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Bank failures come in waves
- saenns 4y agonot really. more like three bursts: great depression, 1980, 2008.
- chrisco255 4y agoHistory didn't start there of course. There were many such failures going all the way back to 1700s in the U.S: https://en.wikipedia.org/wiki/List_of_banking_crises https://en.wikipedia.org/wiki/List_of_banking_crises https://en.wikipedia.org/wiki/Panic_of_1873 https://en.wikipedia.org/wiki/Panic_of_1873
- bubbleRefuge 4y agoPretty Simple fix. Have the fed backstop all depositors to infinity. Today there are no limits on the number of 250k FDIC insured deposits. Logically the same thing as insuring a single account to infinity.
- klipt 4y agoWell not exactly, the limit encourages diversification which always reduces risk.
- bubbleRefuge 4y agorisk = 0 with unlimited deposit insurance. what am I missing.
- enriquec 4y ago"incentives matter" - you're missing Econ 101
- bubbleRefuge 4y agomatter how in this context? deposits should be 100% sound in order to have a payments system. this is for public good.
- ttul 4y agoWhile it may be difficult to see things this way, when you put money into a bank, you’re choosing to not invest that money into something else that might generate a better return for you and for society. The small but real risk of losing your deposits in a bank encourages companies and people with money to invest it into other things. If there is no default risk, then money will be increasingly stored away inside banks, removing much of the healthy risk-taking activity that generates long term growth and improvements in the standard of living. Rich people know there is a tiny chance of losing their cash if they stick it in a bank. So they buy other things instead. Those things generate real growth in the economy and improve productivity. Banks have to invest very conservatively because of regulations. Without the tiny risk of default, banks would get all the cash and the economy would stagnate. Another word for this kind of stagnating economy is “the 1970s.”
- junofan 4y agoThat’s a ridiculous just-so. What happened when the FDIC raised insured deposit amount to 250k?
- bubbleRefuge 4y agoThat make no sense. I don't spend money on things because I'm afraid of loosing my deposit in the bank. My point is if I have 1M I want to deposit safely, then I have to make 5 FDIC accounts instead of just 1.
- kmeisthax 4y agoLow levels of inflation already do what you think insolvency risk does. 2% loss of value per year hurts way more than a 0.001% chance of being completely wiped out.
- mikepurvis 4y agoMost people aren't thinking they're losing their money because the bank sets itself on fire; they're thinking they're losing their money because a savings account interest rate is well below inflation.
- neilwilson 4y ago
- insaneirish 4y ago> Pretty Simple fix. Backstops have a cost, and infinite backstop subsidizes risk taking activity of deposit taking institutions. I'm not even saying that what was done in the wake of SVB and Signature was wrong, per se, but making it formal policy that all deposits in a bank are insured is a fundamental change to the foundation of banking in the US. It may be "right" or it may be "wrong", but the one thing it is not is "simple", because the consequences could be far reaching, unintended, and unpredictable, both short term and long term.
- acjohnson55 4y agoI think that's not necessarily true. They can do what was done for SVB and backstop deposits, but take over the bank if the insurance kicks in, firing the managers and wiping out many of the investors. That's probably enough to prevent moral hazard. The bigger issue is the concentration of deposits and potential suppression of investment.
- bubbleRefuge 4y agoagree with all except your last sentence . whats the issue ?
- acjohnson55 4y agoConcentration of deposits leads to less competition in the banking sector and more concentrated risk in global systemically important banks, i.e. the ones that are too big to fail. But maybe that's no the end of the world, and maybe the deposit limit isn't the best way to create competition. And if banks aren't allowed to make risky investments with deposits (good policy, IMO), then I believe we want people and businesses using banks for their most liquid needs, but otherwise, putting their money to work through investment.
- bubbleRefuge 4y agobanks don not lend deposits per say. this is an anachronism. banks make loans and loans create deposits. there is not a dependency on deposit funding loans. banks create loans on demand so long as they meet capital requirements. deposits are not capital. they are liabilities. (there as a thread last week about all this which you can read that is probably helpfull)
- TechBro8615 4y agoMaybe we should stop paying taxes since the FED can just print new money when we need it.
