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Fed hates that and fights this tooth and nail. See, for example: https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-bank.html https://johnhcochrane.bl
by xyzzyz 4y ago
Fed 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.
- rocqua 4y agoThat has massive fee friction, does not eliminate counter party risk entirely, and earns different (lower?) rates than the Fed offers.
- chrchang523 4y agoI don’t know how long this will last, but I started doing this recently with Vanguard’s VUSXX (short-term Treasury) fund when I realized it had significantly higher after-tax yield than high-interest savings accounts without the hassle of manually rolling over T-bills, and it looks like many other people have been moving in this direction.
- guepe 4y agoIf you buy t-bills yourself fees are low, and brokers aren't banks - so risk of money being stuck there is low. It's a bit of work but very manageable. 10/10 recommend, you earn more than a savings account.
- ac29 4y agoFees on buying treasuries are zero if you buy them directly from the treasury or any of the large brokers (Vanguard, Fidelity, etc).
- em500 4y agoCochrane's speculates a bit about the Fed's motives near the end. He doesn't think they're outright evil, in cahoots with the incumbent commercial banks, etc. He thinks it's a misguided attempt to cross-subsidize the lending activities at the current commercial banks. If the super safe narrow bank draws away a lot of the common depositors, the commercial bank will need to get more other (more expensive) funding sources (bonds and other loans) which can make mortgages, business loans etc more expensive. edit: It was Scott Sumner, commenting on Cochrane's blog, who speculated that the motive might be cross-subsidizing the normal bank lending activities: https://www.econlib.org/why-does-the-fed-oppose-narrow-banking/ https://www.econlib.org/why-does-the-fed-oppose-narrow-banki...
- prox 4y agoIn r/askeconomics this was exactly the answer by the leading answers. https://www.reddit.com/r/AskEconomics/comments/11vtl1c/what_if_we_had_a_type_of_bank_that_was_legally/ https://www.reddit.com/r/AskEconomics/comments/11vtl1c/what_...
- imtringued 4y agoThe narrow bank restricts the Fed's ability to hawkishly raise the interest rate. It won't be able to get away with gross market Vs policy mismatches anymore. I mean think about it, the Fed makes an unintended policy error and raises the interest rate far above what banks can pay, everyone goes to the narrow banks. If the interest rate is too low nobody goes to the narrow bank. So the Fed essentially would have to perfectly choose the optimal interest rate which it probably can't do. It always overshoots or undershoots.
- TheOtherHobbes 4y agoWhich is ok, because that's just the market punishing the Fed for poor decisions.
- dgb23 4y agoAm I reading this right? They expected this mechanism to be too efficient for regular, already established banks to compete? So a safer, more efficient mechanism for banking is declined in order to keep the established banks competitive? Isn't that sort of outrageous?
- blitzar 4y agoFunnily enough, this concept is the central bank digital currency - CBDC business model, with extra steps.
- dageshi 4y agoThey hate it for good reason. The narrow bank would be safer than US Treasury Bonds. In a financial crisis similar to 2008 this would amplify chaos as money drained from all other investment classes into the narrow bank at a time when the government probably needs low interest rates on their debt to solve things.