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More worrying, imagine if a city has some major economic downturn. A factory closes, an industry moves offshore, whatever. House prices in that city go down, n

by wisty 7y ago

More worrying, imagine if a city has some major economic downturn. A factory closes, an industry moves offshore, whatever. House prices in that city go down, not everyone pays their rates, and everyone is looking to the local government to keep the economy ticking along while they wait for new businesses to take advantage of falling wages. However, the local government bank has just written off a bunch of bad loans so the local government's credit rating has fallen off a cliff.

UncleEntity 7y ago
> However, the local government bank has just written off a bunch of bad loans so the local government's credit rating has fallen off a cliff. ...and, presumably, the Fed steps in and bails out the bank by buying up the bad loans. Seems, from a politician's point of view, a much better option than having the city go into bankruptcy when they can get a bunch of "loans" from the Fed to keep chugging along. Moral hazard be damned.
- AnthonyMouse 7y ago
  That's assuming the Feds are going to do that. If they happen to be of the opposing political party at that time, good luck with that. Keep in mind that the bailouts after the 2008 housing crisis were across the whole economy. If that many major banks failed, it would have had a cascade effect, and that was the argument used to justify it. But one bank, in one city? That could fail without anybody saving it and the rest of the economy would barely notice. Though the people in that city sure would.
  - User23 7y ago
    To clarify, when grandparent wrote "Fed" he was referring to the Federal Reserve Bank, of which City-Run banks would be member banks. The Fed would be forced to prop them up or wind them down in an organized fashion in order to maintain the integrity of the payment system. Political considerations wouldn't really be a factor, and which party controlled the federal government wouldn't matter.
    - AnthonyMouse 7y ago
      You're talking about two different things. After 2008 The Feds bailed out the banks by having The Fed issue them loans and buying up their toxic assets. It's less likely that would happen with only an individual local bank. By contrast, when a bank goes out of business, the FDIC covers most of the deposits. But that doesn't end the same way for the bank. And if the bank is the city, the question then becomes whether they have to e.g. sell all of their real estate holdings and other city assets, or allocate their revenues from taxes to covering deposits, before the FDIC has to cover them. Meanwhile all the cronies who got loans for buildings they can't afford would suddenly find the loans owned by somebody else who would be more inclined to foreclose on them if they don't make the payments etc.
      - User23 7y ago
        How do you mean? I was only clarifying that "the Fed" means the Federal Reserve Bank, when the person I responded to originally mistook it to mean "the Feds," which is a much more ambiguous term, but generally means some federal regulatory body or the political branches of the federal government as a whole. You're obviously correct though that the real motivation for a city owned licensed bank is to move pension liabilities and maybe some other assorted boondoggles from the city's balance sheet to the bank's balance sheet with the intention of strong-arming the Fed into acting as a backstop just as it did for commercial banks during the financial crisis.

by wisty 7y ago

UncleEntity 7y ago

> However, the local government bank has just written off a bunch of bad loans so the local government's credit rating has fallen off a cliff. ...and, presumably, the Fed steps in and bails out the bank by buying up the bad loans. Seems, from a politician's point of view, a much better option than having the city go into bankruptcy when they can get a bunch of "loans" from the Fed to keep chugging along. Moral hazard be damned.

AnthonyMouse 7y ago
That's assuming the Feds are going to do that. If they happen to be of the opposing political party at that time, good luck with that. Keep in mind that the bailouts after the 2008 housing crisis were across the whole economy. If that many major banks failed, it would have had a cascade effect, and that was the argument used to justify it. But one bank, in one city? That could fail without anybody saving it and the rest of the economy would barely notice. Though the people in that city sure would.
- User23 7y ago
  To clarify, when grandparent wrote "Fed" he was referring to the Federal Reserve Bank, of which City-Run banks would be member banks. The Fed would be forced to prop them up or wind them down in an organized fashion in order to maintain the integrity of the payment system. Political considerations wouldn't really be a factor, and which party controlled the federal government wouldn't matter.
  - AnthonyMouse 7y ago
    You're talking about two different things. After 2008 The Feds bailed out the banks by having The Fed issue them loans and buying up their toxic assets. It's less likely that would happen with only an individual local bank. By contrast, when a bank goes out of business, the FDIC covers most of the deposits. But that doesn't end the same way for the bank. And if the bank is the city, the question then becomes whether they have to e.g. sell all of their real estate holdings and other city assets, or allocate their revenues from taxes to covering deposits, before the FDIC has to cover them. Meanwhile all the cronies who got loans for buildings they can't afford would suddenly find the loans owned by somebody else who would be more inclined to foreclose on them if they don't make the payments etc.
    - User23 7y ago
      How do you mean? I was only clarifying that "the Fed" means the Federal Reserve Bank, when the person I responded to originally mistook it to mean "the Feds," which is a much more ambiguous term, but generally means some federal regulatory body or the political branches of the federal government as a whole. You're obviously correct though that the real motivation for a city owned licensed bank is to move pension liabilities and maybe some other assorted boondoggles from the city's balance sheet to the bank's balance sheet with the intention of strong-arming the Fed into acting as a backstop just as it did for commercial banks during the financial crisis.