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It is a good read and he obviously is a "good" banker for not overextending his bank. But to say he doesn't rely on government help makes it sound like he runs

It is a good read and he obviously is a "good" banker for not overextending his bank. But to say he doesn't rely on government help makes it sound like he runs a normal corporation. Banks are not normal corporations. Mine can't loan out money at 26 times my deposits. Can yours? Of course not, your not a bank. This is the rub with banks. They want to behave like private entities, but they leverage government backed currency which normal corps cannot do. I think we need a new class of corporation for banks and possibly insurance companies. A class that recognized they are hybrid entities, and not the same as a typical private company. It turns out we sort of do have this class (there are lots of hoops to jump through to become a bank). But this class is built on top of the normal rights and privileges of the standard corporate entity.

jonknee 18y ago
> Mine can't loan out money at 26 times my deposits. Can yours? Of course not, your not a bank. Does your corporation have to abide by all of the banking rules? Of course not, you're a regular corporation. If you want to be a bank, start one. It's a pain in the ass but can be lucrative.
- jhancock 18y ago
  Even very large companies, such as PayPal, find that its far easier to buy an existing licensed bank than to start a new one.
mynameishere 18y ago
Lot of upmods for an extremely confused post. Mine can't loan out money at 26 times my deposits. Can yours? Of course not, your not a bank. ...oh kay. A class that recognized they are hybrid entities, and not the same as a typical private company Umm. You seem to be getting at GSEs, a standard corporate form. http://en.wikipedia.org/wiki/Government-owned_corporation http://en.wikipedia.org/wiki/Government-owned_corporation Generally, this doesn't seem to work out too well with financial companies, see Fannie Mae/Freddie Mac (which weren't GSEs, but close enough...) The truth is, the vast bulk of banks were perfectly healthy and responsible. Almost all the trouble came from a few gigantic ones, and the reasons for their behavior were many.
- byrneseyeview 18y ago
  Is it really responsible for a bank to back 30-year loans with demand deposits, at 25-to-1 leverage? I really can't imagine that happening without government intervention, and if it only happens when the government makes it happen, there's a good reason to expect that it's irrational. Banks are hybrid companies in the sense that FDIC insurance means they are basically conduits for lending to the government. If I deposit $100 with my local bank, I don't care whether the banker keeps it in cash, invests it in penny stocks, or spends it on whores -- no matter what, the government backs my deposit. This is for other promises from companies. E.g. if I pay someone $100 now for $100 worth of lawn care over the next five years, I make damn sure I can trust that person. If I pay the bank $100 for a CD maturing in five years, I don't. This gives all banks an incentive to take undue risk, balanced by government regulation, which gives them a secondary incentive to find clever ways to take big risks (which they do by hiring clever people who would otherwise do more socially useful stuff).
  - anamax 18y ago
    >E.g. if I pay someone $100 now for $100 worth of lawn care over the next five years, I make damn sure I can trust that person. If I pay the bank $100 for a CD maturing in five years, I don't. > This gives all banks an incentive to take undue risk Actually, you've just demonstrated that FDIC insurance gives you an incentive to take undue risk. You'll deposit your money at any bank without regard for whether said bank is trustworthy. BTW - It's curious that you seem to believe that better rules will help since you also seem to believe that "clever people" can always get around the rules. As to whether a govt-run bank would do any better, feel free to point to the fraction of govt enterprises which are run as well as you'd require of govt run banks. Which states' DMV is "good enough"? How about the post office?
    - MaysonL 18y ago
      The trouble is that the trust a bank or any such institution receives is not, and probably cannot be, well correlated to its trustworthiness. Cf. Bernard Madoff, and the vulnerability of any bank (especially when no insurance exists) to a run.
ggchappell 18y ago
> But to say he doesn't rely on government help makes it sound like he runs a normal corporation. Banks are not normal corporations. Mine can't loan out money at 26 times my deposits. Can yours? You might have a point there. I guess the question (regarding whether my point was valid) is whether federal deposit insurance is underpriced. I suppose there is a good chance that it is.
- jibiki 18y ago
  It's the kind of thing that can't be priced (as AIG found out.) The distribution of the default rate is unknown and unknowable (fat tails and black swans and so on.) Also, if you increased the price of FDIC insurance, banks would need to make greater interest rates, and therefore would need to make riskier loans. You could make FDIC insurance contingent on taking less risk, but that sort of regulation always seems to backfire. (Of course we already have such regulation, the article even alludes to it. But increasing the strictness of risk-taking regulation would just solidify the major players.)
kragen 18y ago
You ask: > Mine can't loan out money at 26 times my deposits. Can yours? Of course not; you're not a bank. Actually, I think that if someone loans a hypothetical non-bank US corporation money, it can legally loan out 100% of that money, without retaining any of it as a reserve. This is probably not a good idea, since it means it won't be able to pay any of its bills next week, but it's not illegal. What you wrote makes it sound as if, when depositors loan a bank $100 000, the bank can then loan out $2 600 000. That is not the way fractional-reserve banking works. The actual amount the bank can legally loan out in that case is more like $90 000. A non-bank corporation would be able to loan out a larger amount (up to $100 000) in that case, not a smaller amount, as your post suggests.
- jhancock 18y ago
  sorry, I was vastly oversimplifying the mechanism. I was speaking off-hand assuming most on this forum are well read on how these mechanisms work, it certainly sounds like you are. To be more precise: The effect of banks, in aggregate, on the money supply results in a multiplier, which today runs at, in average, 26 times deposits. Here are a few overviews: http://en.wikipedia.org/wiki/Fractional-reserve_banking http://en.wikipedia.org/wiki/Fractional-reserve_banking http://en.wikipedia.org/wiki/Reserve_requirements http://en.wikipedia.org/wiki/Reserve_requirements http://economics.about.com/cs/money/a/reserve_ratio.htm http://economics.about.com/cs/money/a/reserve_ratio.htm

jonknee 18y ago

> Mine can't loan out money at 26 times my deposits. Can yours? Of course not, your not a bank. Does your corporation have to abide by all of the banking rules? Of course not, you're a regular corporation. If you want to be a bank, start one. It's a pain in the ass but can be lucrative.

