modern finance and economics training which I've seen is absolute garbage and encourages you to look at everything in isolation, or a very narrow context without providing fundamentals or limitations of the models they encourage. I've studied them, they just aren't very useful.
How can both parties be right while being completely wrong pretty much sums up isolation in complex interconnected systems. Many of the basic assumptions that are held true fail under some pretty simple situations involving corruption, control, coercion, and deceit.
If you can find vintage books on the subject they are much better and absolute gold mines (circa 1950s-1967) in comparison.
> bond assets are considered statically valued and not at market value when they have elected to hold it to maturity
Under Basel III, no. They’re marked to market. Under American rules, yes, because the banking rules bone-headedly referenced GAAP. This is the HTM problem and it’s real, though far from fundamental with respect to fractional reserve banking. (It’s also solved in no way by a reserve requirement.)
> When you count debt as reserve
This is why we deprecated the reserve requirement. The Fed funds market is lent and borrowed reserves. A reserve requirement just counts liquid reserves; it doesn’t care if they’re owned or borrowed. A capital requirement takes into account if it’s borrowed. You’re arguing against the solution to the problem you pose.
> same asset is claimed in its entirety among X number of loan originators in clearing bankruptcy/receivership
Again, solved by capital requirements. Assets pledged as collateral net to zero. (A balance sheet should do this, but financial institution balance sheets are unintuitive.)
> If you can find vintage books on the subject they are much better and absolute gold mines (circa 1950s-1967) in comparison
Go to the true vintage: Bagehot and others who wrote from the height of the gold standard in the 19th century. Most English literature from post-War on the topic is fringe by that point.
I guess I'll have to come back to this when I'm fresh as it is getting late here. I still don't see how I"m arguing against the solution but I'll re-examine later.
> Bagehot
I will, and thank you for the suggestion. I'm always on the lookout for books/essays/authors I haven't read. I'll add this to my reading list.
It seems often the further I go back the more applicable and less byzantine discussed subjects are.
I've gotten more out of books from 50-100 years ago then college textbooks ever provided for subjects that were around back then.
The rejection, or at least non-acceptance, of The Narrow Bank's (TNB) application does seem to imply that there is some kind of controlled narrative being worked towards that TNB doesn't comply with.
The more that politics disconnects from working 'for the people', the more examples will come to the fore of logical solutions such as TNB being rejected or outlawed or regulated into an inability to function because the very fact that they're logical solutions means that they're working against political agendas that are incompatible with 'the reality on the ground'.
> What is perplexing is the government has not allowed a “narrow bank” that simply passes deposits into treasuries, which would be much safer.
I guess, in some ways, but that's exactly what led to SVB's collapse. It's only safer in a declining or flat interest rate environment or when you use short duration treasuries. Otherwise, this exact strategy leaves you vulnerable to a bank run. See above. This investment strategy requires active risk management, and that means the same kind of regulation you're bristling at.
> I believe that fractional reserve banking based on fiat currency is inherently risky. However the state does not make it easy for me to avoid this. However it is possible for even the moderately wealthy person to take safe action to reduce such risk.
It's not really, fractional reserve is where money comes from. Money is created when debt is issued and it is destroyed as the debts are repaid. This is how interest rates control the money supply. As interest rates go up, repayments remain constant and originations drop, so the supply goes down. The M2 supply has shrunk about a trillion dollars over the last 8 months, and this is why.
It's weird to me how few people this seems intuitive for, and I only learned about it over the last few years.
The risk is basically zero for anyone under the FDIC limit, which is, substantially everyone. The average American can't rustle up $500 for an emergency expense, never mind $250K in un-invested cash. If you have more than $250-500K but less than $5.5M you can use a sweep account. If you have more than that, you can pay for private insurance.
Remember, nobody has lost a penny of FDIC insured funds in over 100 years, so why exactly do you think it's risky again?
> However it is possible for even the moderately wealthy person to take safe action to reduce such risk.
When you borrow money at a fractional reserve bank, they don't give you other people's money. They create on one side new money, and they give it to you. The create on the other side, a negative balance. As you pay back your loan, it increments the negative balance and evaporates.
The concept of fractional reserve lending just means that banks are allowed to issue new money to make loans.
But the concept isn't really accurate anymore anyways, banks aren't limited in how much money they can create based on a percentage of their asset portfolio but instead based on complex loan qualification rules.
i think the thing that people have a really tough time with is the fact that they create money out of thin air. that's really what happens. they hand you made-up cash and create a negative bank account for you to pay back.
the opposite happens when you buy a government security or a corporate bond, except you had to get that cash from someone else, not create it on your own.
it gets really weird when you borrow money to buy more money.
It's not made out of thin air, it's backed by your obligation to repay the debt that created it and the faith in the legal system to enforce said debt obligations.
Corporate debt is basically exactly what you described... and I assume by 'government security' you mean debt, in which case I have more bad news for you. It's all based on faith in the legal system to enforce debt obligations.
Absolutely not. Increased borrowing meeting the lending standards is a proxy for economic activity and the system is designed to expand money supply into increasing demand for money. The fact that the issuance itself doesn't consume countries worth of power is a feature, and it doesn't mean that it's backed 'by nothing' - it's backed by the economy and the legal system, and created in response to demand. Zoom out a little bit.
The system itself is actually quite elegant and has functioned very well over decades and a wide variety of market conditions.
Remember despite new money being created now in loan issuance the aggregate supply is shrinking so it's silly to look solely at issuances and say they're 'out of thin air' when the system is actually reducing the supply. Look at the whole thing, not one slice.
Yes, this is how its been classically taught, but it hasn't been true for some time now because they removed deposit reserve requirements in 2020 (set it to 0% and haven't changed it back).
Basel III utilizes complex risk formulas tied to specific asset classes for the basis of qualification and capital-based reserves which include stock market exposure (capitalization) counted as part of supplying part of their reserves.
Also, long-term issued debt (bonds) value reporting becomes fixed if they elect to hold them to maturity, with no further reporting needed (at least as far as I've been informed). This was one of the findings from Signature and a number of other banks.
The closest financial structure that describes the banking system is a government granted Ponzi scheme that's limited by rules set by unelected private institutions (Fed/FOMC).
Bubble pressures eventually cause an economic calculation problem which manifests in shortages.
> Money is created when debt is issued and it is destroyed as the debts are repaid.
fourier, fundamentally the quoted statement is wrong except in a very narrow niche. Its a overgeneralization that ignores core principles.
There's no real way to clarify this in the span of a single post, there's a lot of fundamental material you need to be aware of.
I'd instead refer you to a very solid book by David Graeber called Debt, The first 5,000 years; and then The Wealth of Nations & The Wealth and Poverty of Nations, for a more broad economic understanding (when things actually worked).
Following those two, Bridgewater's Report (Ray Dalio) Big Debt Crises will give you sufficient background to understand what they are talking about and realize its just a narrow niche that ignores the forest for the trees. There are people that believe you can borrow from the future indefinitely with debt, and the price never comes due; Modern Monetary Theory is one such dogmatic approach and it ignores important distinctions about who decides what in trade, and also unfortunately many places reuse language in a completely different unrelated context which itself is misleading and corruptive.
Start with the question, "What is money, what is it used for, and what requirements does it have to have, to be money".
> fundamentally the quoted statement is wrong except in a very narrow niche
That niche being money and banking [1]. The comment you dismiss is correct: “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”
The risk is zero for individuals with less than $250k but even small businesses operating on slim profit margins will routinely have more than that. Think restaurants. A bankruptcy, or any reason where they can’t access their funds for even a month, is devastating.
