Good God

“why do we let banks continue to get away with exploiting the implicit guarantee they are given by the state?”

Thats is (for Spud) a good point. Its arguable that banking should be split into two completely legally separate spheres – namely a banking services sphere, which is for people to deposit money in from their pay cheque and pay their bills through (and receive no interest on money deposited and probably pay a service fee to use it, but have no deposit risk), and an investment sphere where people deposit cash for interest, make investments, get mortgages etc but where money is at risk. Then we can let the latter go bust when they make stupid investments because their failure would not have the systemic risk of stopping people being able to pay their bills etc etc. It would also mean that the investment side could be made far more competitive (not allow any one bank to get too big) so the failure of any one bank would not affect the whole financial system. The service banks would be highly regulated, more like utilities. No organisation would be allowed to own both types of bank.

We can indeed have a banking system that doesn’t do this. 100% reserve banking.

Didn’t the Federal Government just guarantee all the deposits in SVB to 100%.

Probably so the Democrat party’s rich techy mates don’t lose out and can still fund the Democrat party…

But if they’re going to do that anyway, why not just say 100% deposit guarantee?

“The general answer is that we’ll be poorer if we do.”

Really? After all the sh*t that the banks have pulled in the last 20 years and all the trouble they have caused you still think we’re better off with the status quo than something else? What makes us so clever to think we’ve invented the sine qua non of financial systems and nothing could possibly be better?

The main issue with FRB is that its become tied up with the mechanics of money, the payment systems, the salary in, bills out bit. 50 years ago the economy operated largely in cash, especially for the plebs. You didn’t have to worry about your card not working and being unable to buy food because your bank has just gone bust, you had cash in your pocket. Now money is all electronic and held by banks. They are effectively using the masses as cover for their investment activities – they know politicians can’t have the masses wiped out financially, so the banks are safe behind their human shield.

And maybe people’s day to day money shouldn’t be FRB’d. Maybe it should just go around and around like water in pipes, rather than shunted off into places where you can’t get at it but everyone pretends they can all get it when they can’t.IMO basing your economy on a fundamental lie isn’t going to work, long term. We are only 50 years into the ‘fiat money FRB’ financial system, and fully electronic money is younger than that.As the Chinese said of the French Revolution, its too soon to tell if it will work. Many people thought they’d invented financial perpetual motion before, and that never ended well. As we are seeing the current system doesn’t work, because the implicit backstop of the state behind investment banking (in the sense that we need to do some of the maturity transformation) has allowed banks a free ride – do dodgy sh*t, either make a fortune or get bailed out if you go bust, because if you did fail the whole money pipes of the economy would go with you.

“Jim’s suggestion is basically that there be Money Vault businesses on the high street. You pop your cash in, they lock it up for you, you take it out when you want it, and they make their living off the fees you pay. ”

Pretty much, except I’d legislate to say all wages had to be paid into a Money Vault (I like the name) account. What you do with it after that is up to you. Leave it there and use it like your FRB current account now, or transfer it out into the wild west of investments. But the former would be 100% safe, the latter at risk.

I don’t think that most people realise that ‘their’ money ‘in the bank’ isn’t theirs at all. Its a loan to the bank. Nor that if everyone wants their money at once the whole system collapses. My system would make all that abundantly clear, and allow people to stay out of the FRB system, but still be part of the larger financial world, which you can’t do today. You need an electronic bank account if only to get paid. And cash is harder and harder to pay with. I don’t see why there shouldn’t be ‘nudge’ towards getting everyone a 100% reserve bank account. It would make the financial system far more stable. And more honest than the ‘We’re private businesses and can make huge profits, but if we f*ck up you plebs must bail us out’ banking world we have today.

Jim

Isn’t it basically a revival of the equivalent of a Glass- Steagall arrangement you are looking for?