- acjohnson55 4y agoYour comment seems pretty unserious, but modern monetary theory (https://en.wikipedia.org/wiki/Modern_Monetary_Theory https://en.wikipedia.org/wiki/Modern_Monetary_Theory) adherents assert that the point of taxes is not to "fund" anything, but to engineer incentives, redistribute wealth, and remove excess money. And that, yes, we should simply print money, to the extent that we need to, subject to the constraint that excess money causes inflation in specific circumstances.
- bubbleRefuge 4y agoupvote! MMT founders think we can eliminate income taxes and get by with state taxes. One has said a national real estate tax would be fair in leu of income taxes. But they all agree taxing is necessary to maitain demand/need for the currency and to slow down the economy if needed.
- nonethewiser 4y agoMany non MMTers think we can get rid of income tax too.
- bubbleRefuge 4y agobut those others believe taxes fund federal government which MMT has shown to be not exactly true.
- brightball 4y agoIn all circumstances. It’s a nonsense theory that is entirely based on the idea that everybody in the world will accept the value of our currency is maintained while no other country on earth gets this benefit. The sarcasm was warranted.
- lapcat 4y agoSVB had a ridiculously high uninsured deposits % of total liabilities, way above all of its peers: https://news.ycombinator.com/item?id=35241691 https://news.ycombinator.com/item?id=35241691
- dragonwriter 4y ago> SVB had a ridiculously high uninsured deposits % of total liabilities They focused on businesses and HNW individuals and used exclusive banking agreements as preconditions for some deals, so, this is not surprising; had it been engineered to maximize uninsured deposits, it would have been hard to do better.
- Lightbody 4y agoYou are mistaken. The money behind the $250k isn’t magic and can’t just be multiplied like that. each FDIC-insured bank pays a premium for each qualified account. 10x the accounts means 10x the money into the pool. So it scales logically. This is a separate issue from the recent trend of the US federal government helping ensure that all deposits, even those beyond the limit, get assumed/recovered.
- bubbleRefuge 4y agowhat ? explain.
- ktta 4y agoFDIC - Federal Deposit Insurance Corporation It is not the Fed itself, but a separate entity that doesn't receive any federal funding. The $250k insurance you hear about is not free, it has a cost associated with it: https://www.fdic.gov/deposit/insurance/assessments/proposed.html https://www.fdic.gov/deposit/insurance/assessments/proposed.... Just like your $25k car has an insurance premium, these bank accounts are also insured because they pay a premium. Now if your car's value is $250k, wouldn't you expect the insurance premium to be higher? What if your car's value is infinity dollars? I love when people on HN start their comment with "Pretty Simple" or a variant of it, because it almost always means they're wrong.
- nonethewiser 4y agoIt comes from the idea that there are no real rules in economics and that we are oppressed by some malevolent force.
- bubbleRefuge 4y agoThe Fed government as an issuer of currency can fund anything to infinity so long as Congress authorizes it. They change numbers in a spread sheet to create money. Rules like FDIC insurance are vestiges of a gold standard era when money was not fungible.
- DoesntMatter22 4y agoExcept it's really not that easy. The fed has 250billion and there are 19 trillion of deposits. The fed has already been using a lot of that 250. And this is likely not over. Not to mention this seems like it spread overseas
- bubbleRefuge 4y agoThe fed has a spreadsheet for which it can enter infinite amounts.
- pishpash 4y agoNo it can't. It's pretty near the end. The world is actively moving away from dollars if you paid attention.
- bubbleRefuge 4y agoIn order for China to continue to export to America which they obviously want todo, they have to maintain exchange rates stable. The only way for them to do this is to accumulate dollars.
- pishpash 4y agoYou got it backwards. People want to export to the US in exchange for dollars only if dollars are worth something. If the dollar won't hold its value well enough people will find other markets and hold other currencies.
