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Continuing 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 b
by vishnugupta 4y ago
Continuing 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Act "effectively separating commercial banking from investment banking"; established in 1933 but it was partly repealed in 1999.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...
- nobodyandproud 4y agoWouldn’t Glass Stegall have made mortgage backed securities difficult if not outright impossible to create?
- rjtavares 4y agoNo. It could have prevented some banks from owning them directly, and that could have cointained their growth, but we don't know really. Crisis would happened anyway for sure, but the scale could have been smaller. But it's hard to do what-ifs.
- vonmoltke 4y agoSince mortgage-backed securities have been a thing since the mid 1980s, no.
- danaris 4y agoThe difference between war and financial regulations is that there is no reason that the conditions that caused a previous financial crisis can't reoccur if you don't regulate against them. It's less like war that way, and more like health: you don't say "well, I got salmonella poisoning last year, so that's the last war; there's no reason to be careful about cooking chicken all the way through now!" If letting retail banks take depositors' money and gamble with it was a bad idea then, it's almost certainly still a bad idea now.
- spacebanana7 4y agoA hybrid solution could be a grade of bank accounts whose deposits are backed 1:1 by short dated government debt. You get most of the safe custody benefits of CBDC whilst minimising the costs of restructuring the banking system. Customers could still use all the same banking apps and branches. Such a program could even be eased in over time by steadily increasing the proportion of bank balance sheets allocated to short dated government debt.
- JDEW 4y agoNarrow banks. The FED didn’t like the idea…[0] [0] - https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-bank.html?m=1 https://johnhcochrane.blogspot.com/2018/09/fed-nixes-narrow-...
- spacebanana7 4y agoThat's deeply frustrating. The FED's potential opposition about balance sheet control and reverse repo have clear weaknesses pointed out by the author you cite.
- drexlspivey 4y agoYou can already do that by buying a money market fund no?
- spacebanana7 4y agoTo the best of my understanding you can’t initiate payments with a money market fund using, say direct debits or visa/Mastercard. So they can’t replace an ordinary bank account.
- thwayunion 4y agoCan't replace it. But with some trivial API glue and a cron job, you can get away with storing next to nothing in the bank account on most days as long as all of your credits and debits are scheduled and upper-bounded. E.g., if the debit side of your entire financial life is payroll + rent + credit card bills. But this shifts risk from your FDIC insurance to your SIPC insurance.
- d1sxeyes 4y agoMost EU banks have always charged a fee for maintaining deposits (at least for private individuals). In the UK, banking is normally free, but on the continent, you normally pay for the account itself and any cards you may hold. Some banks may offer fee waivers for those whose salaries get paid into the account, or if you have a cardless account etc, but it is fairly common practice to charge a small fee for the bank account itself.
- AdamN 4y agoIn addition to the fee they are leveraging your deposits - and European banks are no less risky for the depositor than the US ones (just look at the 2008 era). Having a 'true bank' that does not leverage your money and has no investment risk would probably be useful to a certain segment of people but the assets would still have counterparty risk and everything else so in the end a very niche market since the best way to handle risk is to distribute to multiple counterparties, currencies, etc... and then you might as well get the interest from the money at that point since you've de-risked so much already.
- f_devd 4y agoSince 2008 EU banks have gotten more stringent requirements per regulations compared to the US, the degree of additional risk is hard to know for sure without a large scale collapse.
- ericmay 4y agoWhat are you basing this on? What are some of the ways EU banks (does it not vary by country?) have gotten more stringent requirements per regulations compared to the US?
- f_devd 4y agoAll EU banks (afaik) need to follow Basel III regulations, while smaller US banks don't have to due to lobbying
- frozenwind 4y agoCBDC is a another puzzle piece of a future dystopia. We're exchanging freedom for the sake of a security façade.
- ricardobayes 4y agoOn the other hand, imagine what level of services we could have if it wasn't for the tax dodgers and cash in hand payments. I reckon we could fund universal basic income just from whitening the economy, in any given country.
- ifyoubuildit 4y agoI imagine we'd have a similar level of services, and the same level of urgency to raise taxes.
- v4dok 4y agoDepends on the country. For countries with a lot of "black money" and corruption there is an obvious benefit. Taxes yield less because they don't capture the whole economy, as a result taxes are increased and get paid by the "idiots/ethical" which creates a vicious cycle. Now if tomorrow you had everyone paying taxes then 2 things would happen which would result in a new equilibrium. 1. The tax revenues would massively increase 2. People would push for lower taxes because suddenly they care more as their real marginal tax rate is the nominal one. Would this result in more efficient spending of taxes in a corrupt economy? Not immediately. A lot of shitty people would get reach fast in the meantime, but the system would balance because people would no longer participate in the corruption directly as they used to. Yes, you remove some freedom, but I am convinced that for societies that have a trust disconnection between the government and the people would be a net benefit (assuming democracy). Additionally, comercial banks have been pretty shitty on providing liquidity to the real economy throughout the QE (at least in some parts of the west). They had their chance to not be a bottleneck, they missed it. Good riddance.