To argue that enabling a deposit taking bank that forwards all deposits to short term treasuries should be illegal, is absurd beyond comprehension. Yet that is the situation we live in.
You didn't say short-term treasuries, you said treasuries, which anyone can put money into at treasurydirect. Again, nobody has lost their FDIC insured deposits in 100 years. Sweep accounts provide cover for $5.5+
Personally I think individuals should just be able to open an account at the Fed.
Anyone saying something like that clearly has absolutely no clue or concept what the counter-party risks of doing so are nor how bureaucracies actually work in practice. Just promoting that kind of narrative is fundamentally deceitful because its outcomes pose such harm to not only yourself but everyone else you've enrolled in the process.
You'd wake up one day and not be able to get your money. The account would be frozen, they'd refer you to some other department, who would then point back to the first department in a circle. No escalation route, 8 hours getting through to 1 department, another few days, your back in a loop no resolution. In the meantime funds are still going into your account but they can't be removed.
You'd say that will never happen, but this type of finger pointing happens all the time in business and bureaucracies alike. There is a fundamental lowest common denominator, and in a state funded systems that denominator is ultimately negative production value. Business can't afford it, but government gets paid by the money printer (stealing value from those holding the currency over time).
That's not even going into what they'll use your banking information for? We see you deposited and withdrew cash in 200+ dollar amounts multiple times over the span of a year. This is structuring, in addition to your reported income you owe taxes on the undeclared amounts and this has been referred to department X for further investigation, they make a finding and take your money first, wait time for their due process before returning (if you can prove its yours) or just keeping the money (in the case of non-responsive/lost mail). Civil Asset Forfeiture 2.0. Nevermind you do group grocery shopping on behalf of someone else (elderly who can't drive), or other plausible explanations, you are guilty until innocent because they have your money and you lack the power to stop them.
Business can definitely afford a certain level of "negative" production value. In fact, doing so to their worst clients or especially would be competition can be beneficial to them, as the funds cannot be removed for a time.
Yes, doing this is probably illegal due to banking regulations... If it can be proven to be malicious.
A public institution has to at least actually care about their public image or risk getting voted out, protested or picketed if it annoys sufficient amount of people, or sufficiently powerful people, in a democracy. A private one would just declare insolvency, restructure and rename, while still keeping the profits it achieved by "negative" bureaucratic actions.
What you're describing has literally never happened in over 100 years of banking in the US and there's no indication that it'll start other than a fringe fanatical movement towards shiny pebbles backing the money.
> This has literally never happened in the US over the last 100 years.
You know what's also literally never happened in America.
Converting a fractional to a non-fractional reserve banking system under the nose of the general public.
They set reserve requirements to 0% in 2020 and adopted Basel III which itself is fundamentally flawed counting market capitalization exposure as capital reserves in lieu of deposit reserves with asset valuations based upon varying weighted complex formulas with less reporting, also comingling potentially third-party issued debt as a reserve asset paving the way for Ponzi.
Fun fact also, asset valuations/reporting requirements for bonds have also been fixed and are no longer market-based if the bank elects to hold the bonds to maturity, at least according to everything that I've read.
Sure sounds as sensational as climate change and ice shelf's the size of Rhode Island breaking off. Except, its not a movie and this actually happened, were you paying attention and noticed or is this news to you? Check out the FDIC website if you don't believe me.
Bank of International Settlements has a detailed rundown on Basel III, quite a technical dive but well worth it.
> What is perplexing is the government has not allowed a “narrow bank” that simply passes deposits into treasuries, which would be much safer.
The reasoning here is contentious but straightforward. Narrow banking is safer banks cannot over-leverage themselves in the same way and cause a financial crisis. This means the existence of a narrow bank will very quickly kill fractional reserve banking; why would you as an individual take the extra risk?
Why might that be a problem? Proponents of fractional reserve banking say that the higher volume of loans it enables collectively allows society to take larger risks that result in higher quality of life over time. Without that volume of loans you'd see less housing being built, less small business loans, etc. The argument goes that the crashes are worthwhile for the overall effect on the economy.
Whether fractional reserve banking is a net good over narrow banking is up to debate but the game theory behind why they cannot coexist is hard to argue with. Individuals will overwhelmingly take the choice of "less risk" and switch to narrow banking.
I believe the China model was to pay abysmal returns for bank deposits and use that to fuel economy, but now we have discovered that in the USA a very similar scheme is implemented when you place your money into lion's mouth basically for free.
The hypothesis is that the net benefit to society is higher. The banks can only offer higher returns based on the value they capture, which might be a lot less than they produce.
First comes concentration and consolidation, being close to the money supply provides benefits not available to others. The bail-out game repeated every 8-10 years. Then when that can no longer be done, in the face of crisis nationalization, or inflation until the currency fails bleeding off as much personal profit as possible into other assets and suppressing those assets so you get a bargain. (Ask yourself how two-party collusive options trading in the metals market might affect the spot price, could you farm it for consistent profit while ensuring the USD remains the safer alternative if you were the size of the big 5/4?)
Unfortunately, counter-party risk is inherent in just about everything these days.
You are right to consider it risky, especially when there technically is no longer a fractional reserve.
You may want to take a look at the FDIC website for monetary policy required reserves, protip its 0% a/o 2020. The only reason everything hasn't collapsed is implementing capital reserve requirements via Basel III which counts stock market capitalization as part of the reserves (based on what I read).
As for why there aren't new banks, just look at the requirements for chartering a bank. You must accept personal liability for your decisions as a Board Member and have no financial interest in the bank to be on the board of directors. You can receive no compensation, that started after 2008. Who in their right mind aside from crooks who lie or ethical religious rural/grounded/moral/actual communities (Amish/Mennonites) would find that level of exposure acceptable? The former are so common, and the latter upstanding folk so rare...
> What is perplexing is the government has not allowed a “narrow bank” that simply passes deposits into treasuries, which would be much safer
Narrow banks pass deposits into reserves. It is a good idea. It probably needs new statute to work.
It doesn’t make sense to pay the same interest on narrow-bank reserves as on risk reserves because the narrow bank, by design, must hold those reserves. The central bank doesn’t have to compete with other assets to drain that liquidity from the economy. Whether the rate paid to the narrow bank by the Fed is zero, de minimis, the repo rate or negative is a political question more than a monetary one. (Put another way: Interest on excess reserves is a crisis-era invention [1]. A narrow bank has, by definition, no excess reserves.)
USPS should get into at-cost banking. There's no reason there should be any underbanked persons without a no-fee ATM/debit card, savings account, and check cashing services.
Yeah. It has a last mile reach to every address & city & village in US Plus network of foot employees.
In India, postman sells n pays money order (upto a certain amount) on the go on a bicycle. Bicycle because mostly its letters. Packages go through private courier only.
Completely agree with the sentiment, just not optimistic about the proposed solution. Also only ~4.5% of households are unbanked, and and that’s actually a lower number than adults that don’t use the internet…
Just curious. Europeans under 60 most probably only know about checks from US movies, and would never have seen one irl. Are checks still used over there and if so why?
Checks to pay for a kid's school trip, or a soccer club membership, etc are very much a thing in many of the EU countries with 50+ million inhabitants.
There are only 3 EU countries with 50M+ inhabitants. Germany, France and Italy. Only in France is the concept of checks still a thing, but mostly amongst the elderly in the countryside.
Your comment is technically correct, as there are only three such countries (Germany, France and Italy), and two of them (FR and IT) indeed still use checks to some amount. But the biggest county in the EU certainly doesn't use checks, nor do numbers 4-18 (Ireland is #19).
