4 ms·

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 in

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.
  - dantheman 18y ago
    The threat of a run is only available if you lend out demand deposits, which is something that could be eliminated.
- byrneseyeview 18y ago
  I have no clue what you are talking about. I'm an anarcho-capitalist. I was talking about how the FDIC creates bad incentives. I don't think I said anything about how new regulations would help, since the bit you quote is about how the difference between good regulations and bad regulations is in what kind of talent is misallocated. Edit: Perhaps the part about being 'balanced by regulations' threw you off. What I meant is that the government writes rules to keep people from doing what the FDIC gives them an incentive to do. Those rules, of course, do not work.
  - anamax 18y ago
    > I was talking about how the FDIC creates bad incentives. And I'm pointing out that the bad incentives affect depositor behavior. Thanks to FDIC, you have little incentive to find a trustworthy bank. Instead, you judge entirely on other criteria.
- ilkhd2 18y ago
  Bank of North Dakota. A government run one..
  - byrneseyeview 18y ago
    There haven't been enough defaults in North Dakota for that to be a serious issue. Some places are able to have lots of state involvement without getting into lots of trouble, e.g. the Scandinavian socialist states, Singapore, etc. Most of the defaults were concentrated in the 'sand states' -- California, Florida, Arizona, and Nevada.
  - anamax 18y ago
    > Bank of North Dakota. A government run one.. Majority-Scandanavian states seem capable of lots of things that other states can't manage. Since the majority of US states are not majority-Scandanavian, we can't use the majority-Scandanavian ones as a model.
    - ilkhd2 18y ago
      Well, ND is a German majority state. I understand that it is tempting to say that it has something to deal with scandinavian personality, but look up a bit up north you'll see Canada, with very non-scandinavian in it's population makeup, however I'd think it is a lot like Northern Europe in its political and economical structure
kragen 18y ago
Not only is it not responsible to maintain a 4% reserve ratio, in the US it's illegal, and has been for decades. (The legal requirement is 10%.) That also means that it pretty much doesn't happen; banks are pretty tightly regulated. Until the repeal of Glass-Steagall, if I understand correctly, it was also illegal for your banker to invest your money in stocks, penny or otherwise. The extent to which banks are conduits for lending to the government is independent of FDIC insurance. FDIC insurance is pretty much normal insurance, in that it is funded by premiums charged to policyholders, rather than, say, tax money. Banks are conduits for lending to the government in the sense that they maintain much of their reserves in US Treasury bonds. Your comment gives the appearance of someone commenting vehemently on a topic about which they know very little. I mean, it's hard for me to remember that there are people in the world who know even less about banking than I do, but it sounds like you're a member of that elite group.

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.
- dantheman 18y ago
  The threat of a run is only available if you lend out demand deposits, which is something that could be eliminated.
byrneseyeview 18y ago
I have no clue what you are talking about. I'm an anarcho-capitalist. I was talking about how the FDIC creates bad incentives. I don't think I said anything about how new regulations would help, since the bit you quote is about how the difference between good regulations and bad regulations is in what kind of talent is misallocated. Edit: Perhaps the part about being 'balanced by regulations' threw you off. What I meant is that the government writes rules to keep people from doing what the FDIC gives them an incentive to do. Those rules, of course, do not work.
- anamax 18y ago
  > I was talking about how the FDIC creates bad incentives. And I'm pointing out that the bad incentives affect depositor behavior. Thanks to FDIC, you have little incentive to find a trustworthy bank. Instead, you judge entirely on other criteria.
ilkhd2 18y ago
Bank of North Dakota. A government run one..
- byrneseyeview 18y ago
  There haven't been enough defaults in North Dakota for that to be a serious issue. Some places are able to have lots of state involvement without getting into lots of trouble, e.g. the Scandinavian socialist states, Singapore, etc. Most of the defaults were concentrated in the 'sand states' -- California, Florida, Arizona, and Nevada.
- anamax 18y ago
  > Bank of North Dakota. A government run one.. Majority-Scandanavian states seem capable of lots of things that other states can't manage. Since the majority of US states are not majority-Scandanavian, we can't use the majority-Scandanavian ones as a model.
  - ilkhd2 18y ago
    Well, ND is a German majority state. I understand that it is tempting to say that it has something to deal with scandinavian personality, but look up a bit up north you'll see Canada, with very non-scandinavian in it's population makeup, however I'd think it is a lot like Northern Europe in its political and economical structure

kragen 18y ago

Not only is it not responsible to maintain a 4% reserve ratio, in the US it's illegal, and has been for decades. (The legal requirement is 10%.) That also means that it pretty much doesn't happen; banks are pretty tightly regulated. Until the repeal of Glass-Steagall, if I understand correctly, it was also illegal for your banker to invest your money in stocks, penny or otherwise. The extent to which banks are conduits for lending to the government is independent of FDIC insurance. FDIC insurance is pretty much normal insurance, in that it is funded by premiums charged to policyholders, rather than, say, tax money. Banks are conduits for lending to the government in the sense that they maintain much of their reserves in US Treasury bonds. Your comment gives the appearance of someone commenting vehemently on a topic about which they know very little. I mean, it's hard for me to remember that there are people in the world who know even less about banking than I do, but it sounds like you're a member of that elite group.