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The obvious fact is that we don’t need private banks to run our payment system or provide deposit accounts. It can be done perfectly well by allowing individual

by dools 4y ago

The obvious fact is that we don’t need private banks to run our payment system or provide deposit accounts. It can be done perfectly well by allowing individuals to have accounts at the central bank through a postal savings system. There is probably some value in having banks to do loan underwriting and allowing private credit creation but this whole thing if allowing private banks to run everything and then providing a federal guarantee of some deposits is absurd, just take that function away from the private sector.

nightmarish 4y ago
How do you handle fraud in this setup? Lol.
- djbusby 4y ago
  Same way as now? Eventual Consistency that the current financial industry uses.
- ghayes 4y ago
  The bank doesn’t need to perform those functions like debit and credit cards in this set-up. Transfer funds to a private bank for that. The public bank is just to secure deposits.
gruez 4y ago
>There is probably some value in having banks to do loan underwriting and allowing private credit creation but why would you ever put your money in a commercial bank when you can deposit at the federal reserve with 0 risk?
- xboxnolifes 4y ago
  Interest
  - dools 4y ago
    I’m not an expert in the mechanics but I think there is also a way for private credit creation to run as a separate operation, similar to how loans were originated in the sub prime mortgage crisis and then immediately sold on. I’m not recommending that happen, but a similar system would allow private credit creation without the loan issuers being the primary deposit taking institution. But yes private banks could also operate term deposits and pay interest to attract deposits to satisfy net flows of funds with other institutions.
    - dools 4y ago
      I can't edit my above comment anymore but going back to the original lecture in which I saw this he does specifically say that loans should be held to maturity by the issuer: https://youtu.be/gI86w6bSmS0?t=445 https://youtu.be/gI86w6bSmS0?t=445 Presumably to avoid exactly what happened in the sub-prime mortgage crisis :)
  - mitthrowaway2 4y ago
    That would be nice. Presently, most private banks pay less interest to depositors than the Fed funds overnight rate.
  - SkyMarshal 4y ago
    Presumably you would get at least T-bill equivalent interest rates in a postal saving system, but that still leaves room for higher interest alternatives.
deleted 4y ago
[deleted]
SkyMarshal 4y ago
I agree. It’s not even clear that banks need customer deposits to create credit and loans anyway [1]. Just let them continue with their commercial credit/loan operations, and provide a postal savings system for zero-risk savings for the public. Seems like a much less calamity-prone system. [1]:https://www.youtube.com/watch?v=3N7oD5zrBnc https://www.youtube.com/watch?v=3N7oD5zrBnc
- lend000 4y ago
  If basic customers could be served by a federal deposit system and more "unique" customers might look for private options that cater to their needs (basically all of SVB's customers), nothing that played out in SVB's collapse would have changed.
  - SkyMarshal 4y ago
    Probably true for SVB, but still useful for the banking system overall.
  - dools 4y ago
    You reckon they would have been holding cash for payroll in SVB if they could have an account directly with the fed instead?
    - lend000 4y ago
      Consider the reasons why most of SVB's clients chose SVB instead of a larger, more traditional bank. The traditional banks work very slowly, are hyper-cautious with/outright deny businesses they don't understand, and if a startup did manage to get an account, its transaction maximums would be extremely limited relative to its growth. Now imagine the government is the custodian, and those problems presumably become 10x worse.
      - dools 4y ago
        I looked up "why would a startup choose svb" and found that the reasons are those which could be fulfilled in a myriad ways: https://au.finance.yahoo.com/news/silicon-valley-bank-served-tech-214849273.html https://au.finance.yahoo.com/news/silicon-valley-bank-served... There was nothing especially "startuppy" about their traditional banking services.
fludlight 4y ago
Banks use some of those deposits to make loans to private parties. This is, on the whole, beneficial to society so we want it to continue. You do not want the government, which is supervised by politicians, picking who gets loans.
- swalling 4y ago
  Except if you look at mortgages as an example, the government already has a huge impact on who gets loans (via Fannie Mae and Freddie Mac, plus programs like USDA home loans). That influence is largely to expand access to people who would otherwise get cut out of the system.
- no_wizard 4y ago
  I agree that having a banking system in any major degree at the whims of politicians could and likely is a bad idea. I don’t think however having the Civil Service running a public bank would be a bad thing though. Career government employees are at the whims of politicians no more than private businesses are, has been my observation, and can when structurally enabled make good sound decisions. I think having a public option for banking in this light would be positive
- dools 4y ago
  > You do not want the government, which is supervised by politicians, picking who gets loans. Yes that's why I said there's some value in having private credit creation. In fact, my comment was just lifted from this lecture by Randall Wray where he says precisely what you just said: https://youtu.be/gI86w6bSmS0?t=445 https://youtu.be/gI86w6bSmS0?t=445 Although correction to another comment I made: he does specifically say loans should be held by the issuer until maturity.
- neilwilson 4y ago
  They don’t. Loans create deposits. Deposits in a bank never go anywhere. All that happens as you “move” money around is the ownership tag changes. And that tends to change the price the bank has to pay on those deposits.
88913527 4y ago
Banks depend on depositor's money to generate loans. How would loans be generated, then, if consumers kept their money with the central bank? Issuing debt is a key engine for economic growth. This would incur an extremely contractionary effect.
- alxmng 4y ago
  The way any other creditor issues loans? Investors put money together, loan it out at interest to make a profit and cover losses.
  - digitaltrees 4y ago
    That would be a fraction of the size of depositor back lending which would significantly reduce capital available for all kinds of uses. The current system is better specifically because it supplies guard rails that incentivize private investors and all savers to lend their money.
    - alxmng 4y ago
      The venture capital and stock market are not capitalized with bank deposits, and that comprises the bulk of commercial startup capitalization and investment. What percentage of startup capitalization and investment comes from deposit-backed bank loans? I'd guess not much. None of the tech startups impacted by SVB's insolvency were capitalized by loans from checking deposits. Their deposit accounts were lent out to mostly non-business securities (mortgages and government bonds). Fractional reserve banking always will and always does result in bank runs. The idea of separating deposit and investment banking goes back to the 1930s. It's known as "The Chicago Plan" (full reserve deposit banking). The IMF published a study that estimates no negative impact on economic growth. https://en.wikipedia.org/wiki/Chicago_plan https://en.wikipedia.org/wiki/Chicago_plan https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The-Chicago-Plan-Revisited-26178 https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The... https://qr.ae/pGQXNx https://qr.ae/pGQXNx
      - 4y ago
personomas 4y ago
> There is probably some value in having banks to do loan underwriting and allowing private credit creation but this whole thing if allowing private banks to run everything and then providing a federal guarantee of some deposits is absurd, just take that function away from the private sector. Could you explain this better? I don't understand
- dools 4y ago
  I probably can't explain it better than Randall Wray from whom I got the information, in this lecture: https://youtu.be/gI86w6bSmS0?t=445 https://youtu.be/gI86w6bSmS0?t=445