According this graph[0], there were over 1 million cheque payments in Greece, Germany, Cyprus, Malta, Ireland, Spain, Portugal, Italy and France in 2020. I recognise that the data is a bit dated, but it still seems like these countries maintain the concept of cheques.
You are right, "don't use checks" was too strongly worded. Nevertheless, your own link shows that - except for France - the check usage is on the order of at most a few checks per person per year. So not exactly a widely used payment method.
No, I am describing the three EU countries with 50M+ inhabits (Germany at 80M, France at 65M and Italy at 60M). Of course, the largest counties in population are also often the largest in GDP...
France is an extreme outlier in the EU when it comes to payments by checks (84.7 percent of total check payments in the EU in 2020 happened in France). But even there the method is rapidly falling out of favor [1] be it less fast then it has been in other EU countries [2].
Cheques allow you to give someone a large amount of money (that would be too unmanageable with cash) without knowing anything about them but their name. Don't need to know an account number or a phone number/email address. Pretty handy.
Also, I am 36, and I live in a country (Denmark) that has entirely abandoned cheques, but I am still familiar with Danish cheques (even if I never managed one myself). Additionally, I still see them frequently when I am in France. (Though these days, the vast majority of cheques I see are US cheques, since my wife is American.)
If they’re low income, are you going to hold their welfare check for two weeks? (yes, I know direct deposits exist)
I'm only asking as many people who are "unbanked" are unbanked because no bank wants to do business with customers who play fast and loose with the rules.
If you start with the 5 why's, then it's clear that this could never ever happen until our corruption problem is addressed.
We can't have this because people won't unionize and exercise collective bargaining outside the bounds of the law.
Why can't we have this? Big banks don't want it.
Why does that matter? Big blanks have too much influence over the government.
Why do banks have too much influence? Because money votes on politicians before people do (politicians fundraise before the primary which means that money votes on candidates before people do) and money contributions are unbound (thanks to citizens united).
Why can't we make our politicians work for us? Because we have less power than the our plutocrats.
Why do we have less power? Because the law prevents us from exercising it via unions (or other means) and those in power are able to keep us fighting eachother rather than exercising collective power.
Why don't we put justice above law? Because that puts ourselves at risk and most people would rather live a slave than risk death or otherwise when the powerful defend themselves from having their power reduced.
So if you want a government that works for you, you have to unionize, until people have credible power, we will not be able to influence the government to work on our behalf.
You are mistaken in outcome, but you are not wrong that we do have a corruption problem.
Unfortunately, corruption is endemic in any political system. Socialism also isn't a solution. Someone has to pay and be held accountable.
As long as it remained manageable its not necessarily a negative. What we are seeing is the debt fueled rage of two selfish generations piling up unchecked and snowballing; leaving us with the check, or more appropriately bag of flaming poo rolling down on us.
I sat down with a Chinese person who was willing to have a political conversation with me. They talked about the idea of "planned corruption" in China. What became pretty clear is that corruption does not grow linearly it grows exponentially. It grows exponentially because corruption frequently requires multiple parties. Corruption is often expressed in the form of loyalty. Corruption is social in nature and therefore subject to network effects.
The less manageable the corruption is, the more it costs to manage it less effectively.
So the idea of manageable corruption seems farcicle to me. In your political model of reality, who is doing that managing?
> Socialism also isn't a solution. Someone has to pay and be held accountable.
I think I disagree. In order to hold someone accountable, you must have power. You cannot expect the powerful to hold themselves accountable.
So in your political model of reality, where does the power to hold someone accountable come from?
I agree it seems farcicle but it will inevitably creep in regardless with any centralized system, simply as turnover of people's roles to younger overseers without the benefit of experience occurs. Self-limiting and enforcing limits is not unheard of though usually exceedingly rare.
There is such a thing as the rule of law, but as you mentioned when the powerful band together in collusive behavior anything is possible, and its usually for their benefit. The rule of law as we've come to know it generally speaking usually requires appropriate representation with regard to crafting/maintaining those laws but that is not always the case.
Also, without maintaining a market which limits currency sufficiently to allow rational price discovery, you run into the Economic Calculation problem which has no solution. A form of it is inflation/deflation curves based on lagging indicators where you whipsaw closer and closer to the margins until one or the other outcome spirals out. Very dynamical.
> What we are seeing.
>> I don't buy this at all as a key factor
We'll have to disagree. Its pretty obvious that previous generations starting at the point of taking the dollar off the gold standard have consistently spent more than revenue (negative cashflow). They've spread the loss in value globally, but its still a loss and worse its in lagging inflation adjusted payouts.
The bill always comes due, and the consequences of policies put in place over that time will be paid by generations who had no say in its creation. Debt can be just as coercive when backed by law (austerity measures).
Incidentally, a very similar issue came up during the French Revolution (Bastille) at least according to Thomas Paine who wrote about it in passing in his Rights of Man (1770s). That and Common Sense are both very interesting reads if you can make the time.
In my opinion, power should be entrusted to the people's representation in a republic with important limitations enforced independently to preserve their responsiveness to the people they represent.
For example representatives who spend more than X% of their time on activities other than representation, time for which they are paid by the taxpayer. Or representing/concentrating more than 80,000 people's voting rights in a single person aren't really representing their constituents in any equitable way. Exceeding either of those limits causes their responsibility and duty to fall in furtherance of maintaining their profession.
I'll respond to the substance but you avoided the key question that I think hamstrings your response.
Fundamentally you think the problem with America is framed around money and monetary policy. I think the problem with America is framed around power, of which money is one form of, and the middle class and lower class loss of power.
power should be entrusted to representatives of the people, but what is the remedy when it is not?
Thomas Paine had a few choice words to say in answer your question, though I won't repeat them here.
I don't agree with him on that point, but I haven't come across any other practical wisdom that accounts better for how to deal with people who do not give up power willingly.
I continue to hope, but then again I'm an eternal optimist at heart.
Systems could enforce it independently such as currency indirectly, if you required a funding plan for any proposed program. It does require functioning arms of government though and printing more money than tax revenue obviously not being an option. Corruption would need to be minimized with harsh penalties and not allowing conflicts of interest. Basic stuff.
Then we have come to terms, you understand the awful truth, but are in denial about the reality of it because it is so awful. That awful truth is that we are directly responsible for democracy, and that if everyone shirks that responsibility and that requirement of sacrifice, there can be no democracy. Someone must sacrifice.
You cannot have democracy or republic without citizens who live the ideal of "live free or die" or an educated aristocracy that can see the bigger picture and are convinced that they must exercise their power with responsibility.
You understand that in the game of prisoners dilemma, if the aristocracy defects and there are no consequences, that choice of defection is a winning strategy. You understandably don't like the answer because you bear responsibility for your half of the strategy, your strategy multiplied over the entire population is the game. It takes an MLK to bear that burden and we have none.
I think you underestimate unionization as a 2nd amendment alternative. Unions are not a legal construct, but a power construct. Companies and the economy at large cannot function without labor, and unions purpose are to use this property to get a seat at the negotiation table.
Do you think if we start shouting "no taxation without representation" it's going to be easier next year than it is this year? Of course not. Power is consolidating and will continue to do so, and the cost of taking it back is only going to go up unless our aristocracy can sort itself out, which is just "hope as a strategy." If you work in tech it should be obvious that hope is not a strategy. I'm sure the average Russian citizen used hope as a strategy, that's certainly the consequence of inaction.