- bubbleRefuge 4y agoNo I don't think so. Dollars sitting in a bank have zero utility. At the end of the day what is worth more in real terms, an IPhone today or some 1000 dollar deposit for tomorrow ? So who winning in that trade off?
- dalyons 4y agoI don’t know why you’re being downvoted - it’s the only thing that makes sense. If the fed doesn’t, then we’ll just see a huge boom in middlemen offering accounts that automatically spread across 250k chunks behind the scenes. They already exist as a niche product, but would become mainstream with more failures. Either way the fdic is insuring the same total amount of money, so may as well cut out that inefficiency and overhead of forcing everyone to have spreaders.
- deleted 4y ago[deleted]
- xupybd 4y agoSo the banks can take risks but the tax payer pays when things go wrong? Maybe there needs to be regulation that forces banks to hold way more cash?
- nly 4y agoMoral Hazard?
- pharmakom 4y agoThis is a monumentally bad idea. If there is infinity backstop, I will simply create a bank and lend millions to my friends and promptly go bust. They get paid out by the government and I walk away. They do the same for me. We laugh at the poor taxpayer who foots the bill.
- Kye 4y agoThis won't happen for the same reason people most don't just burn their house/business down for the insurance payout. People lose insurance all the time this way even if they're just unlucky. Like any insurance company, the FDIC can and will drop a bank and isn't obligated to insure a new one if it's run by unreliable people.
- kneebonian 4y agoA healthy economy has ups and downs, and if you have a bigger up there needs to be a corresponding down. In 2008 we made major decisions to prevent a needed correction down, it turns out all that did was kick the can down the road, and if we kick it down the road again we're just in for another problem.
- acjohnson55 4y agoYou're applying proverbial thinking to an extremely complex, emergent system. The reality is that many aspects of the economy can be manipulated, but the consequences of doing (or not doing) anything never completely clear. People are constantly pointing to indicators that they feel are signs of the apocalypse, the excess of central bank activism, or the ineptitude of politicians to enact fiscal policy. Out of a million different assertions, some of them are going to eventually be right.
- dalyons 4y agoOverly simplistic and just not true. There is nothing in observed or theoretical economics that says every “up” has to be exactly balanced by a same sized “down”. We would never get anywhere in aggregate if that was the case - net zero is clearly not what has happened over the last 100+ years.
- watismymalk 4y agoDoesn't any peak separated by time with another come in waves?
- andreareina 4y agoThe point being that there is a peak, that is to say bank failures are positively correlated. If they were negatively correlated or independent you wouldn't see peaks so much.
- personjerry 4y agoIt's awfully easy to say this and make your analysis after the fact. But past results aren't indicative of the future. See also: Taleb's The Black Swan
- twelve40 4y agoWhat was the black swan event here, exactly? sounds like simply a bunch of slopiness? Also, why are you so sure we are after the fact and not in the middle/beginning of it?
- xeromal 4y agoThe black swan event was the fed driving up treasury rates which made the bank's bonds worthless. Of course, it was dumb of them to assume they would never go up, but clearly many many banks thought it was ok. I always think of that saying "If you owe someone a thousand dollars, you're in trouble. If you owe someone a million dollars, they're in trouble." As much as I'd like to see greedy banks burn, the main people who will feel the most pain are the regular joes.
- zizee 4y agoFrom what I understand, when someone takes out a loan, a bank doesn't lend out depositors' money. Instead money is "created" by the bank (on behalf of the fed), and the bank needs to pay the fed interest. The bank also needs to pay the loan back by an agreed uppn time (which destroys the money). Why can we not have a similar system for deposits? A bank takes a deposit, the fed "destroys" the money, but pays interest to the bank. When the depositor wants to withdraw their money, the fed/bank recreates the money. I guess this is sort of what happens with banks buying bonds from various government bodies, but the banks are managing a mix of bond maturity durations. If bank runs are a worry, why not do away with this flexibility for the banks?