Seems a reasonable ask – indeed hasn’t the Uk been trying to do that for the last two decades with the so – called ‘challenger’ banks? The problem is in a ZIRP environment then it’s difficult to make any money purely by investing in low risk instruments. And it’s worth pointing out that SVB’s asset base appears to have been in assets that were ‘lower risk’

Pretty much, except I’d legislate to say all wages had to be paid into a Money Vault

Excellent idea. It’s an electronic equivalent of the employer going down the bank, withdrawing the wages in cash, paying it to employee, who might then deposit some of that back at the bank, or not and simply spend it as they wish.

There would presumably also need to be a ring-fenced inter-bank clearing facility for these Money Vault balances as well, to facilitate spending? Or perhaps simpler just automatic transfers from your Money Vault to the current account whenever you pay something? At which point it is back in the normal system.

And cash is harder and harder to pay with

I still use physical cash all the time; not to pay bills and similar (that would be a hassle), but for a lot of transactions where I am buying something physically (ie, the circumstances where it is practical to use cash). Rarely ever does that not work. Cheques are increasingly the things that people don’t want – cash or electronic is usually fine.

“We did have that, Girobank, no one was interested. We could have it again, Post Office Bank. Shrug.”

It wouldn’t be voluntary. It would be mandated. Everyone would have to have a Digital Vault account, in order to get paid, or indeed pay taxes, which would only be accepted by HMG from Digital Vault accounts, thus ensuring everyone would have to open one. You are never going to get the broad mass of the public to voluntarily move accounts unless you force them to. Once everyone has one then you can free up the FRBs to do what they like, because everyone will still have the ability to be paid and pay others. The failure of Global MegaBank Inc would not stop people buying food or paying their mortgage.

Its a utility in effect, a system of pipes for money. Controlled and regulated and paid for in the same way we pay for other utilities.

I quite liked my Girobank account although they were a bit slow on the technology stuff ( like ATM cards ), but transferring money was really easy and I had a mass of free envelopes to send cheques and payment slips to Bootle. I was quite put out when A&L bought it, their customer service was pretty poor.

Shouldn’t it be called DSB accounts – Digital Shoe Box ?

You people obviously like having your savings stolen via money printing every decade or so to prop up the banking system then……..

“For the entire point of banking is to transform (“maturity transformation”) all those short term savings lying around – the bit of our monthly wages we haven’t spent yet – into longer term investment.”

Loanable funds fallacy Tim…

A bit from Keynes in this article. The part in the double square brackets is from Keynes’ writings:

[quote]
“Anyway, I sent Reissl a copy of Keynes’ famous paper on econometrics entitled Professor Tinbergen’s Method and while we were discussing it Reissl pointed out the short piece that appeared below it. The paper, you see, was a book review published in The Economic Journal in 1939 and below it was another review by Keynes. This review was entitled The Process of Capital Formation and it dealt with an early statistical attempt to formalise the national accounts — something that Keynes would become deeply involved in during the war years and after.

The relevant discussion begins when Keynes discusses the savings/investment identity and clearly states that it is investment that drives savings, not savings that allow for investment. Using his typically brilliant ability for metaphor he writes,”

[[ For example, [the reader] might naturally suppose — for anything the Committee say to the contrary — that the right way to prepare for an increase of investment is to save more at an appropriately prior date. But the corollary shows that this is impossible. Saving at the prior date cannot be greater than the investment at that date. Increased investment will always be accompanied by increased saving, but it can never be preceded by it. Dishoarding and credit expansion provides not an alternative to increased saving, but a necessary preparation for it. It is the parent, not the twin, of increased saving. (p527 — My Emphasis)]]

Or, as Keynes puts,

[[ Prior saving has no more tendency to release funds available for subsequent investment than prior spending has. (pp572-573) ]]
[end quote]

There is maturity transformation happening, but it runs from investment to saving, not the other way around. This is because S = I is an identity and holds true at every instant in time. The loanable funds theory, which is a fallacy, assumes that S > I for a period of time. As Keynes showed, this is not possible.