FWIW, you might like the works of yale history professor Timothy Snyder. I think I am more extreme than him, but he is definitely the modern embodiment of the ideals of our founding fathers. He prescribes investing in our institutions as the potential back-pressure on our decay (my choice of word, not his). "On Tyranny" is a great very short book and he also put it on youtube. Very much worth a read/watch.
I think you would enjoy Snyder's talks on the "politics of inevitability" (on youtube) and the idea that democracy is something you do, not something you are. Which means democracy is the sum total of actions, culture, and beliefs of a society, not a structure and not a ritual. He would likely critique my post as one advocating for "mob rule."
Harvard Law Professor Lawrence Lessig also has some pretty choice words on the state of our democracy and has hope that we can alter it's course via education and campaign finance reform, particularly starting at the local level in an effort to eventually promote it federally.
My experience of unions in general is more akin to the corrupt demagogues of Rome, or the corrupt magistrate of Japanese historical drama.
Initially they were an alternative, but no longer given current case-law relating to corporate sovereignty and other legal frameworks/interpretations that allow dual faces when its most beneficial (i.e. your a person when it suits, your a corporation and not your responsibility when you'd go to jail as a person).
I've been paying close attention to the rail workers which have been largely absent from media and ruminating on what normally happens when you tell people that they cannot strike and must continue to work without pay increases in the face of staggering inflation over the span of 20+ years.
> Do you think if we start shouting ...
I think, at least from my studies, evil has a way of shooting itself in the foot, and compulsion; coercion and deceit all fall into that definition, at least when it comes to cascade failures and their resulting outcomes (historically, thinking of the Cultural Revolution under Mao).
You can only really do whatever is within your sphere of influence, given the consolidation of power outstripped my generation, there isn't much to do besides prepare for the worst.
If it is inevitable as most cascade failures become at some point, at least insofar that it happens regardless of anything you do, those that are prepared have greater opportunity to survive.
Engines either burnout or stall when the balance of factors disrupts normal operations.
I'll take a look at Timothy Snyder, I hadn't heard of him.
I'm familiar with LL, I liked Lawrence Lessig's presentation on tweedism. Really to the point.
As for your comment about Companies and the economy not functioning without labor. That is true, but its a troubling area because for a time they can function without labor. This is part of why AI/GPT related derivatives should be banned; but that's a topic for another day.
I listed the sequence of ideas I think leads to that conclusion, and the best you could muster is an unsubstantiated "you're wrong"?
Imagine if every hacker news response was just a verbose "you're wrong." What low quality discourse.
If voting has been ritualized and is not very meaningful, where does power come from? If wages are determined by the relative power difference between labor and management, how is a laborer supposed to increase their wages? Would you expect labors wages to increase without an increase of power first? What if labors power goes to near zero? If we wanted to stop gerrymandering, where does that power come from? If we wanted to stop Pelosi from trading, how do we do that? If we wanted to bring back the per-Reagan tax rates, how do we do that?
It is about power.
We can't get a government that represents us because we do not have power. Corruption in our government represents a lack of the public's power at large.
We can't have public works because those works benefit the public at the cost of business. The government represents businesses because they have more power than the public. Businesses literally vote on candidates with money before the public at large votes. That's not a fringe idea. That is literally presented by Harvard Law professor and tech darling Lawrence Lessig.
So you think it's a non sequitur because you haven't asked the question "where does public power come from?" "How does a relatively powerless person exercise political force"? "What happens if voting is more of a ritual than a meaningful choice?"
There are a million banks out there with no fee checking accounts, ATM access, check deposit, and debit cards. This is not a rare offering. I personally have four accounts at different banks and all four offer this. They don't even charge overdraft fees anymore.
I don't see the point in forcing the USPS into the banking market unless your goal is to invent new ways for them to incinerate money.
If the FDIC didn’t decide to retroactively insure uninsured depositors, and/or had done their job in the first place then there wouldn’t have been any losses that needs to be socialized and hence no discussion about changing the funding structure of some banks
Summary: They (not sure who "they" is) want banks to borrow money for the sole purpose of not paying it back if they fail.
Then when they fail, instead of the FDIC bailing out customer, those people who loaned money to the bank will lose their money instead.
To me this seems foolish: The interest the bank will have to pay to convince someone to be the "designated target" might as well just be charged by the FDIC and skip the rigamarole.
89 comments
[ 3.6 ms ] story [ 152 ms ] thread> The commercial-bank population reached 14,496 in 1984. It turns out this was a post-1940 peak that may never be reached again. Between 1984 and 2020, the number of banks decreased by 70%.
https://www.stlouisfed.org/en/on-the-economy/2021/december/s...
The number of new banks that have formed is also anemic. Less than 100 new charters over last 10 years, when previously 100 per year was typical.
https://banks.data.fdic.gov/explore/historical?displayFields...
The government is consolidating banks. All banks have had ever more rules and regulations in the last 30 years, but the end result is fewer, larger banks that are more tied in with the state.
Is this good or bad? Opinions differ. What is perplexing is the government has not allowed a “narrow bank” that simply passes deposits into treasuries, which would be much safer. You would also think that with the rapid change in technology and innovation over the past 30 years there would be more banks rather than less - freedom of choice and innovation and whatnot - but that is not the case.
https://en.m.wikipedia.org/wiki/Narrow_banking
https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-...
I believe that fractional reserve banking based on fiat currency is inherently risky. However the state does not make it easy for me to avoid this. However it is possible for even the moderately wealthy person to take safe action to reduce such risk.
Uh... what's perplexing about the fact that the government wants banks to offer loans?
Barely anyone is qualified to assess the quality of a bank. It's difficult even for auditors. It shouldn't be your uncle's responsibility, it should be the responsibility of regulators.
That's really nothing to do with fractional reserve and more of an assessment of the US banking system.
If something is difficult to understand, even for so-called “experts”, that is a sign of severe dysfunction. All topics can be distilled into simplistic understanding. Once you speak in academic gobble-dee-gook you are done for.
Yes, my guy, I happen to believe that people who know what they're talking about should be listened to. I suspect most won't find this controversial. The world is far too complex for anyone to be sufficiently competent in every field, and yes spending time working in a field gives you more expertise than an average rando you pull off the street.
Experts aren't always right, and the consensus isn't always right, which is why we have the scientific method. It's totally fair to question these folks but to blanket dismiss them is silly.
> All topics can be distilled into simplistic understanding.
Simply false.
> Once you speak in academic gobble-dee-gook you are done for.
lol.
This would be a good candidate for a Reddit-like 'flair' concept so I wouldn't waste my time responding to someone who doesn't believe in the concept of people who know what they're talking about. It's fine, I'll make a note of your screen name for next time.
Also, the executives from those banks received compensation packages and structured equity sales prior to the banks failing. They did make out like bandits, and congress was looking at options to claw it back, but nothing was ever finalized.
Retirement funds which were invested heavily in index weighted stocks took the biggest hit net worth wise.
This is nonsense. Reserve requirements were deprecated in favour of finer-grained capital and liquidity requirements [1].
They serve the same purpose, but with a broader consideration than reserve requirements’ “is it a reserve” binary test. Banks’ ability to create money is still constrained by their capital requirements. We are on a fractional reserve system.
[1] https://www.federalreserve.gov/monetarypolicy/0693lead.pdf 1993
Those asset classes are heavily collateralized. If you want to get technical, what really happens when you convert the same underlying asset to be collaterilized multiple times and aggregate it in a single security or several steps removed so no one is the wiser?
Are you referring to SLR? In America, this is a second test [1].
Also, this is a total non sequitur.
[1] https://www.newyorkfed.org/medialibrary/media/banking/intern...
