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> Larry Summers warned against “moral hazard lectures” and demanded SVB depositors be made whole immediately in 2023, months after calling student loan relief i

• lotsofpulp 9mo ago
  > bank depositors are not engaging in risky behavior, Because the taxpayers (and all users of USD) repeatedly bail them out. I could define anything as not being risky if I knew taxpayers would bail it out. More importantly, if there is no risk, what purpose does a bank serve? They’re a pretty bloated middleman if their sole purpose is to update a database to reflect incoming and outgoing cash flow. The government should be able to offer that service for free.
  • triceratops 9mo ago
    Banking is a basic utility. Penalizing customers of a business for the business going under is bonkers. We learned this lesson during the Great Depression. Bank shareholders or creditors are engaging in risky behavior and should face the full consequences of bank failures. No bailouts for them.
    • munk-a 9mo ago
      I dislike that the SVB bailout happened without a revision to FDIC insurance rules. It felt like a good time to reevaluate those rules (if the limit needs to be raised then lets raise it) and encode the new version to ensure consistency of insurance going forward. SVB accounts getting a full bailout without any formal shift towards that being the future policy felt arbitrary - either we want that policy or we don't - lets not just change the rules for a single case.
      • triceratops 9mo ago
        Agreed.
      • YetAnotherNick 9mo ago
        > SVB bailout There wasn't any bailout at all. This entire thread is so confusing. But yes they got 2 days or something of deposit freeze IIRC.
        • munk-a 9mo ago
          My apologies on the imprecise language - maybe "extension of FDIC account insurance beyond the standard 250k limit to depositors" is better terming? SVB came out of this broke - as they should for such mismanagement - but the concern is that depositors were made whole beyond the amount usually insured by the FDIC.
          • SpicyLemonZest 9mo ago
            It's not a question of terminology. As you say, SVB came out of it broke, but their stuff didn't burn to the ground - their operations and assets were taken over by a bridge institution Silicon Valley Bridge Bank, which was then quickly acquired by First Citizens Bank. Where's the point where the depositors should have lost money? Would it have been fair for First Citizens to tell every customer who had over $250k in their account "sorry, we've taken the rest as an acquisition bonus"?
          • YetAnotherNick 9mo ago
            No, not only there was no extension, there even wasn't 250k given by FDIC. Absolutely no taxpayer money or even FDIC money went into the collapse.
  • stanmancan 9mo ago
    > Because the taxpayers bail them out. I could define anything as not being risky if I knew taxpayers would bail it out. I feel like I must be misunderstanding something here because it sounds like you're saying depositing funds in a bank is considered risky behaviour?
    • devman0 9mo ago
      It is supposed to be if the amounts are above $250,000. I have no problem with the first $250k being risk free, that is a policy that is well published and that we all "agree" on. Making arbitrary policy decisions that in some cases depositors should be made whole when risky behavior (such as depositing above the insurance limit) bites them is problematic. Stick to the policy or change the policy don't make one off exceptions because that sets weird expectations. 89% of deposits at SVB were uninsured.
      • zeroonetwothree 9mo ago
        I’m sure you would feel differently if it was your employers money there and they weren’t able to pay your salary. $250k is not much at all for a business
        • devman0 8mo ago
          Businesses can use deposit management services to spread cash among many banks. Bonus points they also are less impacted by the poor business practices of one bank. Individuals can do this too with investment brokers or wealth management providers. Alternatively we could just made FDIC coverage unlimited, but then that creates poor risk taking incentives, which is the whole point of not setting the expectation of the a bailout by making exceptions.
    • chasd00 9mo ago
      > depositing funds in a bank is considered risky behaviour? of course it is, that's why the bank pays you interest on your deposit. They loan out what you deposit at a higher rate and collect the difference as profit. If that loan defaults then your money is gone because the bank was never able to collect it back. FDIC was invented to insure your deposit up to 250k so you're protected (up to 250k) in case that happens.
  • lokar 9mo ago
    There has been a lot of discussion about how the basic setup of banks (borrow short, lend long, collect the spread) is probably not a great idea, and we should just separate these two activities (see Money Stuff). People who want to lend long should do that with their own money, and people who just want to save should be able to do that. But, at least in the US, regulators keep blocking the 1st step: narrow banking. Let banks offer savings accounts that just stick the money in the Fed, zero risk.
    • bpt3 9mo ago
      So I read the Matt Levine article on this and a couple other pieces, and I'm not getting the impression Levine or other mainstream economists think this is a good idea as it currently stands? I don't necessarily think they are suggesting its clearly bad either, but it didn't seem as positive on it as I was expecting from your comment. Can you provide some more information, because I'm not really seeing the value in being required to interact with more financial institutions in practice.