- sidewndr46 4y ago
- cflynnus 4y agoThinking CBDCs are “safe” is extremely naive. They’re a dystopian nightmare. They’re every dictators wet dream. This is why Bitcoin matters. Bitcoin = freedom.
- atlasunshrugged 4y agoCouldn't you sub cash for Bitcoin here and have it make just as much sense? Also, isn't bitcoin highly traceable, especially for a sophisticated state actor?
- v4dok 4y agoAn economy run on Bitcoin is an absolute dystopia. You reluinquish monetary control to a deflationary coin, being in the whim of Bitcoin whales. People who advocate for it, either are whales or they are stupid. Ask south europe how well it worked for them having no power over their monetary policy.
- shagymoe 4y agoContinuing this charade of "the government and banks are competent at monetary control" is more stupid. Inflation is theft.
- krferriter 4y agoThe USD and Euro are managed by central banks much better at monetary policy than random rich people trying to manipulate an asset market (like those for cryptocurrencies) because they have an untreated gambling addiction. The idea that US Dollars are less stable and reliable in terms of price trends over the long term than cryptocurrencies is just ridiculous. Small amounts of inflation is good for the economy. It incentivizes people to put their money stashes back into productive use, instead of just keeping it sealed in a box.
- shagymoe 4y agoBitcoin != cryptocurrencies. You might as well be comparing dollars and beanie babies. Define "much better" and for who because they're very clearly, very bad at monetary policy.
- nkuttler 4y ago> I think this crisis is the strongest yet reason to push for CBDCs as only a central bank can fully guarantee a deposit This makes zero sense. A CBDC doesn't have a stronger "guarantee" than normal central bank money, yet it has all kinds of negatives like total surveillance and control.
- mejutoco 4y agoExactly. And regarding > only a central bank can fully guarantee a deposit The buck stops at the government, as we are seeing with changing laws to allow Credit Suisse acquisition or by Biden and European representatives statements abou "doing whatever is needed" or similar.
- HWR_14 4y agoJust to be clear, those are two different things. The Biden administration's response is using powers granted to the executive branch explicitly to save banks. The Swiss government seems to be modifying their laws to save CS (by getting it acquired).
- jpmattia 4y ago> The buck stops at the government, as we are seeing with changing laws... Not to mention the majority party in the US House is threatening default.
- dsfyu404ed 4y ago>CBDC: If you want safe custody of your money. Not safe from the moralizing pricks (of which there is a surplus in our midst) who the executive or legislature will inevitably try to cozy up to by stealing my money on the basis of some attribute or box that I check.
- roenxi 4y agoI don't think you're actually proposing anything with that CBDC statement - CBDC doesn't imply any particular policies or mechanisms. It is a non-phrase without a concrete proposal. What exactly is the central bank supposed to do here?
- pnut 4y agoAfter some internet searching, apparently CBDC means "Central Bank Digital Currency" https://www.investopedia.com/terms/c/central-bank-digital-currency-cbdc.asp https://www.investopedia.com/terms/c/central-bank-digital-cu...
- OhNoNotAnother1 4y ago[dead]
- retube 4y agocentral banks could offer 100% guaranteed deposit facilities without a CBDC.
- thwayunion 4y agoI'm so confused by what role a CBDC is even supposed to play... why would the government establish a new currency pegged 1:1 to its existing currency? Why not just... allow normal Americans to keep deposits at federal reserve banks?
- maxwell 4y agoCBDCs are programmable: whoever controls the CBDC can decide where it is or isn't spent.
- retube 4y agoWell they could, but actual implementation would be via an intermediary commercial bank that held it's deposits with the Fed. Central banks don't want to have to deal with retail customers. But the result is the same.
- clarge1120 4y agoThe biggest challenge facing CBDCs (Central Bank control of Digital Currencies) is that any laws or regulations concerning them can be changed at anytime, without the consent of the governed. See Credit Suisse.
- amelius 4y agoGood analysis. Similarly, the App Store mixes "Store" with "Content filter". We should be able to choose both independently.
- hanniabu 4y ago> CBDC: If you want safe custody of your money. That's cash. CBDC is if you want no control over your money. At the flip of the switch you can be put on a denial of service list. Except unlike when PayPal does it, you can't just switch providers.
- hkt 4y ago> 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. Ideally, depositors in a CBDC would also get at minimum the central bank rate.
- GenericDev 4y agoNot to disparage the poster, but these type of comments always come across to me as astro-turfing. At no point has anyone been advocating for a Central Bank Digital Currency (CBDC) and furthermore the only people who stand to gain from this are the powers that be. I'm vehemently against a CBDC purely because I like to play a thought experiment if I were from the 18th century and landed in the present day, how hard would it be for me to engage with society. A CBDC is 100% the anti-thesis to creating and supporting people. In short, boo to OP, I doubt their legitimacy.