Most of the requirements are only applied to G-Sibs, which are only classified as such if they hold over 200 or 250B in assets (off the top of my head).
If you were paying attention to what happened with FRC, that was a trial run of things to come. There's an option's mechanism to cause the market maker to create synthetic shares. In volatility spikes they have two options to recoup losses, write/sell options and receive preferential treatment for clearing in receivership, or purchase shares. The latter in the face of significant shorting in addition to gamma squeeze causes a short squeeze (Gamestop), the former causes aggregate indebtness violations forcing delisting within 30-60 days which aren't usually announced (FRC).
Market mechanics say when there are more sellers than buyers the price goes down. If you can indirectly trigger more shares than are in existence being sold, the market can be tanked at a profit with sufficiently obfuscated capital.
Anytime you have over a 100% leverage ratio, its no longer fractional. Given the complexity of collateralization and the lack of any single clearing house for collateralized debt. You have no way of proving that the underlying capital reserve won't suddenly vanish in a contagion crisis. At any time there are tens of thousands of floating contracts that influence the market capitalization/stock price.
All banks are subject to capital requirements. Large banks have extra testing; that doesn’t mean “most” capital requirements are waived for small banks.
> an option's mechanism to cause the market maker to create synthetic shares
Former options market maker. All market makers can do this, it’s called naked shorting, and it has little to nothing to do with capital requirements in general.
> you have no way of proving that the underlying capital reserve won't suddenly vanish in a contagion crisis
Capital isn’t cash in a vault. It’s risk-weighted assets minus liabilities. Public equities are heavily weighted; that disincentivises using them significantly for capital. The only proof one needs that capital won’t vanish is the Fed’s discount window.
> Anytime you have over a 100% leverage ratio, its no longer fractional
This is the definition of fractional reserve. 10% reserve requirement means 9 parts debt to 1 part reserves, a 900% debt ratio.
We'll have to disagree. The moment the framework allowed market exposure in lieu of a capital reserve (in whole or part) it became inseparably linked as it impacts the basis of the capital reserve asset potentially misclassifying the asset as reserve instead of debt.
> This is the definition of fractional reserve.
It is the definition so long as all debt and reserve are segmented correctly into debt and reserve. The moment you have obfuscation such as multiple separate levels of collateralization or leverage being misclassified as assets; this definition fails, and the only time you'd find out about it given current frameworks is in a deleveraging (after the money is suddenly gone).
You have the same exact characteristics in a ponzi scheme.
I'm aware you think this is a simple double-entry accounting misunderstanding. Its not. The moment assets change hands between a third party it becomes an exponential expansion issue with regards to fraud. Double-entry accounting is limited to within a single organization. Boundaries are where things slip past, that and footnotes. Unfortunately its not letting me respond to your latest response so here's an example.
You (Bank A) loan out 9 parts per 1 of reserves. That's a 9x expansion. The person you loaned 9 out to goes to multiple banks, secures the loans with the same 9$ it just received multiple times (fraudulently, we'll say 9x), he/she receives 81 dollars back. Then they take those 81 dollars in deposits into their bank account at bank A. That 81 dollars is counted as reserves. The bank loans out 723 more dollars. You see where this is going?
Eventually this fails, but not before a large chunk that which was created out of thin air simply ceases to exist (when this is discovered as being the equivalent of a naked contract). The main problem is, the person doing this has the control because only they know what's going on.
The point is, market exposure provides the attack surface to allow this, the capitalization is an aggregate that counts as reserves which impacts what you can loan out, because debt/leverage is commingled with its asset value indeterminably and it changes with the whims of the market where many bad actors play, this previous example is possible right up until a precipitating event. When something is possible but bad, particularly in finance and banking, and there are profit incentives, this will happen as it has many times before only on a grander scale with more systemic risk. Imagine a top 4 bank with this exposure doing a Madoff through an intermediary via the stock market. Who is left holding the bag. Payouts from FDIC/Fed don't come out of thin air, the value is unwound in inflation as all fraud in aggregate are at the upper levels of the banking system. The game is bail-out.
Regarding gold, take a close look at the COMEX, its never been independently audited. Compare the eligible contracts vs. Registered. What percentage are they. COMEX disclaims responsibility for eligible contract reporting but that in large part dictates spot for the future month given percentages. If they were collusive the fix would be in right? What would you see if in addition to Dealer A's selling a gold contract to Dealer B, and back again the following month, they have a private repurchase agreement and vice versa to guarantee and deviations in the market can be capitalized on by either side at a profit (as a strangle). Its all paper (a warrant) after all until you have a load-out policy.
Assets minus liabilities. What alternate valuation do you want for assets other than the price at which they can be sold?
Again, in a crisis, the Fed’s discount window turns quality assets into reserves. And in practice, reserves are always part of banks’ assets; without them they couldn’t clear a single cheque or wire.
You’re letting yourself get confused with naked shorting, which doesn’t apply to most of a bank’s assets. (You can’t count a borrowed Treasury as net capital. And banks could always borrow reserves, though that doesn’t change their net capital position.)
> it impacts the basis of the capital reserve asset potentially misclassifying the asset as reserve instead of debt
This is double-entry accounting. Your bank deposit is your asset and the bank’s debt. A central bank reserve is a commercial bank’s asset and the central bank’s debt.
> as all debt and reserve are segmented correctly into debt and reserve
This isn’t even on the level of finance or economics. It’s a fundamental misunderstanding of accounting. Debt versus reserve is an inchoate ontology; they’re parts of opposite sides of the balance sheet. It’s like asking if your car is cash or a credit card.
Reserves are a component of capital, and both are assets and liabilities of someone’s. This is what fractional-reserve banking is all about. You’re seemingly upset there isn’t gold backing the central bank’s reserves, though even then, your requirements wouldn’t be met since the market price of gold varies with respect to other assets.
Regarding your Assets minus liabilities that's not strictly true. Its my understanding that bond assets are considered statically valued and not at market value when they have elected to hold it to maturity, I'm sure those aren't the only asset classes with alternate valuations/reporting.
See my edit in my last post addressing double-entry accounting, and how its not relevant to the discussion since the fraud and counterparty risk I'm talking about occurs outside the boundaries of double-entry accounting.
You seem to have mistaken the context.
Issued debt is not counted as reserve, its considered leverage and a liability, as a result you cannot issue more debt to increase your reserve. The ratio of reserve to issued debt must be below or equal to the set rate.
When you count debt as reserve unintentionally you have exponential debt being issued exceeding the ratio which ultimately collapses in the form of a Ponzi as environment and conditions change. Any ponzi eventually has a deleveraging, this often occurs when clearing any company whose assets have been collateralized potentially multiple times. The payout has already been made at origination, the value of the loan asset with backed secured collateral suddenly becomes 1/X depending on the number of X times it was loaned against; in reality it always was but the bankers didn't know it. The same asset is claimed in its entirety among X number of loan originators in clearing bankruptcy/receivership.
At the individual level people who invest in a Ponzi take losses. Risk of investing.
At the primary bank level, this is a systemic risk, bailout provided by FDIC/Fed is unwound as all aggregate fraud is unwound over time as inflation for troubled assets. Creating these plausible unforeseeable situations is incentivized.
It creates perverse incentives which is why bailout has been a recurring issue at least once every decade since the 70s. Concentrated banking means so big it will certainly fail.
When that inevitably happens, everyone holding USD or working for USD pays without their consent or knowledge via inflation. That is upsetting especially when it is easily foreseeable.