      • lokar 9mo ago
        When you deposit money in a US regulated bank, there are basically two places that can end up: - on deposit at the Fed, in the account of a Fed member bank (which could be your bank, or a bank your bank has an account at) - loaned out by your bank (or again, a bank your bank uses) The Fed, so far, has refused to allow new member banks (eg that could deposit at the Fed) that don't intend to ever loan out deposits. They would take all customer deposits and stick them at the Fed. Many (most? the ones at the Fed anyway) think allowing this would siphon away money that would otherwise be used to make loans. They are, in effect, putting their finger on the scale to push you to allow your savings to be used as loans. The rise of Private Credit, where wealthy individuals and institutions loan money to private firms for to fund loans is the new thing that could break this open. These arrangements are long term, the customer can't "call" the money back, they are committed, and (for the most part) their commitment matches the duration of the loans. So there can be no bank runs. And the people providing the money know what they are doing. Levine is mostly arguing that with so much money in private credit, we could do without forcing small savers to fund loans.
  • bpt3 9mo ago
    Taxpayers don't bail out bank depositors, the FDIC (which is insurance paid for by the banks) does. And banks do a lot more than what you described, which I have to assume you know already.
    • lotsofpulp 9mo ago
      Insurance priced for damages capped at $250k per person per bank or whatever it is. If the insurance covered unlimited damages, then this wouldn’t be a discussion.
      • bpt3 9mo ago
        Yes. What are these repeated bailouts by taxpayers that you mentioned? And you can't think of any way that the federal government providing retail banking services could possibly go wrong?
        • lotsofpulp 8mo ago
          https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_United_States_(2008–present) https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U... https://americandeposits.com/insights/brief-history-us-bank-failures/ https://americandeposits.com/insights/brief-history-us-bank-... >In response to these significant failures, the FDIC took historic action to restore faith in the banking system and protected all deposits – even those above the traditional limit. However, it is important to note that the FDIC limit did not change, nor did the standard process for protecting deposits. Instead, the extended protection offered to depositors of Signature Bank and SVB was an exception to the normal operating procedure. I do not have a comprehensive list of every time depositors have been bailed out, but I have read about it multiple times in my adult life of the last 25 years. >And you can't think of any way that the federal government providing retail banking services could possibly go wrong? The federal government already controls all the banks. What could go wrong that they already do not have the power to make go wrong? The act of maintaining a central database of funds so that individuals can transfer money to one another is a relatively simple and cheap problem, one perfectly suited to be provided by the government. It should be infrastructure, just like printing money is infrastructure under the purview of the government.
  • epistasis 9mo ago
    The FDIC insures $200k of deposits because banks are not supposed to be risky. Thats taxpayers bailing out everybody in order to keep banks as "not risky" In particular the article incorrectly states that the bank was bailed out. It was not. The bank failed. Depositors who were running their non-profit in the Bay Area did not lost all their charitable contributions. The bank failed because it had placed deposits into US Treasury bonds that were temporarily worth less for sale on the open market than they would be at maturity. When Peter Thiel started a bank run by telling all his investments to pull their funds, that exposed the SCB mismanagement. When the depositors were bailed out, taxpayers didn't lost anything, it was a wash. We could have paid at bond maturity or now, but it made little difference to us.
    • s1artibartfast 9mo ago
      What about banking regulations that mandated that SBC put those deposits into treasury bonds? The bailout did not accelerate bond maturity. Those were picked up by other Banks when assets were sold off. Last, who is the other banks that paid for the bailout, not taxpayers, at least not directly. If you call higher FDIC insurance rates for JPMorgan Chase a taxpayer cost, how does that logic scale to the rest of the economy?
    • FireBeyond 9mo ago
      > When Peter Thiel started a bank run by telling all his investments to pull their funds, that exposed the SCB mismanagement. I think he did more than that. He either has precognition Nostradamus would be proud of or he absolutely had insider information, and a good amount of it. 1. He knew that when the bank closure would be, because despite how the FDIC has very detailed and historically very successful efforts at keeping such plans highly confidential (for obvious reasons), like agents in hotels under fake names, etc., he told his investments on Wednesday night that "all funds must be out of SVB by COB Thursday". FDIC rolled into SVB 8am Friday morning. 2. He had also had instructed another of his companies to build a website and app that was able to handle applications for business bridge loans, and it "needed to be tested, and ready to go live, by noon on Friday". Also, not for nothing, causing a bank run is a federal felony.
