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Is that even true? FDIC estimates it will have to come up with $13Bn, which will eventually be clawed back through insurance costs to big banks. Meanwhile FRC w

Is that even true? FDIC estimates it will have to come up with $13Bn, which will eventually be clawed back through insurance costs to big banks. Meanwhile FRC was worth $22Bn a few months ago and that's now gone to zero. So isn't it actually the case that the total money supply has gone down during this collapse, so the value of my money has actually gone up?

opportune 3y ago
FRC having a market cap of X has nothing to do with the monetary supply. That is the value of a single transaction of a portion of the bank’s ownership between a buyer and seller at a certain price, divided by the number of shares, multiplied by all existing shares. During that transaction, the actual money was transferred from buyer to seller and was the same across both sides before, during, and after the tx and FRB going bankrupt - the monetary supply was the same the entire time. The only way the monetary supply changes is when a bank loan begins or ends, or when the Fed buys or sells something, because those are the only cases in which a transaction occurs with more or less money across all parties after it completes. In all other transactions money is just moving from one account to another (but the Fed issues money, so their account is special in that it can create or destroy any quantity). Reality is a bit more complicated than this, but when a bank gets a deposit for $100 that becomes both a bank asset ($100) and liability (they need to be able to pay out $100 on short notice). Loaning the money out to another account in the bank, you’ll notice that the bank now has $200 in liabilities, $100 in cash assets, and a loan for $100 paying some interest and principle over time. Those loans can be valued at some price between starting and ending based on risk, duration, and rates. When the Fed raised rates, those previously issued loans at lower rates become less valuable. Now the bank has the same amount of liabilities but less valuable assets. Banks can lend from each other to make up for short term liquidity problems, but if the situation gets bad enough, nobody will lend to the bank anymore and they can only look at their balance sheet in terms of their current asset prices (which may have fallen a lot compared to the full value they were using for accounting) and liabilities. Shortly thereafter they become unable to meet liabilities and are considered to have failed and enter receivership (basically bankruptcy). The monetary supply then changes in one of two ways: it decreases by any amount that depositors lose due to the bank not having it (they end up with an account with less dollars) or it increases by any new money loaned/printed to shore up the failed bank’s balance sheet so it can be sold off to other banks (since in aggregate it has negative value, it can’t completely sell off as-is). I don’t know exactly what financial trickery backs FDIC insurance but I suspect it’s not new-money. What is monetary supply inflation is when the failed bank exercises the new Fed backstop to cover losses past FDIC, because this lets them sell some debt-based-instruments at coupon value (amount ultimately due) rather than fair-market-value (amount if you tried to sell it right now) to the Fed (remember, them buying stuff means more money gets created). And that is why these bank failures are causing everybody with cash to be effectively bailing out depositors: https://www.reuters.com/business/finance/feds-new-banking-backstop-could-slow-balance-sheet-drawdown-2023-03-15/ https://www.reuters.com/business/finance/feds-new-banking-ba...

opportune 3y ago

FRC having a market cap of X has nothing to do with the monetary supply. That is the value of a single transaction of a portion of the bank’s ownership between a buyer and seller at a certain price, divided by the number of shares, multiplied by all existing shares. During that transaction, the actual money was transferred from buyer to seller and was the same across both sides before, during, and after the tx and FRB going bankrupt - the monetary supply was the same the entire time. The only way the monetary supply changes is when a bank loan begins or ends, or when the Fed buys or sells something, because those are the only cases in which a transaction occurs with more or less money across all parties after it completes. In all other transactions money is just moving from one account to another (but the Fed issues money, so their account is special in that it can create or destroy any quantity). Reality is a bit more complicated than this, but when a bank gets a deposit for $100 that becomes both a bank asset ($100) and liability (they need to be able to pay out $100 on short notice). Loaning the money out to another account in the bank, you’ll notice that the bank now has $200 in liabilities, $100 in cash assets, and a loan for $100 paying some interest and principle over time. Those loans can be valued at some price between starting and ending based on risk, duration, and rates. When the Fed raised rates, those previously issued loans at lower rates become less valuable. Now the bank has the same amount of liabilities but less valuable assets. Banks can lend from each other to make up for short term liquidity problems, but if the situation gets bad enough, nobody will lend to the bank anymore and they can only look at their balance sheet in terms of their current asset prices (which may have fallen a lot compared to the full value they were using for accounting) and liabilities. Shortly thereafter they become unable to meet liabilities and are considered to have failed and enter receivership (basically bankruptcy). The monetary supply then changes in one of two ways: it decreases by any amount that depositors lose due to the bank not having it (they end up with an account with less dollars) or it increases by any new money loaned/printed to shore up the failed bank’s balance sheet so it can be sold off to other banks (since in aggregate it has negative value, it can’t completely sell off as-is). I don’t know exactly what financial trickery backs FDIC insurance but I suspect it’s not new-money. What is monetary supply inflation is when the failed bank exercises the new Fed backstop to cover losses past FDIC, because this lets them sell some debt-based-instruments at coupon value (amount ultimately due) rather than fair-market-value (amount if you tried to sell it right now) to the Fed (remember, them buying stuff means more money gets created). And that is why these bank failures are causing everybody with cash to be effectively bailing out depositors: https://www.reuters.com/business/finance/feds-new-banking-backstop-could-slow-balance-sheet-drawdown-2023-03-15/ https://www.reuters.com/business/finance/feds-new-banking-ba...