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No need to write an essay to explain basic banking. > but suffice it to say, those questions don't refute this discussion. You should address them -- you've c

No need to write an essay to explain basic banking. > but suffice it to say, those questions don't refute this discussion. You should address them -- you've completely avoided the point. There is no dispute about the mechanism; I'm interested in the cause / incentive that drove the results. > The thing that changed was deregulation: the S&L debacle got people sent to prison, while the latest resurgence of liar's loans came in an era of notoriously ineffective banking oversight. Perhaps you missed the part about unpredictable Federal Reserve price-setting... from Wikipedia: "In 1979, the Federal Reserve System of the United States raised the Discount Rate that it charged its member banks from 9.5% to 12% in an effort to reduce inflation. The building or savings and loans associations (S&Ls) had issued long-term loans at fixed interest rates that were lower than the interest rate at which they could borrow. In addition, the S&Ls had the liability of the deposits which paid higher interest rates than the rate at which they could borrow. When interest rates at which they could borrow increased, the S&Ls could not attract adequate capital, from deposits to savings accounts of members for instance, they became insolvent. Rather than admit to insolvency, lax regulatory oversight allowed some S&Ls to invest in highly speculative investment strategies." Someone like you would probably blame everything on the last sentence, whereas I am more interested in the root cause.

colorint 9y ago
An essay on banking seemed necessary, since you said that banks "give away money" when lending. It's important to understand that banks create money when they lend, but that's too esoteric to say on its own. As for the questions that were set aside, one role of the Fed is to ensure that enough ("high-powered") money is available to ensure that transactions clear, which is part of monetary policy (including, as you sort of mentioned, the discount window). Asymmetries between banks are resolved through interbank lending. Because all these mechanisms are available to cover their reserve needs, banks will issue loans (creating deposits) based on the creditworthiness of their applicants, not on their own reserve positions. But these are secondary matters, which is why I didn't talk about them earlier. >Someone like you would blame everything on the last sentence, whereas I am more interested in the root cause. On the one hand, interest rate risk is precisely why we allow lenders to charge interest; otherwise it would be money for nothing. On the other, I suspect you just want to blame the federal government, because that's ideologically convenient. For my part, I'm skeptical of the Fed's belief (and general economic orthodoxy) that interest rate increases are the correct response to inflation, but that's even more secondary. More importantly, we have the issue that normal people need to be secure in their bank deposits, and since the government is us, it's perfectly reasonable to make that happen. In particular, once you start insuring deposits, you really need to be ready to regulate. As for S&Ls, deregulation was the response to their interest rate troubles (they went for deregulation rather than closure because of free market orthodoxy), but then that turned out to be a disaster. The "control fraud" I talked about, where executives pillage the bank, was rife in the latter days of the S&L boom. Past that, y'know, it was a situation of making extremely risky loans with capital from insured deposits, because there was nothing holding them back. This is about as far from "won't somebody think of the bankers" as it gets. The FDIC has a fair write-up of it: https://www.fdic.gov/bank/historical/history/167_188.pdf https://www.fdic.gov/bank/historical/history/167_188.pdf Indeed, if you keep a vaguely open mind and know anything about the global financial crisis, you ought to spot one or two similarities, that have nothing whatsoever to do with the federal government strong-arming put-upon banks to make unreasonable loans to poor people---and, if anything, a failure of the federal government to lay down the hammer on private-sector fuckery.
- lend000 9y ago
  > if you keep a vaguely open mind I would advise you to take your own advice and read the initial article I posted. The solution is not absolutism on either end of the spectrum, but our current system is too far on the over-regulated side with convoluted, "unintended consequence" programs, regulations, and infrastructure. The sooner we can come to a consensus on that, the sooner we can employ smarter, simpler regulations that the average educated person can read and understand in fewer than 100 lifetimes.

colorint 9y ago

An essay on banking seemed necessary, since you said that banks "give away money" when lending. It's important to understand that banks create money when they lend, but that's too esoteric to say on its own. As for the questions that were set aside, one role of the Fed is to ensure that enough ("high-powered") money is available to ensure that transactions clear, which is part of monetary policy (including, as you sort of mentioned, the discount window). Asymmetries between banks are resolved through interbank lending. Because all these mechanisms are available to cover their reserve needs, banks will issue loans (creating deposits) based on the creditworthiness of their applicants, not on their own reserve positions. But these are secondary matters, which is why I didn't talk about them earlier. >Someone like you would blame everything on the last sentence, whereas I am more interested in the root cause. On the one hand, interest rate risk is precisely why we allow lenders to charge interest; otherwise it would be money for nothing. On the other, I suspect you just want to blame the federal government, because that's ideologically convenient. For my part, I'm skeptical of the Fed's belief (and general economic orthodoxy) that interest rate increases are the correct response to inflation, but that's even more secondary. More importantly, we have the issue that normal people need to be secure in their bank deposits, and since the government is us, it's perfectly reasonable to make that happen. In particular, once you start insuring deposits, you really need to be ready to regulate. As for S&Ls, deregulation was the response to their interest rate troubles (they went for deregulation rather than closure because of free market orthodoxy), but then that turned out to be a disaster. The "control fraud" I talked about, where executives pillage the bank, was rife in the latter days of the S&L boom. Past that, y'know, it was a situation of making extremely risky loans with capital from insured deposits, because there was nothing holding them back. This is about as far from "won't somebody think of the bankers" as it gets. The FDIC has a fair write-up of it: https://www.fdic.gov/bank/historical/history/167_188.pdf https://www.fdic.gov/bank/historical/history/167_188.pdf Indeed, if you keep a vaguely open mind and know anything about the global financial crisis, you ought to spot one or two similarities, that have nothing whatsoever to do with the federal government strong-arming put-upon banks to make unreasonable loans to poor people---and, if anything, a failure of the federal government to lay down the hammer on private-sector fuckery.

lend000 9y ago
> if you keep a vaguely open mind I would advise you to take your own advice and read the initial article I posted. The solution is not absolutism on either end of the spectrum, but our current system is too far on the over-regulated side with convoluted, "unintended consequence" programs, regulations, and infrastructure. The sooner we can come to a consensus on that, the sooner we can employ smarter, simpler regulations that the average educated person can read and understand in fewer than 100 lifetimes.