- xyzzyz 4y agoFed hates that and fights this tooth and nail. See, for example: https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-bank.html https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-... https://johnhcochrane.blogspot.com/2019/03/fed-vs-narrow-banks.html https://johnhcochrane.blogspot.com/2019/03/fed-vs-narrow-ban...
- tasubotadas 4y agoCrazy. How did the story with narrow bank end?
- xyzzyz 4y agoIt’s dead.
- SOLAR_FIELDS 4y agoI’m curious about this as well, because the top comment (TNB takes over an existing bank that already has this account) seems like a perfectly viable alternative. Given that they had the resources to get to this point in the first place, was there a reason why this wasn’t an option?
- fuoqi 4y agoYou can be your own narrow bank by directly investing into short-term bonds or by buying a money market fund.
- unsupp0rted 4y agoWhat’s the purported bad assumption during the current wave? That interest rates would never rise?
- dehrmann 4y agoThat's the open question. Also if this is a wave or splash.
- MichaelMoser123 4y agothat's what he is saying after the slides Is there another bad assumption today? The recent failure of Silicon Valley Bank has raised fears of a new banking crisis. One way to look at SVB's failure is: SVB assumed that interest rates won't rise. what i don't understand: how did they handle the banking crisis of the eighties? Somehow that one didn't manage to kill the economy, how?
- nkuttler 4y agoMy guess is less concentration, debt and leverage in total. We seem to have progressed to a point where the entire system is very unstable and always at risk, and the only tool we seem to have left is creating more debt/money. Our modern fiat money is one of the greatest experiments in human history, and we have no evidence yet that such a system can be stable long term.
- rtkwe 4y agoFor one we hadn't gutted Glass-Steagall yet so banks were still separated into investment and savings/commercial so banks weren't as leveraged. We keep undoing and rapidly relearning why these things were put in place and the cycle from repeal to collapse is only getting tighter.
- Lapsa 4y agohttps://www.youtube.com/watch?v=MHRn-WDhFO0 https://www.youtube.com/watch?v=MHRn-WDhFO0
- laserbeam 4y agoThat's it? Alright. What do you mean by a wave? How did any of the 3 previous bank failures collapse "in waves"? Based on your graphic why did the S&L failure have more financial institutions fail towards the end of thr wave, but the 2008 crysis had more fail at the start? The graph is beautiful but really, none of the analysis done even discusses waves, or how a bank failure can progress. Finally, you make a point towards the end that SVB made a mistake and we don't know how widespread it is... Can we look at the pretty graph to other scenarios when a bank made a mistake and was isolated? I somehow felt cheated at the end of the article, as if I expected some analysis but only found surface level news. This feels like a piece that should have been 2-3x long, and could have explored how each of the previous failures evolved over time.
- wesapien 4y agoNothing to see here, just garbage collection time. Everyone's successful when interest are low or near zero. Degens feel naked now with the higher cost of capital from interest rates.
- sgsag33 4y agoWhy do we even need banks? If they make money by lending money that mostly belong the people (state/feds) anyways, I guess we all would be better if banking was just a state monopol. I guess I'm just missing some points here so maybe someone can help and explain me why this is a bad idea?!
- HDThoreaun 4y agoThe government doesn't want to be responsible for making all the loans banks do. It's not easy to do and if the government makes bad ones and loses money people will complain.
- TheOtherHobbes 4y agoWe need banks because they make it possible for the rich to gamble with the income of the poor. If your deposits are backed by mortgages or other secured loans you and the bank expect an added return for the "risk" - which is really just making a bet that enough people can pay something extra to compensate for those who default. This is presented as "how things are" but it actually makes no sense - not least in failing to explain why most of the population is so starved of cash, in spite of long working hours, that it has to borrow at all. That aside - there's a feedback loop which pushes investors to riskier and riskier lending, sometimes supported by more and more extreme kinds of fraud. Eventually, but somewhat predictably, the system suffers logistic collapse. Because that's what happens to recursive systems with permissive parameters.
