4 ms·
>And yet we did see commercial banks taking massive risk and going bankrupt because of it The depositors were insured, so the depositors didn't care. The bank
by murbard2 12y ago
>And yet we did see commercial banks taking massive risk and going bankrupt because of it
The depositors were insured, so the depositors didn't care. The bank shareholders had a free call option from the federal government in the form of an an implicit bailout guarantee, so they were incentivised to take as much risk as possible.
> I don't know what you mean by that. Do you mean ibanks can buy publicly traded commercial bank stocks?
Without Glass-Steagall: commercial bank takes 90$ from Joe's 100$ deposit and invests it in leveraged CDO^2 on Bhutanese real estate.
With Glass-Steagall: commercial bank takes 90$ from Joe's 100$ deposit and buys 30-day debt from an ibank. The ibank use the money to invest in leveraged CDO^2 on Bhutanese real estate.
- wdewind 12y agoYeah that all makes sense, but if we aren't going to prevent commercial banks from buying high risk securities, it also seems like the FDIC shouldn't be insuring them.
- murbard2 12y agoThe whole point is that even if you prevent them from buying high risk securities, they will buy AAA rated commercial paper from ibanks that will. And surely you're not going to prevent a bank from making loans, that's their whole raison d'etre (safekeeping of money is incidental). Short of getting rid of central banking, I don't think you can do anything about this.
- wdewind 12y agoYeah, I am convinced. Thanks for a great conversation.