  • avidiax 9mo ago
    Depositors are lending their money to the bank at low interest. They may seek risk in terms of increased yield on their savings account, but FDIC insured banks will have trouble meeting their requirements while offering high yields on their accounts. Banks provide security for deposits as well as liquidity (velocity of money), and slight inflationary pressure. Wiping out depositors doesn't prevent much moral hazard since the depositors are unsophisticated, so they are unable to differentiate risk among banks.
    • lotsofpulp 8mo ago
      Unsophisticated depositors are not holding more than $250k of cash in bank accounts. The problem is not that depositors were made whole, the problem is that the FDIC insurance prices are based on limited losses, when for all intents and purposes, the depositors' risk is completely based on their political influence. This type of corruption is antithetical to a strict, rules based system, which is needed for trust in the financial system. Either give everyone the same protection explicitly, or follow the rules. Also, the rules and lack of centralization might have made sense when cash was a thing, but in a society where electronic money is the primary mode of payment, I see no reason why a non government entity should be involved at all in the simple act of maintaining a record of how much money is an account and adding and subtracting to it.
  • Aunche 9mo ago
    > Because the taxpayers (and all users of USD) repeatedly bail them out. The taxpayer didn't pay for those bailouts. They were funded by the DIF, which was replenished by premiums that banks pay. > They’re a pretty bloated middleman if their sole purpose is to update a database to reflect incoming and outgoing cash flow. Did you just look into what banks do at all before making this claim? If that were the case, companies like Apple, Bilt, and Robinhood wouldn't be relying on real banks and could easily start their own.
• lokar 9mo ago
  One round of loan forgiveness is fine, but it builds an expectation of it in the future. All of the loans, growing larger and larger, just encourage universities to grow fatter and raise costs to students. If students could not borrow enough to attend, they would be forced to lower costs (not necessarily the very top universities, but all the rest).
  • tehjoker 9mo ago
    other poorer countries just pay all or most tuition for students and own the universities
    • jandrewrogers 9mo ago
      The State governments do own many universities. To a large extent, the government is responsible for the current situation. Also some of the universities are older than the government by hundreds of years and private, the government can’t just “own” them.
      • tehjoker 8mo ago
        This is true, state gov does own many universities, though there was a concerted effort to bring the idea of privatization and deregulation there too since at least the 1990s by cutting subsidies. I met a Polish student a number of years ago who was attending a U.S. Ivy League institution. She said people made fun of her back home for "buying her degree". That has stuck with me ever since.
    • creato 9mo ago
      In most such countries there is also an entrance exam requirement that would exclude most student loan borrowers in the US.
  • estimator7292 9mo ago
    It's already unaffordable, enrollment is dropping, and tuition has only continued to go up to offset lower enrollment. The incentives are not so naively simple
• jazz9k 9mo ago
  I disagree about student loans. The entire system needs to be dismantled. Universities don't care if their majors will result in a job and the student loans are a source of risk-free money. They need to start taking on the risk of all student loan, not me, the tax payer.
  • etchalon 9mo ago
    So you believe universities have taken advantage of students by crafting, encouraging and financing education programs with an understanding that those programs would not result in jobs which would be sufficient to repay the debt needed to complete them, but you think the 18 year olds who were taken advantage of should be forced to suffer for their failure to make perfect decisions at 18. Cool. Cool.
    • sejje 9mo ago
      So you believe uninvolved taxpayers should be on the hook when the 18 year olds make bad decisions. Cool cool.
      • hparadiz 9mo ago
        Should post grad be funded by the government? Yes. Next question. Feel like I'm answering whether or not public schools should be a thing from some 19th century peasant.
        • AlexandrB 9mo ago
          It's a question of supply and demand though. Sure we should fund science post grad, I'm not so sure about humanities (supply already outstrips demand there). Saying we should fund "post grad" in general elides this complexity. Public school is as much about providing babysitters for parents that have to work as it is about education. Notice how hard it is to be expelled from public school. Grades are irrelevant. This is very different from how post secondary education operates.
• terminalshort 9mo ago
  > bank depositors are not engaging in risky behavior, they are putting cash in a bank That is risky behavior. You can't earn interest without taking a risk.
  • creato 9mo ago
    Is there a lower risk, lower interest option with the same capabilities (ability to use the money to pay others)? Genuine question, I have no idea, but I didn't choose my bank based on interest rate. I can't pay bills or transfer money if it's cash under the mattress.
    • 1899-12-30 9mo ago
      There is, it's called a narrow bank and it would probably pay more interest than normal banks. Unfortunately they have been mostly outlawed thanks to lobbying by the banking industry(see also the current lawsuits about usd stablecoins paying yield).
