5 ms·

Here's what's going on here: banks use debt to increase their returns. A bank might have $100M in capital, $1B in assets, and $900M in debt. Now, to keep things

Here's what's going on here: banks use debt to increase their returns. A bank might have $100M in capital, $1B in assets, and $900M in debt. Now, to keep things from getting too crazy, there are national and international regulations limiting how much they can borrow. Those limits depend on how risky the assets are that they're buying. US government bonds? You might need to have 3 cents in capital for every dollar of T Bonds. For high quality commercial bonds, maybe 5 or 10 cents. Cryptocurrency is a new asset class, so they have to decide how much capital a bank needs to hold. Quite sensibly, given its volatility, you need $1 in capital to hold $1 in crypto. I.e. a bank cannot borrow against its crypto holdings.

SturgeonsLaw 5y ago
In this cheap debt environment, I'm not sure "sensible" applies to the market's mindset when it comes to leverage
cletus 5y ago
This. To add a little more context to this, the first banks took deposits and lent that money out to borrowers. They would keep a certain percentage of that for liquidity ie to cover withdrawals. This became viewed as overly conservative so banks started retaining a smaller percentage of the loans in hard currency and/or gold. This is the origin of the fractional reserve system. Some Luddites who often bemoan abandoning the gold standard point to this is a mistake but the last few centuries has shown this to be wildly successful. Ultimately this led to the formation of central banks (sometimes called the lenders of last resort) to, in part at least, avoid the issues of runs on individual banks. Nowadays debt tends to be securitized and not even on a bank's books anymore anyway. This is actually one of the desirable properties of a currency that cryptos (or Bitcoin at least) just doesn't have. Combine that with highly volatile values and it's a mistake (IMHO) to call cryptos "currencies". They're assets not currencies.
- yowlingcat 5y ago
  > This is actually one of the desirable properties of a currency that cryptos (or Bitcoin at least) just doesn't have. You've got to be careful making these kinds of assertions. Maybe they'd be accurate if you put Bitcoin in a vacuum, but if you consider the entire crypto ecosystem that revolves around bitcoin, it's completely false. Not only is DeFi a burgeoning asset class, it's gotten so popular (via yield farming) that many an institutional hedge fund has gotten in on the action. The decentralized lending ecosystem in crypto is surprisingly mature. With that said, it's not inaccurate to say that by virtue of volatility and commensurate reserve requirements, bitcoin is more challenging to keep on a balance sheet, nevermind use as currency. There's also something about stablecoins that I can't quite put my finger on but which makes me nervous.
- lettergram 5y ago
  > Some Luddites who often bemoan abandoning the gold standard point to this is a mistake but the last few centuries has shown this to be wildly successful. First, that's not accurate. Federal reserve system is ~100 years old (and arguably caused the great depression, 1970 inflation crisis, 2008 and what may be coming in 2021-2022). The gold standard was only abandoned completely in 1970's (~50 years). > Starting in the 1959–1969 administration of President Charles de Gaulle and continuing until 1970, France reduced its dollar reserves, exchanging them for gold at the official exchange rate, reducing U.S. economic influence. This, along with the fiscal strain of federal expenditures for the Vietnam War and persistent balance of payments deficits, led U.S. President Richard Nixon to end international convertibility of the U.S. dollar to gold on August 15, 1971 (the "Nixon Shock"). In 1934 the U.S. Nationalized all gold: > Congress passed the Gold Reserve Act on 30 January 1934; the measure nationalized all gold by ordering Federal Reserve banks to turn over their supply to the U.S. Treasury. https://en.wikipedia.org/wiki/Gold_standard https://en.wikipedia.org/wiki/Gold_standard I'm making no claims but you can see some of what the implications are (I think this site is a bit over the top, but makes some stuff clear): https://wtfhappenedin1971.com/ https://wtfhappenedin1971.com/
