@ryanlcooper @Alon the broad question concerns what is or isn’t desirable. repo finance would remain available in a world where retail deposits went to the Fed, but it could become more expensive, because the Fed unlike banks might not bid down rates to provide it. or it could! 1/

@ryanlcooper @Alon the Fed is sometimes in the business of both seeking and providing repo finance, and to the degree we want to maintain current institutional shadow banking practices where a savings account is a bond portfolio and liquidity comes from repo finance against it, the Fed could ensure liquidity is available at whatever rates it sees fit. 2/

@ryanlcooper @Alon but as we saw in 2008, that sort of shadow banking is runnable, in that reduction in perceived safety or value of the bonds borrower against can leave firms unable to finance operations, or for banks provoke runs. in extremis, the state (via the CB) must become “market maker” of last resort to stabilize this kind of shadow banking. 3/

@ryanlcooper @Alon in what gets termed the “disintermediation” debate, there are always these horrified what ifs. if retail depositors run to the Fed, where will the finance for bank credit come from? should we really disrupt this centuries old system that sometimes has supercharged development? if banks aren’t flush with reserves, where will be the liquidity backstop for institutions accustomed to cheap finance at will against their bonds? 4/

@ryanlcooper @Alon but the point if disintermediation is to reorganize in a way that takes responsibility for these functions from financial markets and locates them explicitly with the state. 5/

@ryanlcooper @Alon if credit (for repo if we choose to maintain it or for anything else) is too scarce once retail deposits sit at the Fed, then it will be the state (via the Fed, or some Treasury facility) that will have to intervene, explicitly, with investment or guarantees, in credit investment funds to ensure the level and character of lending we desire. 6/

@ryanlcooper @Alon that’s scary, given how pathological our politics are. but the status quo financial system is also pathological, no longer collects and lends against local soft information, disproportionately funds financial and real estate, no longer seems to function as an engine of real economic development but expands financial flows to the already wealthy. 7/

@ryanlcooper @Alon in the modern era (since central banks and deposit guarantees), it has always been true that “private” banking is a bit of a swindle, because the bulk of the at-risk capital is provided in the end by the state. but the rationale has been that lending on “commercial terms” will yield superior outcomes than lending on terms that might become overtly political if the public nature of banking were fully acknowledged. 8/

@ryanlcooper @Alon btw the sharp pain of financial crises and the anesthetized, slow pain of deindustrialization and financialized plutocracy, the case for this once arguably virtuous swindle is diminishing. “deintermediation” means choosing the brave new world where there is no veil over the public, therefore political, nature of modern finance. that will cure certain pathologies, but require overt, accountable state action, which undoubtedly brings new ones. 9/

@ryanlcooper @Alon pick your poison. /fin