3 ms·

When this happens to a bank, the FDIC should step in, make the bank liquid again (perhaps by trading the bonds and other investment products for cash), evenly p

When this happens to a bank, the FDIC should step in, make the bank liquid again (perhaps by trading the bonds and other investment products for cash), evenly pay out every customer with whatever there is, pay up to $250,000 per customer for the shortfall, if there is any. If there was no shortfall, pay out to investors/debtors. Then shut the bank down. I think a lot of people perceive the bank as having zero assets and the FDIC is covering 100% of the deposits. Some $200B or whatnot. But most of what people deposited didn’t just vanish.

twblalock 4y ago
What you described is what happens during a normal bank failure. That happens fairly regularly to small local banks and it's not normally even newsworthy. That's not an adequate response to a systemic risk against the entire banking system.
- Waterluvian 4y ago
  Good to know. And fair enough. I won’t pretend to understand just how much risk there was to the entire system. But obviously the officials felt it was immense.
QuadmasterXLII 4y ago
The challenge is what to pay to the people who pulled out all their assets hours before the bank failed. If the people who pulled out all their assets fast enough keep 100% and the people who didn't keep 50%, this is wildly unstable and we see constant bank runs, as was common in the early 20th century. If the people who pulled out all their assets fast enough keep 100% and the people who didn't keep 95%, and normal people are banking, this is slightly unstable but most people aren't going to bring down the financial system to slightly reduce their risk of losing 5%. The system has been working like this for 70 years. The current batch of Silicon valley/new york financial types would stab an orphan in the face with their mother's fine silverware, to avoid losing 5%.

3 ms·

When this happens to a bank, the FDIC should step in, make the bank liquid again (perhaps by trading the bonds and other investment products for cash), evenly p

by Waterluvian 4y ago

twblalock 4y ago
What you described is what happens during a normal bank failure. That happens fairly regularly to small local banks and it's not normally even newsworthy. That's not an adequate response to a systemic risk against the entire banking system.
- Waterluvian 4y ago
  Good to know. And fair enough. I won’t pretend to understand just how much risk there was to the entire system. But obviously the officials felt it was immense.
QuadmasterXLII 4y ago
The challenge is what to pay to the people who pulled out all their assets hours before the bank failed. If the people who pulled out all their assets fast enough keep 100% and the people who didn't keep 50%, this is wildly unstable and we see constant bank runs, as was common in the early 20th century. If the people who pulled out all their assets fast enough keep 100% and the people who didn't keep 95%, and normal people are banking, this is slightly unstable but most people aren't going to bring down the financial system to slightly reduce their risk of losing 5%. The system has been working like this for 70 years. The current batch of Silicon valley/new york financial types would stab an orphan in the face with their mother's fine silverware, to avoid losing 5%.