I'm not upset that it isn't gold backed. I simply do not believe it is a good idea to enable foreseeable fraud that will go undetected until its too late and encourage it to keep happening.
The risk by far outweighs any potential benefit. I'm all to aware what happens when hyper-inflation occurs. Ray Dalio wrote some nice case studies on those if you haven't already reviewed ("Bridegwater/Ray Dalio - Big Debt Crises").
In my opinion, most modern finance and economics training which I've seen is absolute garbage and encourages you to look at everything in isolation, or a very narrow context without providing fundamentals or limitations of the models they encourage. I've studied them, they just aren't very useful.
How can both parties be right while being completely wrong pretty much sums up isolation in complex interconnected systems. Many of the basic assumptions that are held true fail under some pretty simple situations involving corruption, control, coercion, and deceit.
If you can find vintage books on the subject they are much better and absolute gold mines (circa 1950s-1967) in comparison.
Under Basel III, no. They’re marked to market. Under American rules, yes, because the banking rules bone-headedly referenced GAAP. This is the HTM problem and it’s real, though far from fundamental with respect to fractional reserve banking. (It’s also solved in no way by a reserve requirement.)
> When you count debt as reserve
This is why we deprecated the reserve requirement. The Fed funds market is lent and borrowed reserves. A reserve requirement just counts liquid reserves; it doesn’t care if they’re owned or borrowed. A capital requirement takes into account if it’s borrowed. You’re arguing against the solution to the problem you pose.
> same asset is claimed in its entirety among X number of loan originators in clearing bankruptcy/receivership
Again, solved by capital requirements. Assets pledged as collateral net to zero. (A balance sheet should do this, but financial institution balance sheets are unintuitive.)
> If you can find vintage books on the subject they are much better and absolute gold mines (circa 1950s-1967) in comparison
Go to the true vintage: Bagehot and others who wrote from the height of the gold standard in the 19th century. Most English literature from post-War on the topic is fringe by that point.
> Bagehot
I will, and thank you for the suggestion. I'm always on the lookout for books/essays/authors I haven't read. I'll add this to my reading list.
It seems often the further I go back the more applicable and less byzantine discussed subjects are.
I've gotten more out of books from 50-100 years ago then college textbooks ever provided for subjects that were around back then.
The more that politics disconnects from working 'for the people', the more examples will come to the fore of logical solutions such as TNB being rejected or outlawed or regulated into an inability to function because the very fact that they're logical solutions means that they're working against political agendas that are incompatible with 'the reality on the ground'.
I guess, in some ways, but that's exactly what led to SVB's collapse. It's only safer in a declining or flat interest rate environment or when you use short duration treasuries. Otherwise, this exact strategy leaves you vulnerable to a bank run. See above. This investment strategy requires active risk management, and that means the same kind of regulation you're bristling at.
> I believe that fractional reserve banking based on fiat currency is inherently risky. However the state does not make it easy for me to avoid this. However it is possible for even the moderately wealthy person to take safe action to reduce such risk.
It's not really, fractional reserve is where money comes from. Money is created when debt is issued and it is destroyed as the debts are repaid. This is how interest rates control the money supply. As interest rates go up, repayments remain constant and originations drop, so the supply goes down. The M2 supply has shrunk about a trillion dollars over the last 8 months, and this is why.
It's weird to me how few people this seems intuitive for, and I only learned about it over the last few years.
The risk is basically zero for anyone under the FDIC limit, which is, substantially everyone. The average American can't rustle up $500 for an emergency expense, never mind $250K in un-invested cash. If you have more than $250-500K but less than $5.5M you can use a sweep account. If you have more than that, you can pay for private insurance.
Remember, nobody has lost a penny of FDIC insured funds in over 100 years, so why exactly do you think it's risky again?
> However it is possible for even the moderately wealthy person to take safe action to reduce such risk.
What do you mean exactly.
I understand money is created with issued debt, since the interests do not exist yet.
I don't understand why do you say money is destroyed when interest are repaid? If the bank now holds that money, why do you say it is destroyed?
The concept of fractional reserve lending just means that banks are allowed to issue new money to make loans.
But the concept isn't really accurate anymore anyways, banks aren't limited in how much money they can create based on a percentage of their asset portfolio but instead based on complex loan qualification rules.
the opposite happens when you buy a government security or a corporate bond, except you had to get that cash from someone else, not create it on your own.
it gets really weird when you borrow money to buy more money.
Corporate debt is basically exactly what you described... and I assume by 'government security' you mean debt, in which case I have more bad news for you. It's all based on faith in the legal system to enforce debt obligations.
The system itself is actually quite elegant and has functioned very well over decades and a wide variety of market conditions.
Remember despite new money being created now in loan issuance the aggregate supply is shrinking so it's silly to look solely at issuances and say they're 'out of thin air' when the system is actually reducing the supply. Look at the whole thing, not one slice.
Basel III utilizes complex risk formulas tied to specific asset classes for the basis of qualification and capital-based reserves which include stock market exposure (capitalization) counted as part of supplying part of their reserves.
Also, long-term issued debt (bonds) value reporting becomes fixed if they elect to hold them to maturity, with no further reporting needed (at least as far as I've been informed). This was one of the findings from Signature and a number of other banks.
The closest financial structure that describes the banking system is a government granted Ponzi scheme that's limited by rules set by unelected private institutions (Fed/FOMC).
Bubble pressures eventually cause an economic calculation problem which manifests in shortages.
fourier, fundamentally the quoted statement is wrong except in a very narrow niche. Its a overgeneralization that ignores core principles.
There's no real way to clarify this in the span of a single post, there's a lot of fundamental material you need to be aware of.
I'd instead refer you to a very solid book by David Graeber called Debt, The first 5,000 years; and then The Wealth of Nations & The Wealth and Poverty of Nations, for a more broad economic understanding (when things actually worked).
Following those two, Bridgewater's Report (Ray Dalio) Big Debt Crises will give you sufficient background to understand what they are talking about and realize its just a narrow niche that ignores the forest for the trees. There are people that believe you can borrow from the future indefinitely with debt, and the price never comes due; Modern Monetary Theory is one such dogmatic approach and it ignores important distinctions about who decides what in trade, and also unfortunately many places reuse language in a completely different unrelated context which itself is misleading and corruptive.
Start with the question, "What is money, what is it used for, and what requirements does it have to have, to be money".
That niche being money and banking [1]. The comment you dismiss is correct: “Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”
[1] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
To argue that enabling a deposit taking bank that forwards all deposits to short term treasuries should be illegal, is absurd beyond comprehension. Yet that is the situation we live in.
Personally I think individuals should just be able to open an account at the Fed.
Anyone saying something like that clearly has absolutely no clue or concept what the counter-party risks of doing so are nor how bureaucracies actually work in practice. Just promoting that kind of narrative is fundamentally deceitful because its outcomes pose such harm to not only yourself but everyone else you've enrolled in the process.
You'd wake up one day and not be able to get your money. The account would be frozen, they'd refer you to some other department, who would then point back to the first department in a circle. No escalation route, 8 hours getting through to 1 department, another few days, your back in a loop no resolution. In the meantime funds are still going into your account but they can't be removed.
You'd say that will never happen, but this type of finger pointing happens all the time in business and bureaucracies alike. There is a fundamental lowest common denominator, and in a state funded systems that denominator is ultimately negative production value. Business can't afford it, but government gets paid by the money printer (stealing value from those holding the currency over time).
