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I think the point is that the banks do not have enough cash to take the losses. Nearly all money is someone else's debt, $1 of bad debt can lead to a chain of
by londons_explore 3y ago
I think the point is that the banks do not have enough cash to take the losses.
Nearly all money is someone else's debt, $1 of bad debt can lead to a chain of hundreds of people - each losing $1.
And if the government steps in with FDIC or other protections to prevent hundreds of people losing $1, then the government has to print more money, and inflation happens.
There is no good solution.
- AnimalMuppet 3y agoI would argue that the inflation has already happened, in the loans without adequate reserves. That creates money. The government would be printing money to prevent a deflation happening from the money disappearing.
- kyrra 3y agoWhen the government takes over a bank, they get that all the assets that go with it. Yes, at first the FDIC will pay out of its own coffers. But then the FED will liquidate all assets at the bank and recoup much of their payouts. And the fdic does not fill its coffers from tax revenue. It is funded entirely by required payments from Banks. The FDIC will raise its required fees from banks, and the consumers want paying through their banks, not through taxes or printing. Though it does hurt consumers in the end.
- londons_explore 3y ago> at first the FDIC will pay out of its own coffers But if its coffers run dry, the US treasury pays out.
- deleted 3y ago[deleted]
- no_wizard 3y agoI don't think its that simple. Even if we have a cascading failure, the FDIC coverage backstops at $250,000, and it only recovers depositors, and we are talking about loans here, not deposits. If banks fail, they fail. It may short term feel very painful for people, that I can agree with. My point is, as both a society and as a market place, need to eat the fruits of which grew from what we have sewn. If that means a lot of people get hurt, maybe finally we'll learn a lesson this time that allowing banks to act with impunity is a terrible idea and distorts the overall marketplace. Ending those distortions will net win when the dust settles, allowing new players and new ideas to grow. Keeping depositors whole isn't the same thing as backstopping terrible loans or other bad financial activity. They used to be largely separate entities until the "reforms" of the 1980s and 1990s. Perhaps there is something to be said for separation of concerns here
- JumpCrisscross 3y ago> the FDIC coverage backstops at $250,000, and it only recovers depositors Practically, no, the FDIC set the precedent last year of full depositor coverage.
- boringg 3y agoDoes anyone know how the FDIC insurance is funded? In the case of total financial collapse at what point does the FDIC break? I know its un unlikely event but I've always been curious what would necessitate it to fail. As we know, all things can fail.
- lotsofpulp 3y agoIf the FDIC breaks, then the whole country is broken. FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency, which is ultimately the belief in an orderly US society that results in being able to trust that the digits listed in a database next to your name will allow you to procure products/services you want.
- JumpCrisscross 3y ago> If the FDIC breaks, then the whole country is broken Sure, but the FDIC “breaking” would require the Treasury to actively repudiate its Constitutional and legal duties. > FDIC insurance is the federal government’s ability to issue currency AND still maintain purchasing power of that currency No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation.
- lotsofpulp 3y agoMy point was that the “insurance” premiums and whatnot the FDIC collects are all fiction, because in practice, the Federal government will always step in if the reserves are insufficient (assuming it can). If it can’t, then the country is about to dissolve or otherwise undergo some major changes. Kind of like the PBGC premiums that are wholly inadequate, and the real DB pension insurance is the political power your union has (see multi employer pension bailout a couple years ago). https://news.bloomberglaw.com/daily-labor-report/biden-to-unveil-bailout-plan-for-multiemployer-pension-funds https://news.bloomberglaw.com/daily-labor-report/biden-to-un... >No, it isn’t. The Fed (and Treasury) issue currency. And when the FDIC is coming in the risk is deflation. The short term risk is deflation, but I think the longer term would be still be reduced purchasing power of currency since it would disrupt so much of US society’s ordering, that it would decrease confidence in the US to be as economically productive and secure as it used to be.
- KWxIUElW8Xt0tD9 3y agoDollars -- whether created by the Fed or fractional reserve banking -- are debt with interest due. Coinage is the exception but it is very small quantity-wise.
- JumpCrisscross 3y ago> Dollars -- whether created by the Fed or fractional reserve banking -- are debt with interest due This is not correct. Loans create money. So the creation of money involves the creation of the loan. But if the loan is poofed, the currency doesn’t go away. (Think: loan to buy a house makes money, seller gets the money, buyer defaults, loan is impaired.)