by dools 4y ago

nightmarish 4y ago

How do you handle fraud in this setup? Lol.

djbusby 4y ago
Same way as now? Eventual Consistency that the current financial industry uses.
ghayes 4y ago
The bank doesn’t need to perform those functions like debit and credit cards in this set-up. Transfer funds to a private bank for that. The public bank is just to secure deposits.

gruez 4y ago

>There is probably some value in having banks to do loan underwriting and allowing private credit creation but why would you ever put your money in a commercial bank when you can deposit at the federal reserve with 0 risk?

xboxnolifes 4y ago
Interest
- dools 4y ago
  I’m not an expert in the mechanics but I think there is also a way for private credit creation to run as a separate operation, similar to how loans were originated in the sub prime mortgage crisis and then immediately sold on. I’m not recommending that happen, but a similar system would allow private credit creation without the loan issuers being the primary deposit taking institution. But yes private banks could also operate term deposits and pay interest to attract deposits to satisfy net flows of funds with other institutions.
  - dools 4y ago
    I can't edit my above comment anymore but going back to the original lecture in which I saw this he does specifically say that loans should be held to maturity by the issuer: https://youtu.be/gI86w6bSmS0?t=445 https://youtu.be/gI86w6bSmS0?t=445 Presumably to avoid exactly what happened in the sub-prime mortgage crisis :)
- mitthrowaway2 4y ago
  That would be nice. Presently, most private banks pay less interest to depositors than the Fed funds overnight rate.
- SkyMarshal 4y ago
  Presumably you would get at least T-bill equivalent interest rates in a postal saving system, but that still leaves room for higher interest alternatives.

deleted 4y ago

[deleted]