That's not even going into what they'll use your banking information for? We see you deposited and withdrew cash in 200+ dollar amounts multiple times over the span of a year. This is structuring, in addition to your reported income you owe taxes on the undeclared amounts and this has been referred to department X for further investigation, they make a finding and take your money first, wait time for their due process before returning (if you can prove its yours) or just keeping the money (in the case of non-responsive/lost mail). Civil Asset Forfeiture 2.0. Nevermind you do group grocery shopping on behalf of someone else (elderly who can't drive), or other plausible explanations, you are guilty until innocent because they have your money and you lack the power to stop them.
A public institution has to at least actually care about their public image or risk getting voted out, protested or picketed if it annoys sufficient amount of people, or sufficiently powerful people, in a democracy. A private one would just declare insolvency, restructure and rename, while still keeping the profits it achieved by "negative" bureaucratic actions.
Government can.
The bar for proving intent is very high. Its why most defamation suits fail.
> A public institution has to...
No, they don't have to do anything. Look at California. Specifically EDD and FTB. There are plenty of horror stories you can Google.
lol, yep, just waiting for my check from Soros.
What you're describing has literally never happened in over 100 years of banking in the US and there's no indication that it'll start other than a fringe fanatical movement towards shiny pebbles backing the money.
You know what's also literally never happened in America.
Converting a fractional to a non-fractional reserve banking system under the nose of the general public.
They set reserve requirements to 0% in 2020 and adopted Basel III which itself is fundamentally flawed counting market capitalization exposure as capital reserves in lieu of deposit reserves with asset valuations based upon varying weighted complex formulas with less reporting, also comingling potentially third-party issued debt as a reserve asset paving the way for Ponzi.
Fun fact also, asset valuations/reporting requirements for bonds have also been fixed and are no longer market-based if the bank elects to hold the bonds to maturity, at least according to everything that I've read.
Sure sounds as sensational as climate change and ice shelf's the size of Rhode Island breaking off. Except, its not a movie and this actually happened, were you paying attention and noticed or is this news to you? Check out the FDIC website if you don't believe me.
Bank of International Settlements has a detailed rundown on Basel III, quite a technical dive but well worth it.
The reasoning here is contentious but straightforward. Narrow banking is safer banks cannot over-leverage themselves in the same way and cause a financial crisis. This means the existence of a narrow bank will very quickly kill fractional reserve banking; why would you as an individual take the extra risk?
Why might that be a problem? Proponents of fractional reserve banking say that the higher volume of loans it enables collectively allows society to take larger risks that result in higher quality of life over time. Without that volume of loans you'd see less housing being built, less small business loans, etc. The argument goes that the crashes are worthwhile for the overall effect on the economy.
Whether fractional reserve banking is a net good over narrow banking is up to debate but the game theory behind why they cannot coexist is hard to argue with. Individuals will overwhelmingly take the choice of "less risk" and switch to narrow banking.
If the higher risk is a net benefit, then those riskier banks should be able to pay higher returns on your deposits. Why don’t they?
Seems to sum it up nicely...
First comes concentration and consolidation, being close to the money supply provides benefits not available to others. The bail-out game repeated every 8-10 years. Then when that can no longer be done, in the face of crisis nationalization, or inflation until the currency fails bleeding off as much personal profit as possible into other assets and suppressing those assets so you get a bargain. (Ask yourself how two-party collusive options trading in the metals market might affect the spot price, could you farm it for consistent profit while ensuring the USD remains the safer alternative if you were the size of the big 5/4?)
Unfortunately, counter-party risk is inherent in just about everything these days.
You are right to consider it risky, especially when there technically is no longer a fractional reserve.
You may want to take a look at the FDIC website for monetary policy required reserves, protip its 0% a/o 2020. The only reason everything hasn't collapsed is implementing capital reserve requirements via Basel III which counts stock market capitalization as part of the reserves (based on what I read).
As for why there aren't new banks, just look at the requirements for chartering a bank. You must accept personal liability for your decisions as a Board Member and have no financial interest in the bank to be on the board of directors. You can receive no compensation, that started after 2008. Who in their right mind aside from crooks who lie or ethical religious rural/grounded/moral/actual communities (Amish/Mennonites) would find that level of exposure acceptable? The former are so common, and the latter upstanding folk so rare...
Narrow banks pass deposits into reserves. It is a good idea. It probably needs new statute to work.
It doesn’t make sense to pay the same interest on narrow-bank reserves as on risk reserves because the narrow bank, by design, must hold those reserves. The central bank doesn’t have to compete with other assets to drain that liquidity from the economy. Whether the rate paid to the narrow bank by the Fed is zero, de minimis, the repo rate or negative is a political question more than a monetary one. (Put another way: Interest on excess reserves is a crisis-era invention [1]. A narrow bank has, by definition, no excess reserves.)
[1] https://www.federalreserve.gov/monetarypolicy/reserve-balanc...
https://en.wikipedia.org/wiki/United_States_Postal_Savings_S...
In India, postman sells n pays money order (upto a certain amount) on the go on a bicycle. Bicycle because mostly its letters. Packages go through private courier only.
Even if they did, the banking industry is far too accustomed to its massively inflated ATM and overdraft fees.
https://www.fdic.gov/analysis/household-survey/index.html
https://www.pewresearch.org/internet/fact-sheet/internet-bro...
Now what?
Checks to pay for a kid's school trip, or a soccer club membership, etc are very much a thing in many of the EU countries with 50+ million inhabitants.
[0] https://www.statista.com/statistics/443677/cashless-payment-...
Bedsides being wrong, as another comment points out, you’re describing the EU’s largest economies.
[1] https://www.statista.com/statistics/443371/check-payment-in-...
[2] https://www.statista.com/statistics/1110744/share-total-eu-c...
Also, I am 36, and I live in a country (Denmark) that has entirely abandoned cheques, but I am still familiar with Danish cheques (even if I never managed one myself). Additionally, I still see them frequently when I am in France. (Though these days, the vast majority of cheques I see are US cheques, since my wife is American.)
Where cheque are still used, they verify and clear them the same day.
There are little reason to cash a check when everyone have a bank account
No-credit banking. That means the funds are not available until the cheque clears.
I'm only asking as many people who are "unbanked" are unbanked because no bank wants to do business with customers who play fast and loose with the rules.
We can't have this because people won't unionize and exercise collective bargaining outside the bounds of the law.
Why can't we have this? Big banks don't want it.
Why does that matter? Big blanks have too much influence over the government.
Why do banks have too much influence? Because money votes on politicians before people do (politicians fundraise before the primary which means that money votes on candidates before people do) and money contributions are unbound (thanks to citizens united).
Why can't we make our politicians work for us? Because we have less power than the our plutocrats.
Why do we have less power? Because the law prevents us from exercising it via unions (or other means) and those in power are able to keep us fighting eachother rather than exercising collective power.
Why don't we put justice above law? Because that puts ourselves at risk and most people would rather live a slave than risk death or otherwise when the powerful defend themselves from having their power reduced.
So if you want a government that works for you, you have to unionize, until people have credible power, we will not be able to influence the government to work on our behalf.
Unfortunately, corruption is endemic in any political system. Socialism also isn't a solution. Someone has to pay and be held accountable.
As long as it remained manageable its not necessarily a negative. What we are seeing is the debt fueled rage of two selfish generations piling up unchecked and snowballing; leaving us with the check, or more appropriately bag of flaming poo rolling down on us.
The less manageable the corruption is, the more it costs to manage it less effectively.
So the idea of manageable corruption seems farcicle to me. In your political model of reality, who is doing that managing?
> Socialism also isn't a solution. Someone has to pay and be held accountable.
I think I disagree. In order to hold someone accountable, you must have power. You cannot expect the powerful to hold themselves accountable.
