This Bank Proposal Will Damage Our Economy

[Cuddles]

This article is wrong headed in my opinion. It confuses bailing out of depositors with bailing out banks. Insolvent banks have never been bailed out. Banks that were solvent but had liquidity problems or mark to market problems due to market failures have been "bailed out", but insolvent banks are forced into resolution --- they are not bailed out. Furthermore any thought that the Fed gives money to banks is complete nonsense. Under the Constitution, only the Congress can create and give money away. Neither the Fed nor the Treasury can do that.

I don't think the writer of this article has given enough thought to the problems that were created in the past and could be created again by a banking system where depositors' money was not absolutely secure. One of the great strengths of U.S. Banking, and of virtually all other Banking systems in modern democracies, is that the depositor never has to worry about the security of their money when deposited in a government regulated bank. To you, the depositor, the solvency of your bank is of little concern. Your deposited money is safe! There should be no limit on F.D.I.C. insured amounts, but it may be desirable for other reasons to limit the amounts any one depositor can deposit in any one bank.

To quote Dest (and to some degree things I had echoed on taking the danger away from risk but unfamiliar w/structure):

Gear up-> bonus tiiiime ->fail->bailout->walk away w/200M <<this is more a moral hazard as the bond/stock holders would get wiped but management gets theirs.

Also, fed set up fund that pays 100c/dollar backstop to losing treasuries.

https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm

My take. If the fed is guaranteeing every deposit no matter the amount, why the fuck do we need the middle man banks for? Just nationalize the damn things and trim the fat out.

 

[piezoe]

To quote Dest (and to some degree things I had echoed on taking the danger away from risk but unfamiliar w/structure):

Gear up-> bonus tiiiime ->fail->bailout->walk away w/200M

Also, fed set up fund that pays 100c/dollar backstop to losing treasuries.

https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm

The Fed is not an investor and can loan against collateral such as Treasuries at par. This would typically be through the discount window at the current discount rate. The Par refers to evaluation of the collateral. The institution still must have enough collateral valued at par to cover their loan liability. The Fed doesn't give any money away. The institution might elect to do this in the instance where the collateral's par value minus its current market value was greater than the discount window interest. Otherwise the institution might be forced to sell the collateral at a loss or hold it to maturity to be assured it is worth par. In any case, the institution electing to borrow through the discount window will have to pay the discount rate of interest.

 

[Cuddles]

The Fed is not an investor and can loan against collateral such as Treasuries at par. This would typically be through the discount window at the current discount rate. The Par refers to evaluation of the collateral. The institution still must have enough collateral valued at par to cover their loan liability. The Fed doesn't give any money away. The institution might elect to do this in the instance where the collateral's par value minus its current market value was greater than the discount window interest. Otherwise the institution might be forced to sell the collateral at a loss or hold it to maturity to be assured it is worth par. In any case, the institution electing to borrow through the discount window will have to pay the discount rate of interest.

Not spelled out in the link, but from some old WSJ reporting. Language's been scrubbed from the article so dunno if they had it wrong:

 

[UsualName]

The problem is that rising interest rates have reduced the value of bank's bond portfolios.

This is actually true. Good for you.

 

[Ricter]

Furthermore any thought that the Fed gives money to banks is complete nonsense. Under the Constitution, only the Congress can create and give money away. Neither the Fed nor the Treasury can do that.

"Yes, the Federal Reserve does provide money to banks through a variety of mechanisms. One of the main ways that the Federal Reserve provides money to banks is through the process of open market operations, which involves buying and selling government securities in the open market. When the Federal Reserve buys securities from banks, it pays for them by crediting the banks' reserve accounts with the Federal Reserve, effectively adding new money to the banks' balances.

"The Federal Reserve can also provide money to banks through its discount window, which is a mechanism through which banks can borrow money from the Federal Reserve directly. The interest rate that the Federal Reserve charges banks for these loans is called the discount rate.

"Finally, the Federal Reserve can also provide money to banks through various lending facilities, such as the Term Auction Facility or the Primary Dealer Credit Facility. These facilities provide short-term loans to banks in times of stress or when there is a shortage of liquidity in the financial system."

 

[Tsing Tao]

True, but don't turn around and raise the coverage still more.

Agreed. 100%.

 

[Tsing Tao]

The wealthy have their money in brokerages with SIPC protection. I don't know who would keep more than $250K in a savings or checking account unless it is a payroll account by a big business.

Doesn't matter. Any corporate treasurer who didn't set up a money market sweep for the majority of their cash needs to be shot.

 

[UsualName]

https://www.federalreserve.gov/newsevents/pressreleases/monetary20230312a.htm

My take. If the fed is guaranteeing every deposit no matter the amount, why the fuck do we need the middle man banks for? Just nationalize the damn things and trim the fat out.

This is actually a good point. The Fed is moving to instant transactions through the FedNow application this summer. If this goes the way I think it will we may get to cut out the middleman with digital wallets through social security and payment through the FedNow system, which will essentially digitize our currency and cut out the need for middleman checking accounts.

 

[Cuddles]

This is actually a good point. The Fed is moving to instant transactions through the FedNow application this summer. If this goes the way I think it will we may get to cut out the middleman with digital wallets through social security and payment through the FedNow system, which will essentially digitize our currency and cut out the need for middleman checking accounts.

This has been the take of cryptobros for a while..."be your own bank".

 

[UsualName]

This has been the take of cryptobros for a while..."be your own bank".

I don’t know what you’re getting at here but I have always contended cryptocurrency is a scam but there is real innovation in the digital wallet coupled together with payment apps.

Banks have grown to become too much a part of our lives. It was not that long ago you could pay your bills in cash, or at least money orders. I am all about limiting banks roles in our lives. There is no benefit to a checking account but for people with limited money there’s lots of downside.