- sidewndr46 3y agoBut that is just fantasy accounting. If the bank loans me $200,000 to buy a house no one rationally suggests the bank has $200,000. They have a $200,000 share in a piece of real estate. The real liquid value of the asset should be discounted by the cost of reclaiming that asset and what it might be expected to fetch on the market (which as we learned in 2007, might as well be zero in some cases). The long-term value of that asset would be marked up by the expected gains in interest from the loan. The bank (or anyone for that matter) only "lost" the money if they mistakenly believed they still had it in the first place. This is the same kind of analysis that leads people to claim they only lose money in the stock market if they sell after stock price drops. For tax purposes in the US it does work that way. But in reality, the money was gone the minute you bought the stock. There is never any guarantee of a future buyer or for that matter a guarantee of a brokerage even interested in executing your order.
- JumpCrisscross 3y ago> If the bank loans me $200,000 to buy a house no one rationally suggests the bank has $200,000 No, but the seller’s bank does.
- robertlagrant 3y agoBut that's the point - the seller gets real money, that no one disputes should be real - but the buyer's bank should be careful how much it counts assets it would need to liquidate as lendable money.
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- User23 3y agoThe real asset and the financial asset are accounted for separately. That’s why a bank can sell your mortgage without selling your house.
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- robertlagrant 3y ago> $1 of bad debt can lead to a chain of hundreds of people - each losing $1 Why would that happen?
- thelastgallon 3y ago> Nearly all money is someone else's debt, $1 of bad debt can lead to a chain of hundreds of people - each losing $1. Its probably not? Money is created as debt:https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy https://www.bankofengland.co.uk/-/media/boe/files/quarterly-...
- danesparza 3y agoThis really smacks of propaganda from a bank (and oh -- look who's publishing it!). You can really think through this yourself logically: - There is nothing magic to lending money - Interest paid back creates an incentive to lend money (not to borrow it) - Borrowed money always (ALWAYS) represents risk, because the borrower may not be able to repay. - Risk must always be measured. You can choose to ignore it, but it never goes away. - If money is created as debt, how do you explain bankruptcies?
- JoeAltmaier 3y agoCan't all those be turned around? I don't think they're any kind of truism. Interest compared to return on your use of money may not be any kind of disincentive (you profit by borrowing, that's the expectation) Lent money always (ALWAYS) represents risk as well, for the same reason given above. There's risk in anything, sometimes to proceed you accept it. Calling that 'ignoring it' doesn't make it any more important. And I have no idea what the comment on bankruptcies is about. But I agree on the main point, which is some armchair pundit like the OP finds it easy to draw a circle around a cherry-picked part of the economy-space and say "See! Some Obvious Conclusion!" and think they've said something. You have to look at all of it of course, as a complete system.
- stray 3y ago> If money is created as debt, how do you explain bankruptcies? Banks typically loan money they don't have on hand (see fractional-reserve banking). And when they do that -- money is created out of thin air. Bankruptcies have nothing to do with it.
- JumpCrisscross 3y ago> the banks do not have enough cash to take the losses Nope, the headline refers to loss reserves. The specific reserves these banks have set aside for these loans. The article alleges they need to increase those. That might, at worst, hit their earnings. > all money is someone else's debt All money originates as a loan. (Other than federal spending.) That link disappears the moment it’s created. > if the government steps in with FDIC or other protections to prevent hundreds of people losing $1, then the government has to print more money Deposits are highly liquid. Replacing a deposit with an FDIC guarantee isn’t generally inflationary. (In practice, the FDIC having to step in tends to dampen credit and money velocity.)
- mrcartmeneses 3y agoTherefore the total loss on a bad debt is n* the length of the debt chain?
- mint2 3y agoPart A of the comment is saying debt is a money multiplier up to 100x. One break in The chain erases the 100x of money. Part B is then saying that if the debt chains collapse, erasing massive amounts of money, partially backfilling people via the limited insurance will cause inflation? Please clarify this contradictory reasoning.
- lamontcg 3y ago> There is no good solution. There's no good solution after the fact once the horses have bolted. You can address it up front with regulation and don't leave the barn door open all the time.