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I think you're describing "narrow banking". It doesn't exist in the US because the government doesn't allow it. As I understand it, they don't allow it because

I think you're describing "narrow banking". It doesn't exist in the US because the government doesn't allow it. As I understand it, they don't allow it because it would be obviously better for deposits individually, but would slow down the economy as a whole by driving up the price of loans, since all of the deposit money would suddenly be unavailable for lending.

toomuchtodo 3y ago
Specifically, the Federal Reserve doesn’t allow it. They are explicitly stoking fractional reserve banking by preventing narrow banking, leading to this performative art (deposits backing fractional reserve lending, FDIC oversight, etc). “Can we have narrow banking?” “No!” “Okay, how about not taking actions that cause massive consolidation in the banking industry and systemic issues?” “Also no.” Spot on about cheap deposits funding lending and bank ops. https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...
opportune 3y ago
Before digital payments or online banking, it was common for an average Joe to keep much of what would otherwise go into a checking account in physical cash. In modern amounts maybe $5k at the high end or $500-2k on average. It didn’t seem to prevent the system from functioning; I certainly can’t seem to draw a direct conclusion between shifting to a cashless economy and the living standards of an average personal directly improving as a result of lower cost of capital, unless they had assets that would benefit from easy/low-rate credit access like a house. If the Fed keeps trying to fix failed banks through indirect money printing (covering uninsured deposits by overpaying for treasuries/MBS) they could lose control of inflation and be unable to further raise rates. That seems like a worse outcome for the average person than a slightly higher cost of capital from banks having to compete with narrow banking. And the Fed should hope for narrow banking at that point because it would be the easiest to manage compared to the other options like physical cash, crypto, and other currencies.
- thedufer 3y ago
  Yeah, the amounts they're worried about are a few orders of magnitude larger than that. I don't think that's a compelling counter-example. > If the Fed keeps trying to fix failed banks through indirect money printing (covering uninsured deposits by overpaying for treasuries/MBS) Is this happening? The uninsured deposits are being covered by the FDIC insurance fund, which is funded by the banks. None of it is coming from the fed.

toomuchtodo 3y ago

Specifically, the Federal Reserve doesn’t allow it. They are explicitly stoking fractional reserve banking by preventing narrow banking, leading to this performative art (deposits backing fractional reserve lending, FDIC oversight, etc). “Can we have narrow banking?” “No!” “Okay, how about not taking actions that cause massive consolidation in the banking industry and systemic issues?” “Also no.” Spot on about cheap deposits funding lending and bank ops. https://www.chicagobooth.edu/review/safest-bank-fed-wont-sanction https://www.chicagobooth.edu/review/safest-bank-fed-wont-san...

opportune 3y ago

Before digital payments or online banking, it was common for an average Joe to keep much of what would otherwise go into a checking account in physical cash. In modern amounts maybe $5k at the high end or $500-2k on average. It didn’t seem to prevent the system from functioning; I certainly can’t seem to draw a direct conclusion between shifting to a cashless economy and the living standards of an average personal directly improving as a result of lower cost of capital, unless they had assets that would benefit from easy/low-rate credit access like a house. If the Fed keeps trying to fix failed banks through indirect money printing (covering uninsured deposits by overpaying for treasuries/MBS) they could lose control of inflation and be unable to further raise rates. That seems like a worse outcome for the average person than a slightly higher cost of capital from banks having to compete with narrow banking. And the Fed should hope for narrow banking at that point because it would be the easiest to manage compared to the other options like physical cash, crypto, and other currencies.

thedufer 3y ago
Yeah, the amounts they're worried about are a few orders of magnitude larger than that. I don't think that's a compelling counter-example. > If the Fed keeps trying to fix failed banks through indirect money printing (covering uninsured deposits by overpaying for treasuries/MBS) Is this happening? The uninsured deposits are being covered by the FDIC insurance fund, which is funded by the banks. None of it is coming from the fed.