SkyMarshal 4y ago

I agree. It’s not even clear that banks need customer deposits to create credit and loans anyway [1]. Just let them continue with their commercial credit/loan operations, and provide a postal savings system for zero-risk savings for the public. Seems like a much less calamity-prone system. [1]:https://www.youtube.com/watch?v=3N7oD5zrBnc https://www.youtube.com/watch?v=3N7oD5zrBnc

lend000 4y ago
If basic customers could be served by a federal deposit system and more "unique" customers might look for private options that cater to their needs (basically all of SVB's customers), nothing that played out in SVB's collapse would have changed.
- SkyMarshal 4y ago
  Probably true for SVB, but still useful for the banking system overall.
- dools 4y ago
  You reckon they would have been holding cash for payroll in SVB if they could have an account directly with the fed instead?
  - lend000 4y ago
    Consider the reasons why most of SVB's clients chose SVB instead of a larger, more traditional bank. The traditional banks work very slowly, are hyper-cautious with/outright deny businesses they don't understand, and if a startup did manage to get an account, its transaction maximums would be extremely limited relative to its growth. Now imagine the government is the custodian, and those problems presumably become 10x worse.
    - dools 4y ago
      I looked up "why would a startup choose svb" and found that the reasons are those which could be fulfilled in a myriad ways: https://au.finance.yahoo.com/news/silicon-valley-bank-served-tech-214849273.html https://au.finance.yahoo.com/news/silicon-valley-bank-served... There was nothing especially "startuppy" about their traditional banking services.

fludlight 4y ago

Banks use some of those deposits to make loans to private parties. This is, on the whole, beneficial to society so we want it to continue. You do not want the government, which is supervised by politicians, picking who gets loans.

swalling 4y ago
Except if you look at mortgages as an example, the government already has a huge impact on who gets loans (via Fannie Mae and Freddie Mac, plus programs like USDA home loans). That influence is largely to expand access to people who would otherwise get cut out of the system.
no_wizard 4y ago
I agree that having a banking system in any major degree at the whims of politicians could and likely is a bad idea. I don’t think however having the Civil Service running a public bank would be a bad thing though. Career government employees are at the whims of politicians no more than private businesses are, has been my observation, and can when structurally enabled make good sound decisions. I think having a public option for banking in this light would be positive
dools 4y ago
> You do not want the government, which is supervised by politicians, picking who gets loans. Yes that's why I said there's some value in having private credit creation. In fact, my comment was just lifted from this lecture by Randall Wray where he says precisely what you just said: https://youtu.be/gI86w6bSmS0?t=445 https://youtu.be/gI86w6bSmS0?t=445 Although correction to another comment I made: he does specifically say loans should be held by the issuer until maturity.
neilwilson 4y ago
They don’t. Loans create deposits. Deposits in a bank never go anywhere. All that happens as you “move” money around is the ownership tag changes. And that tends to change the price the bank has to pay on those deposits.

88913527 4y ago

Banks depend on depositor's money to generate loans. How would loans be generated, then, if consumers kept their money with the central bank? Issuing debt is a key engine for economic growth. This would incur an extremely contractionary effect.

alxmng 4y ago
The way any other creditor issues loans? Investors put money together, loan it out at interest to make a profit and cover losses.
- digitaltrees 4y ago
  That would be a fraction of the size of depositor back lending which would significantly reduce capital available for all kinds of uses. The current system is better specifically because it supplies guard rails that incentivize private investors and all savers to lend their money.
  - alxmng 4y ago
    The venture capital and stock market are not capitalized with bank deposits, and that comprises the bulk of commercial startup capitalization and investment. What percentage of startup capitalization and investment comes from deposit-backed bank loans? I'd guess not much. None of the tech startups impacted by SVB's insolvency were capitalized by loans from checking deposits. Their deposit accounts were lent out to mostly non-business securities (mortgages and government bonds). Fractional reserve banking always will and always does result in bank runs. The idea of separating deposit and investment banking goes back to the 1930s. It's known as "The Chicago Plan" (full reserve deposit banking). The IMF published a study that estimates no negative impact on economic growth. https://en.wikipedia.org/wiki/Chicago_plan https://en.wikipedia.org/wiki/Chicago_plan https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The-Chicago-Plan-Revisited-26178 https://www.imf.org/en/Publications/WP/Issues/2016/12/31/The... https://qr.ae/pGQXNx https://qr.ae/pGQXNx
    - 4y ago

personomas 4y ago

> There is probably some value in having banks to do loan underwriting and allowing private credit creation but this whole thing if allowing private banks to run everything and then providing a federal guarantee of some deposits is absurd, just take that function away from the private sector. Could you explain this better? I don't understand

dools 4y ago
I probably can't explain it better than Randall Wray from whom I got the information, in this lecture: https://youtu.be/gI86w6bSmS0?t=445 https://youtu.be/gI86w6bSmS0?t=445