@Alon @ryanlcooper no one favors “politicized lending” in the sense that the executive directs credit, likely to cronies. but all contemporary bank lending, with “normal rule of law” is political in the sense the state provides the ultimate capital + regulates its alloc8n. at issue is the architecture of accountability: do politicians get to wash their hands of outcomes, “it was mkt forces”, or do we hold them accountable for finance in aggregate.

i’m out and about, more, but not ‘til tonight.

@Alon @ryanlcooper (i lied. things got busy, it’s gonna be a few days until i’ll get to write something about this. 🙁)

@Alon @ryanlcooper ( here is an initial attempt to unlie https://drafts.interfluidity.com/2023/03/21/banks-are-not-private/index.html )

@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

@MadMadMadMadRN @ddayen investment funds. offering credit at interest is a lucrative business. they should perform credit analysis, offer auto loans, etc. people can invest in such funds and earn that interest, at cost of bearing the full investment risk. or they can keep deposits, liquid and attached to the payments system, in postal banks, “earning” something like an overnight policy rate minus 25 bps. 1/

@MadMadMadMadRN @ddayen you can keep all the money you want safe and liquid, but you won’t profit from safe liquid deposits. when you invest for profit, you do so in vehicles detached from the payment systems, whose value fluctuates daily, at your own risk. /fin

@MadMadMadMadRN @ddayen You have to pick one. Either you are serious about the reasoning behind limited deposit insurance (rich people and all but the smallest businesses must look after themselves, we want market discipline of bank soundness), and insure account holders only up to the limit, across all institutions. If you do this, you have not cured bank runs however. You can’t both have market discipline and no reason to run. Or, alternatively…

@MadMadMadMadRN @ddayen you give up on market discipline as a source of bank soundness, and acknowledge that market discipline is in fact bad at that, causing unsoundness in the sound as often as it ensures soundness in banks that might become unsound. So you just insure all deposits, and rely solely on regulation for banks soundness. Then…

@MadMadMadMadRN @ddayen ideally, perhaps eventually, you realize the structure of status quo banking is not regulable, bankers will always find ways to increase lucrative risk-taking despite your regulation, and you change the structure of banking to disentangle the deposits and payments system from at-risk lending and investing. We are working our way there, one crisis at a time.

@MadMadMadMadRN @ddayen deposit splitting by firms individually and concentration of deposits overall are largely independent. Imagine 3 banks, 3 firms. Without deposit splitting, each firm keeps all of its funds in a different one of the three banks. With deposit splitting, each firm keeps 1/3 of their deposits in each of the three banks. The distribution of aggregate deposits is exactly the same. 1/

@MadMadMadMadRN @ddayen I don’t think that, from FDIC’s perspective, deposit splitting is something they encourage because they see a financial stability benefit. It’s an accident of how FDIC was structured, insuring institutions not depositors, but up to a limit of X per customer. 2/

@MadMadMadMadRN @ddayen (Because “customers” desire it and people with money have influence in politics, “customer” gets defined very generously, so you can double your insuredness AT THE SAME BANK by making a trust for yourself, or opening a joint account with your spouse. The whole mechanism is accidental and idiosyncratically defined.) 3/

@MadMadMadMadRN @ddayen Deposits are incredibly concentrated in actual fact, at TBTF banks. Megafirms don’t split their billions into $250K/account. They bank with Chase or Citi. Eliminating with more assurance the deposit insurance limit allows smaller and regional banks to compete on a more equal basis with the “systematically important financial institutions”, making more likely actual deconcentration of deposits from TBTF banks. /fin

@MadMadMadMadRN @ddayen (i wasn’t suggesting FDIC thinks bank failures are independent. i was suggesting people who think per firm deposit splitting might would increase financial stability might have that intuition. i don’t think FDIC has any interest whatsoever in encouraging deposit splitting, other than as an accident of how they are structured. i don’t think they think the practice contributes to financial stability.)

@MadMadMadMadRN @ddayen to claim that deposit-splitting reduces the risk of failures requires some pretty not-in-evidence assumptions. deposits in aggregate are already split across all banks. if firms are encouraged to split their individual deposits, how would that affect the distribution across banks? 1/

@MadMadMadMadRN @ddayen it seems like the intuition you are going for is that deposits would be less concentrated at a few banks, would be more evenly spread. but if that’s the goal, the main problem to address is concentration of deposits at a few TBTF banks. 2/

@MadMadMadMadRN @ddayen and it’s not clear mere spreading around of deposit obligations reduces their riskiness. 3/

@MadMadMadMadRN @ddayen another attractive but perhaps-not-great intuition is that bank failures are independent events, so spreading deposits around reduces the cost. unfortunately, finance may rival fashion the trendiest industry in the world. banks pile onto similatr trends, and suffer similar, correlated failures. the 1980s S&L crisis involved lots of smaller thrifts doing the same dumb things. 4/

@MadMadMadMadRN @ddayen i can’t tell you that it’s *wrong* there’s some financial stability upside in having firms split thr deposit base across lots of banks (directly or via products like CDARS). but i’ve never seen a strong case for such an upside, and there are clear downsides in terms of complexity, opacity, and fees. i think absent a strong case to the contrary, we shld want to reduce rather than increase the financial complexity required to run actually productive nonfinancial firms. /fin

i’m a huge @ddayen fan, and i agree that SVB’s customer base is particularly unsympathetic.

but the idea businesses should in general split deposits or use CDARSes and other techniques that basically game the deposit insurance limit is not ideal. if they do, it puts FDIC on the hook anyway, but at waste of lots of people’s time, generates unnecessary complexity, creates fee opportunities for new species of useless finance professionals. 1/

https://prospect.org/economy/2023-03-13-silicon-valley-bank-bailout-deregulation/

i 1000% endorse his mocking condemnation of the “crapo bill” and its supporters though.

it probably is not a coincidence that precisely the banks who took advantage of that abomination (hint — not predominantly small community banks) are now the locus of a new crisis. (thanks Rs and sell-out Ds.)

deposits and payments should be structurally segregated from risk investing (including traditional commercial-bank risk investing, not just the glass-steagall stuff). postal banking ftw. /fin