So in your political model of reality, where does the power to hold someone accountable come from?
> What we are seeing...
I don't buy this at all as a key factor.
There is such a thing as the rule of law, but as you mentioned when the powerful band together in collusive behavior anything is possible, and its usually for their benefit. The rule of law as we've come to know it generally speaking usually requires appropriate representation with regard to crafting/maintaining those laws but that is not always the case.
Also, without maintaining a market which limits currency sufficiently to allow rational price discovery, you run into the Economic Calculation problem which has no solution. A form of it is inflation/deflation curves based on lagging indicators where you whipsaw closer and closer to the margins until one or the other outcome spirals out. Very dynamical.
> What we are seeing. >> I don't buy this at all as a key factor
We'll have to disagree. Its pretty obvious that previous generations starting at the point of taking the dollar off the gold standard have consistently spent more than revenue (negative cashflow). They've spread the loss in value globally, but its still a loss and worse its in lagging inflation adjusted payouts.
The bill always comes due, and the consequences of policies put in place over that time will be paid by generations who had no say in its creation. Debt can be just as coercive when backed by law (austerity measures).
Incidentally, a very similar issue came up during the French Revolution (Bastille) at least according to Thomas Paine who wrote about it in passing in his Rights of Man (1770s). That and Common Sense are both very interesting reads if you can make the time.
In my opinion, power should be entrusted to the people's representation in a republic with important limitations enforced independently to preserve their responsiveness to the people they represent.
For example representatives who spend more than X% of their time on activities other than representation, time for which they are paid by the taxpayer. Or representing/concentrating more than 80,000 people's voting rights in a single person aren't really representing their constituents in any equitable way. Exceeding either of those limits causes their responsibility and duty to fall in furtherance of maintaining their profession.
Fundamentally you think the problem with America is framed around money and monetary policy. I think the problem with America is framed around power, of which money is one form of, and the middle class and lower class loss of power.
power should be entrusted to representatives of the people, but what is the remedy when it is not?
Who "enforces independently"?
I don't agree with him on that point, but I haven't come across any other practical wisdom that accounts better for how to deal with people who do not give up power willingly.
I continue to hope, but then again I'm an eternal optimist at heart.
Systems could enforce it independently such as currency indirectly, if you required a funding plan for any proposed program. It does require functioning arms of government though and printing more money than tax revenue obviously not being an option. Corruption would need to be minimized with harsh penalties and not allowing conflicts of interest. Basic stuff.
You cannot have democracy or republic without citizens who live the ideal of "live free or die" or an educated aristocracy that can see the bigger picture and are convinced that they must exercise their power with responsibility.
You understand that in the game of prisoners dilemma, if the aristocracy defects and there are no consequences, that choice of defection is a winning strategy. You understandably don't like the answer because you bear responsibility for your half of the strategy, your strategy multiplied over the entire population is the game. It takes an MLK to bear that burden and we have none.
I think you underestimate unionization as a 2nd amendment alternative. Unions are not a legal construct, but a power construct. Companies and the economy at large cannot function without labor, and unions purpose are to use this property to get a seat at the negotiation table.
Do you think if we start shouting "no taxation without representation" it's going to be easier next year than it is this year? Of course not. Power is consolidating and will continue to do so, and the cost of taking it back is only going to go up unless our aristocracy can sort itself out, which is just "hope as a strategy." If you work in tech it should be obvious that hope is not a strategy. I'm sure the average Russian citizen used hope as a strategy, that's certainly the consequence of inaction.
FWIW, you might like the works of yale history professor Timothy Snyder. I think I am more extreme than him, but he is definitely the modern embodiment of the ideals of our founding fathers. He prescribes investing in our institutions as the potential back-pressure on our decay (my choice of word, not his). "On Tyranny" is a great very short book and he also put it on youtube. Very much worth a read/watch.
I think you would enjoy Snyder's talks on the "politics of inevitability" (on youtube) and the idea that democracy is something you do, not something you are. Which means democracy is the sum total of actions, culture, and beliefs of a society, not a structure and not a ritual. He would likely critique my post as one advocating for "mob rule."
Harvard Law Professor Lawrence Lessig also has some pretty choice words on the state of our democracy and has hope that we can alter it's course via education and campaign finance reform, particularly starting at the local level in an effort to eventually promote it federally.
Initially they were an alternative, but no longer given current case-law relating to corporate sovereignty and other legal frameworks/interpretations that allow dual faces when its most beneficial (i.e. your a person when it suits, your a corporation and not your responsibility when you'd go to jail as a person).
I've been paying close attention to the rail workers which have been largely absent from media and ruminating on what normally happens when you tell people that they cannot strike and must continue to work without pay increases in the face of staggering inflation over the span of 20+ years.
> Do you think if we start shouting ...
I think, at least from my studies, evil has a way of shooting itself in the foot, and compulsion; coercion and deceit all fall into that definition, at least when it comes to cascade failures and their resulting outcomes (historically, thinking of the Cultural Revolution under Mao).
You can only really do whatever is within your sphere of influence, given the consolidation of power outstripped my generation, there isn't much to do besides prepare for the worst.
If it is inevitable as most cascade failures become at some point, at least insofar that it happens regardless of anything you do, those that are prepared have greater opportunity to survive.
Engines either burnout or stall when the balance of factors disrupts normal operations.
I'll take a look at Timothy Snyder, I hadn't heard of him.
I'm familiar with LL, I liked Lawrence Lessig's presentation on tweedism. Really to the point.
As for your comment about Companies and the economy not functioning without labor. That is true, but its a troubling area because for a time they can function without labor. This is part of why AI/GPT related derivatives should be banned; but that's a topic for another day.
I think you will enjoy this if you didn't see it: https://www.reddit.com/r/CuratedTumblr/comments/13tpq18/hear...
This is a non sequitur from why we can’t have postal banking.
Imagine if every hacker news response was just a verbose "you're wrong." What low quality discourse.
If voting has been ritualized and is not very meaningful, where does power come from? If wages are determined by the relative power difference between labor and management, how is a laborer supposed to increase their wages? Would you expect labors wages to increase without an increase of power first? What if labors power goes to near zero? If we wanted to stop gerrymandering, where does that power come from? If we wanted to stop Pelosi from trading, how do we do that? If we wanted to bring back the per-Reagan tax rates, how do we do that?
It is about power.
We can't get a government that represents us because we do not have power. Corruption in our government represents a lack of the public's power at large.
We can't have public works because those works benefit the public at the cost of business. The government represents businesses because they have more power than the public. Businesses literally vote on candidates with money before the public at large votes. That's not a fringe idea. That is literally presented by Harvard Law professor and tech darling Lawrence Lessig.
So you think it's a non sequitur because you haven't asked the question "where does public power come from?" "How does a relatively powerless person exercise political force"? "What happens if voting is more of a ritual than a meaningful choice?"
Clearly it is a "sequitur".
I don't see the point in forcing the USPS into the banking market unless your goal is to invent new ways for them to incinerate money.
This HN headline is editorialized… The article mostly explains the difference in loss absorbing debt regulators for banks with $100B+ in assets.
Separately, it is a false premise to argue that the median retail banking customer is not “safe”.
The US banking system is incredibly safe for the vast majority of its customers. Those customers with uninsured deposits are not in the majority.
Then when they fail, instead of the FDIC bailing out customer, those people who loaned money to the bank will lose their money instead.
To me this seems foolish: The interest the bank will have to pay to convince someone to be the "designated target" might as well just be charged by the FDIC and skip the rigamarole.