  - only_as_i_fall 5y ago
    Are you implying that fractional reserve banking is only as old as the federal reserve act?
    - jakeogh 5y ago
      When the answer is obviously... no... why ask?
      - only_as_i_fall 5y ago
        Do you know what a pointed question is?
- billytetrud 5y ago
  When banks simply get bailed out at taxpayers expense when their overly risky loans go bust, why bother keeping anything in reserve at all? I guess that's "desirable" if you own a bank.
  - idiotsecant 5y ago
    Welcome to the cutting edge of finance where the money is all made up and interest doesn't matter! The perpetual motion machine that is the world of modern finance is either blindingly stupid and short sighted or just too complex for me to properly understand, I'm not sure which.
  - cletus 5y ago
    This is a tricky subject. Take the TARP loans post-GFC. These have pretty much all been repaid (and most were by 2011). So while it still qualifies as a bailout there's a difference between extending a line of credit and just giving banks money. So I'm curious what you're specifically referring to because most of the time people conflate loans and handouts. Not that there aren't egregious examples here. One of the biggest (IMHO) was the LTCM bailout.
    - billytetrud 5y ago
      > there's a difference between extending a line of credit and just giving banks money. Certainly. But loans have value when you want them. And most of these institutions certainly got lower loan rates than their creditworthiness deserved. And loans weren't the only thing TARP did. Lots of shinanigans in the bailouts and TARP programs. For example the US treasury bought Goldman Sachs shares 35% above market rates. That's basically $3.5 billion in free money. The execs that fueled all that overrisky behavior often left with bonuses despite their failures and being complicit in an economic disaster. This was the rule not the exception. Its quite clear to me that these things were mechanisms for the elite in these companies to take advantage of the situation to their benefit, and they used the corrupt connections in politics to get it. Even if TARP actions didn't just give free money to the companies as a whole, the higher up people at these companies took away massive amounts of that money, at the expense of their shareholders and the taxpayers.
tumetab1 5y ago
That’s the reality but article tells a totally different story which is funny and also unsettling how The Guardian can do so bad reporting. I for once agree with these council suggestion, 100% bank reserves for cripto-things. The world doesn’t need to add more instability to the FIAT system.
- syshum 5y ago
  The world needs to toss the FIAT system....
  - zja 5y ago
    why?
    - syshum 5y ago
      The reasons are far too numerous to list all of them here, entire books have been written outlying why Fiat currency is bad over all for humanity however for me, I am supporter of extremely limited government, as such commodity based money is a natural limit on how much government a civilization can have, as government can only directly tax soo much before the citizens revolt, fiat currency allows them to tax by inflation and take on far more debt than a commodity currency would allow. Also fiat currency makes War between nations far more economically possible.
    - brighton36 5y ago
      "anything but this" is a compelling direction, when people don't subscribe to a least-worst model of governance. 'Anything but this' is an utopian path. There's really no justification or even rationalization, for compromise, online. 'Anything but this' is a form of 'cures whatever ails you'.
  - nps1 5y ago
    You are removing one problem with another. In FIAT govt control flow of money. In bitcoin, you give that control to some private companies who manufacture mining rigs and energy producing companies. Except, the cost of the alternative is you see increase in price of silicon tech and energy costs for regular use. I bet the supply chain issues you are seeing now a days with silicon products and high cost of crude can be attributed to increase in price of bitcoin.