- sumedh 4y ago> If they make money by lending money that mostly belong the people (state/feds) anyways, Naa most of the loans are not using other people's money, banks just create money out of thin air (aka put a record in some database table) and that entry is your loan money.
- madsbuch 4y agoIn my understanding, the role of banking is to take on the intrinsic risk when doing money allocation. 1. The central banks control supply (by controlling their interest rates) 2. The banks allocate resources (lending out with a risk premium) 3. Consumers and entrepreneurs use the money for value creation. To me it seems like banks ought to be able to fail. The problem is that banks have gotten the responsibility of the money infrastructure (the cash to e-money transition) which we can not afford to fail. We should lift the money infrastructure responsibility of banks.
- fedeb95 4y agoInterestingly enough, the graph of bank failures looks like the ones Mandelbrot shows in his works about transmission errors if I recall correctly (can't check right now). My conjecture is that markets encode information rather than other things like value etc. Failures are just transmission errors.
- padobson 4y agoThis makes sense. Prices are literally encoding information - first the demand for the item being priced and then the cost of supplying the item. The price of beef is signaling a lot of phenomena including consumer tastes, weather, costs for feed, slaughter, and transportation, etc. You could argue that central banks putting non-market pricing on the money supply distorts the information that a market-priced money supply would transmit effectively - and that's why all these crises seem to originate in the finance sector.
- fedeb95 4y agojust found out this paper by Kelly (which may be widely known as the Kelly criterion), stating that one should maximize the expected value of the logarithm of its capital, independent from one's utility function of money, in which Kelly starts by mere information theory considerations. Edit: the paper https://www.princeton.edu/~wbialek/rome/refs/kelly_56.pdf https://www.princeton.edu/~wbialek/rome/refs/kelly_56.pdf
- vishnugupta 4y agoContinuing the theme of the article the current banking crisis has exposed two conflicting functions of money i.e., store of value and a vehicle of investment both of which are facilitated by banks. Keeping money safe, whether physically or digitally, comes at a cost. Banks absorb this cost because they make money through credit creation, maturity transformation, and interchange fees. They even pass on some of that profit to depositors. However, each of these banking activities create risk, which is passed onto the deposit holders and is offset, to an extent, by deposit insurance. In low to zero-interest-rate scenarios, banks act as pure custodians as their revenues decline, which is why we saw EU banks charging negative interest rates, i.e., a fee, to maintain customer deposits. There's a delicate balance and an inherent conflict between keeping money safe and earning yields, the two functions performed by a commercial bank. Customers don't perceive this conflict unless a bank breaks down as SVB did. I think this crisis is the strongest yet reason to push for CBDCs as only a central bank can fully guarantee a deposit. In terms of systems design, this is a clear delineation of responsibilities. CBDC: If you want safe custody of your money. Bank: If you want to lend your money in return for a yield. And as with any lending, you take the risk of a borrower defaulting.
- kzrdude 4y agoIn the US there used to be the Glass-Steagall Act "effectively separating commercial banking from investment banking"; established in 1933 but it was partly repealed in 1999.
- i67vw3 4y agoCould the Glass-Steagall Act prevented the 2008 banking crisis?
- deleted 4y ago[deleted]
- rjtavares 4y agoWe don't know. Glass Steagall Act doesn't really deal with the fundamental problem with 2008, which was at its core an error in measuring potential risk of new finantial products. It could have prevented some of the worst impacts of that error, but we're not sure. Here's quote from former Federal Reserve Vice Chairman Alan Blinder: "What bad practices would have been prevented if Glass-Steagall was still on the books? I've yet to hear a good answer."[1] You know that saying: generals always prepare to fight the last war. Finantial Regulations are like that too. We don't know where the next crisis will come from, and so we don't know if we're ready for it. [1]: https://www.npr.org/sections/thetwo-way/2015/10/14/448685233/fact-check-did-glass-steagall-cause-the-2008-financial-crisis https://www.npr.org/sections/thetwo-way/2015/10/14/448685233...