    • mordechai9000 8mo ago
      In the US, depositors are insured by the FDIC (Federal Depositors Insurance Fund) up to $250000 per institution. This doesn't apply to investment accounts, but would cover standard checking and savings accounts, even if they pay interest. The interest on those accounts is usually negligible at most banks, anyway - not even close to offsetting inflation. Edited to add: not my area of expertise, but I did research it a couple years ago when I was acting as executor for the estate of a deceased person. So take what you will from that. I do notice banks usually have a sign up saying they are FDIC insured. I think it's required, but I don't know for sure. I suppose a shady investment firm could try to suggest they are an insured bank without actually saying so.
  • crazygringo 9mo ago
    I've never had a checking account at a bank that paid interest. What interest are you talking about?
• steveBK123 9mo ago
  > bank depositors are not engaging in risky behavior Supposedly intelligent investors leaving money in accounts above FDIC limits ($250k per holder per bank, so $500k for joint account) were engaging in risky laziness.
  • epistasis 9mo ago
    So what do you do when your payroll is more than $200k? The depositors were not treating SVB as investment, they were bank accounts for doing transactions.
    • sejje 9mo ago
      Multiple accounts?
    • 58028641 9mo ago
      There are banks that sweep the money across various other banks automatically.
      • steveBK123 9mo ago
        Things I learned in Econ 101 like 25 years ago, and one of about four options if you google "how do companies manage payroll with fdic limits". But people with [mb]illions of funding just plopped money in a single account ..
        • epistasis 9mo ago
          Indeed, most of SVBs customers were those who had almost zero business finance experience. There were lots of startups but there were also lots of normal businesses and non-profits in the Bay Area that used SVB. Perhaps the slow depositors should be punished for not being sufficiently sophisticated, or as quick as the Thiel-backed startups that got the bat-signal to do a bank run. But the "moral" value of letting all those organizations lose their deposits is very low. The moral value of letting SVB fail, which it did, seems high to me!
• Moldoteck 9mo ago
  It's expensive because it's not built in series, unlike say korea or china or russia. Both loan forgiveness and nuclear have huge benefits
• Aurornis 9mo ago
  > And as some of who supports the student loan forgiveness, yes, it is slightly inflationary but I think the benefits out weigh the inflationary effects. Being slightly inflationary is a strawman concern. Student loan forgiveness has a major problem in that it’s a large reward the goes only to a specific slice of society who match some arbitrary criteria and who have useful degrees. It also fails to address the root cause of the problem, letting current generations accumulate debt in the same way. It’s an idea that appeals to a subset of the voter base for whom a college graduate with loan debt represents the prototypical struggling young person, but ignores all of the young people who are even worse off and don’t have college degrees either. Spending a huge amount of money to forgive student loans would be politically catastrophic in ways that a lot of people who live in highly educated middle class bubbles don’t realize. There are a lot of people struggling out there, but college graduates are not at the top of the list of people who need the most help.
  • zeroonetwothree 9mo ago
    Exactly. I don’t know who decided we should spend our limited redistribution dollars on young middle class individuals with above average human capital instead of say on working class people?
• swang 9mo ago
  larry summers? the epstein guy?
• paulsutter 9mo ago
  Student loan forgiveness yes, paid for by the schools that let people rack up debt for low value degrees. In the olden days student loans qualification depended on the students degree program and grades, and there wasn’t any repayment problem
• lawstkawz 9mo ago
  As someone who supports education loan forgiveness, I say we do as our elders have and just take from them without a whiff of concern for their grandstanding about morality. What obligation to the generation that's been aware of physical evidence of climate change for decades and ignored it? The old dying and the youth rewriting social and political custom and truism is a physical constant of the universe. Physics is ageist; sorry/not sorry grandparents.
• tristor 9mo ago
  Yeah that quote fundamentally misunderstands what it meant to make depositors whole. That's not bailing out the bank, it's bailing out the depositors, which is exactly what the FDIC is for. In the case of SVB most of the depositors were businesses, but in any case depositing money in a bank is intended to not be a risky activity at all, and FDIC is part of how the government acts to ensure that is so.
  • oh_my_goodness 9mo ago
    FDIC limits are very clearly spelled out. Ignoring them is known by high-school kids to be risky behavior.
• UltraSane 9mo ago
  Over the last 30 years the primary role of economists seems mainly to be providing justification for the enormous concentration of wealth that has occurred.
• matwood 9mo ago
  Yeah, bailing out bank depositors is nowhere near the same as forgiving a loan. The bank failed as it should and depositors were made whole as they should. I'm not sure how this has any bearing on forgiving student loans.