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Pretty 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
by bubbleRefuge 4y ago
Pretty 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"The small but real risk of losing your deposits in a bank encourages companies and people with money to invest it into other things." I'm surprised that belief still persists. The counter to that, of course, is that the silly instability in the banking system we're now seeing worldwide will destroy risk taking as people scramble to protect their positions. Look at the damage to stock market valuations. How many banks are thinking about creating loans at the moment? Banks provide liquidity against real things by creating money. They don't invest, and they don't take in money. All they do is shuffle their balance sheet to try and improve their net interest margin. This idea that banks will suck up all the money is yet another consequence of thinking about banks backwards. There isn't, and never has been, a fixed amount of money. Just as you get fancier trapeze moves if you have a safety net installed, you get far more risk taking when the basics operate correctly, safely and without having to think about them.
- roflyear 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.