- nathias 4y agoBanking failiure is very simply a failiure of regulation because of its conflict with capital. The customers of banks give banks money as loans that have a small % of risk and have a small yield, but banks are able to take on more risk than that % and have the profit imperative to do so, so they will do it if they can.
- whenanother 4y ago[dead]
- kderbyma 4y agoperhaps....it's because they are not independently operating.....wow!! physics has analogy for quantum particles....banks....they act independent...but they arent
- zackmorris 4y agoJust a friendly reminder that neither the 2008 subprime mortgage crisis nor the Silicon Valley Bank collapse should have happened: The Gramm–Leach–Bliley Act of 1999 repealed the Glass–Steagall Act of 1933: https://en.wikipedia.org/wiki/Gramm–Leach–Bliley_Act https://en.wikipedia.org/wiki/Gramm–Leach–Bliley_Act The Economic Growth, Regulatory Relief, and Consumer Protection Act of 2018 repealed part of the Dodd–Frank Wall Street Reform and Consumer Protection Act passed in 2010: https://en.wikipedia.org/wiki/Economic_Growth,_Regulatory_Relief,_and_Consumer_Protection_Act https://en.wikipedia.org/wiki/Economic_Growth,_Regulatory_Re... Articles that only look at the numbers miss the elephant in the room, which is that policy controls economics. That's why academics generally don't subscribe to ideas like deregulation, at least they didn't before the Reagan administration began chipping away at public funding for universities to rein in the rabble of hippies opposed to war/monopoly/neoliberalism: https://theintercept.com/2022/08/25/student-loans-debt-reagan/ https://theintercept.com/2022/08/25/student-loans-debt-reaga... At nearly every turn for 40+ years, our elected officials have made unpragmatic decisions. They push revisionist history and constrain debates to 2 ends of an approved axis of narratives so that people who think outside the box are demonized as fringe. Which is very not meta, and for me one of the great disappointments of the modern era, especially in how it's bamboozled the minds of so many thought leaders in tech. Is that political? These policies affect our money and work and the trajectories of our lives. Are we supposed to just not seek working solutions anymore because they don't please the status quo? Every win for concentrated wealth is another pressure convincing people to vote against their own self-interest. Which creates the negative feedback loop we're trapped in, where every loss is compounded by further loss, enabling polarizing candidates who sell their vote to the highest bidder to consistently win at the highest levels of government.
- yalogin 4y agoWhen fed started raising interest rates to curb inflation, the prevalent wisdom was that the average consumer has too much money because of low rates and is spending way too much. The thought was raising rates would curb their spending and bring prices down slowly. However, it turns out the average consumer is very principled with money and is handling it very well. The rich/corporations like banks, VCs, companies felt super rich with the raising stock and began taking on abnormal risk. This was not expected by many. It may eventually lead to the average consumer getting hurt as a repercussion of the failure at the top though. Of course even the crisis of 2008 was caused by exuberant bankers. You need to have access to lots of money to cause lots of damage.
- mhh__ 4y agoIt requires great political training to believe the best person to spend your money isn't you — e.g. some people believe the poor can't be trusted with money, and so on (socialism etc)
- gongle 4y agocorporations cant be trusted to spend the peoples money.
- endtime 4y ago> the prevalent wisdom was that the average consumer has too much money because of low rates I'm sure it was all the low rates, and not at all due to printing 40% of the money supply in two years and mailing people checks.
- sethd 4y agoFYI, this part didn't happen: > printing 40% of the money supply in two years
- mech987 4y agoHere's the data on M2 money supply in billions of dollars, for those curious, in billions of dollars: Feb 2020: 15,457.9 Feb 2022: 21,699.2 This is a 40.3% increase. To be charitable, this money isn't all on printed physical cash dollar bills, but nowadays there is no need for it to be. (I'm tempted not to be charitable though.) https://fred.stlouisfed.org/series/M2SL https://fred.stlouisfed.org/series/M2SL