SturgeonsLaw 5y ago

In this cheap debt environment, I'm not sure "sensible" applies to the market's mindset when it comes to leverage

cletus 5y ago

This. To add a little more context to this, the first banks took deposits and lent that money out to borrowers. They would keep a certain percentage of that for liquidity ie to cover withdrawals. This became viewed as overly conservative so banks started retaining a smaller percentage of the loans in hard currency and/or gold. This is the origin of the fractional reserve system. Some Luddites who often bemoan abandoning the gold standard point to this is a mistake but the last few centuries has shown this to be wildly successful. Ultimately this led to the formation of central banks (sometimes called the lenders of last resort) to, in part at least, avoid the issues of runs on individual banks. Nowadays debt tends to be securitized and not even on a bank's books anymore anyway. This is actually one of the desirable properties of a currency that cryptos (or Bitcoin at least) just doesn't have. Combine that with highly volatile values and it's a mistake (IMHO) to call cryptos "currencies". They're assets not currencies.

yowlingcat 5y ago
> This is actually one of the desirable properties of a currency that cryptos (or Bitcoin at least) just doesn't have. You've got to be careful making these kinds of assertions. Maybe they'd be accurate if you put Bitcoin in a vacuum, but if you consider the entire crypto ecosystem that revolves around bitcoin, it's completely false. Not only is DeFi a burgeoning asset class, it's gotten so popular (via yield farming) that many an institutional hedge fund has gotten in on the action. The decentralized lending ecosystem in crypto is surprisingly mature. With that said, it's not inaccurate to say that by virtue of volatility and commensurate reserve requirements, bitcoin is more challenging to keep on a balance sheet, nevermind use as currency. There's also something about stablecoins that I can't quite put my finger on but which makes me nervous.
lettergram 5y ago
> Some Luddites who often bemoan abandoning the gold standard point to this is a mistake but the last few centuries has shown this to be wildly successful. First, that's not accurate. Federal reserve system is ~100 years old (and arguably caused the great depression, 1970 inflation crisis, 2008 and what may be coming in 2021-2022). The gold standard was only abandoned completely in 1970's (~50 years). > Starting in the 1959–1969 administration of President Charles de Gaulle and continuing until 1970, France reduced its dollar reserves, exchanging them for gold at the official exchange rate, reducing U.S. economic influence. This, along with the fiscal strain of federal expenditures for the Vietnam War and persistent balance of payments deficits, led U.S. President Richard Nixon to end international convertibility of the U.S. dollar to gold on August 15, 1971 (the "Nixon Shock"). In 1934 the U.S. Nationalized all gold: > Congress passed the Gold Reserve Act on 30 January 1934; the measure nationalized all gold by ordering Federal Reserve banks to turn over their supply to the U.S. Treasury. https://en.wikipedia.org/wiki/Gold_standard https://en.wikipedia.org/wiki/Gold_standard I'm making no claims but you can see some of what the implications are (I think this site is a bit over the top, but makes some stuff clear): https://wtfhappenedin1971.com/ https://wtfhappenedin1971.com/
- only_as_i_fall 5y ago
  Are you implying that fractional reserve banking is only as old as the federal reserve act?
  - jakeogh 5y ago
    When the answer is obviously... no... why ask?
    - only_as_i_fall 5y ago
      Do you know what a pointed question is?
billytetrud 5y ago
When banks simply get bailed out at taxpayers expense when their overly risky loans go bust, why bother keeping anything in reserve at all? I guess that's "desirable" if you own a bank.
- idiotsecant 5y ago
  Welcome to the cutting edge of finance where the money is all made up and interest doesn't matter! The perpetual motion machine that is the world of modern finance is either blindingly stupid and short sighted or just too complex for me to properly understand, I'm not sure which.
- cletus 5y ago
  This is a tricky subject. Take the TARP loans post-GFC. These have pretty much all been repaid (and most were by 2011). So while it still qualifies as a bailout there's a difference between extending a line of credit and just giving banks money. So I'm curious what you're specifically referring to because most of the time people conflate loans and handouts. Not that there aren't egregious examples here. One of the biggest (IMHO) was the LTCM bailout.
  - billytetrud 5y ago
    > there's a difference between extending a line of credit and just giving banks money. Certainly. But loans have value when you want them. And most of these institutions certainly got lower loan rates than their creditworthiness deserved. And loans weren't the only thing TARP did. Lots of shinanigans in the bailouts and TARP programs. For example the US treasury bought Goldman Sachs shares 35% above market rates. That's basically $3.5 billion in free money. The execs that fueled all that overrisky behavior often left with bonuses despite their failures and being complicit in an economic disaster. This was the rule not the exception. Its quite clear to me that these things were mechanisms for the elite in these companies to take advantage of the situation to their benefit, and they used the corrupt connections in politics to get it. Even if TARP actions didn't just give free money to the companies as a whole, the higher up people at these companies took away massive amounts of that money, at the expense of their shareholders and the taxpayers.

tumetab1 5y ago

That’s the reality but article tells a totally different story which is funny and also unsettling how The Guardian can do so bad reporting. I for once agree with these council suggestion, 100% bank reserves for cripto-things. The world doesn’t need to add more instability to the FIAT system.

syshum 5y ago
The world needs to toss the FIAT system....
- zja 5y ago
  why?
  - syshum 5y ago
    The reasons are far too numerous to list all of them here, entire books have been written outlying why Fiat currency is bad over all for humanity however for me, I am supporter of extremely limited government, as such commodity based money is a natural limit on how much government a civilization can have, as government can only directly tax soo much before the citizens revolt, fiat currency allows them to tax by inflation and take on far more debt than a commodity currency would allow. Also fiat currency makes War between nations far more economically possible.
  - brighton36 5y ago
    "anything but this" is a compelling direction, when people don't subscribe to a least-worst model of governance. 'Anything but this' is an utopian path. There's really no justification or even rationalization, for compromise, online. 'Anything but this' is a form of 'cures whatever ails you'.
- nps1 5y ago
  You are removing one problem with another. In FIAT govt control flow of money. In bitcoin, you give that control to some private companies who manufacture mining rigs and energy producing companies. Except, the cost of the alternative is you see increase in price of silicon tech and energy costs for regular use. I bet the supply chain issues you are seeing now a days with silicon products and high cost of crude can be attributed to increase in price of bitcoin.