jhancock 18y ago
Even very large companies, such as PayPal, find that its far easier to buy an existing licensed bank than to start a new one.

mynameishere 18y ago

Lot of upmods for an extremely confused post. Mine can't loan out money at 26 times my deposits. Can yours? Of course not, your not a bank. ...oh kay. A class that recognized they are hybrid entities, and not the same as a typical private company Umm. You seem to be getting at GSEs, a standard corporate form. http://en.wikipedia.org/wiki/Government-owned_corporation http://en.wikipedia.org/wiki/Government-owned_corporation Generally, this doesn't seem to work out too well with financial companies, see Fannie Mae/Freddie Mac (which weren't GSEs, but close enough...) The truth is, the vast bulk of banks were perfectly healthy and responsible. Almost all the trouble came from a few gigantic ones, and the reasons for their behavior were many.

byrneseyeview 18y ago
Is it really responsible for a bank to back 30-year loans with demand deposits, at 25-to-1 leverage? I really can't imagine that happening without government intervention, and if it only happens when the government makes it happen, there's a good reason to expect that it's irrational. Banks are hybrid companies in the sense that FDIC insurance means they are basically conduits for lending to the government. If I deposit $100 with my local bank, I don't care whether the banker keeps it in cash, invests it in penny stocks, or spends it on whores -- no matter what, the government backs my deposit. This is for other promises from companies. E.g. if I pay someone $100 now for $100 worth of lawn care over the next five years, I make damn sure I can trust that person. If I pay the bank $100 for a CD maturing in five years, I don't. This gives all banks an incentive to take undue risk, balanced by government regulation, which gives them a secondary incentive to find clever ways to take big risks (which they do by hiring clever people who would otherwise do more socially useful stuff).
- anamax 18y ago
  >E.g. if I pay someone $100 now for $100 worth of lawn care over the next five years, I make damn sure I can trust that person. If I pay the bank $100 for a CD maturing in five years, I don't. > This gives all banks an incentive to take undue risk Actually, you've just demonstrated that FDIC insurance gives you an incentive to take undue risk. You'll deposit your money at any bank without regard for whether said bank is trustworthy. BTW - It's curious that you seem to believe that better rules will help since you also seem to believe that "clever people" can always get around the rules. As to whether a govt-run bank would do any better, feel free to point to the fraction of govt enterprises which are run as well as you'd require of govt run banks. Which states' DMV is "good enough"? How about the post office?
  - MaysonL 18y ago
    The trouble is that the trust a bank or any such institution receives is not, and probably cannot be, well correlated to its trustworthiness. Cf. Bernard Madoff, and the vulnerability of any bank (especially when no insurance exists) to a run.

ggchappell 18y ago

> But to say he doesn't rely on government help makes it sound like he runs a normal corporation. Banks are not normal corporations. Mine can't loan out money at 26 times my deposits. Can yours? You might have a point there. I guess the question (regarding whether my point was valid) is whether federal deposit insurance is underpriced. I suppose there is a good chance that it is.

jibiki 18y ago
It's the kind of thing that can't be priced (as AIG found out.) The distribution of the default rate is unknown and unknowable (fat tails and black swans and so on.) Also, if you increased the price of FDIC insurance, banks would need to make greater interest rates, and therefore would need to make riskier loans. You could make FDIC insurance contingent on taking less risk, but that sort of regulation always seems to backfire. (Of course we already have such regulation, the article even alludes to it. But increasing the strictness of risk-taking regulation would just solidify the major players.)

kragen 18y ago

You ask: > Mine can't loan out money at 26 times my deposits. Can yours? Of course not; you're not a bank. Actually, I think that if someone loans a hypothetical non-bank US corporation money, it can legally loan out 100% of that money, without retaining any of it as a reserve. This is probably not a good idea, since it means it won't be able to pay any of its bills next week, but it's not illegal. What you wrote makes it sound as if, when depositors loan a bank $100 000, the bank can then loan out $2 600 000. That is not the way fractional-reserve banking works. The actual amount the bank can legally loan out in that case is more like $90 000. A non-bank corporation would be able to loan out a larger amount (up to $100 000) in that case, not a smaller amount, as your post suggests.

jhancock 18y ago
sorry, I was vastly oversimplifying the mechanism. I was speaking off-hand assuming most on this forum are well read on how these mechanisms work, it certainly sounds like you are. To be more precise: The effect of banks, in aggregate, on the money supply results in a multiplier, which today runs at, in average, 26 times deposits. Here are a few overviews: http://en.wikipedia.org/wiki/Fractional-reserve_banking http://en.wikipedia.org/wiki/Fractional-reserve_banking http://en.wikipedia.org/wiki/Reserve_requirements http://en.wikipedia.org/wiki/Reserve_requirements http://economics.about.com/cs/money/a/reserve_ratio.htm http://economics.about.com/cs/money/a/reserve_ratio.htm