I kept my money in FR even when they were at risk because they have been BY FAR the best financial institution I've ever worked with. They gave me a mortgage rate much better than any other bank was offering. When my appraisal came in a bit lower than was required for my desired loan size, they got an exception. When I need something, I email or text one of the two people there who I know by name and they immediately take care of it. I needed a new ATM card, so I pinged my guy at FR and had a new card the next morning. The web portal is fine - basic but does everything you need and does not bombard you with internal quasi-ads like Bank of America does. When I wanted to set up a particular kind of new account I talked to one of my people there, and they explained how they would do it but basically advised I'd be better off doing it at another bank. They never tried to upsell me or push junk onto me. It's really a nice place to do business.
And in the end, though I have a meaningful amount there, it is within the FDIC limits, so a crash should turn into an inconvenience rather than a financial disaster.
Not really, no. Like SVB, FRCs problem was just having too high a percent of uninsured deposits (rich customers, basically). When rumors started that they were next, unlike SVB they were actually a healthy, well run bank. But no bank can handle losing more than half their deposits. It killed them.
My understanding is that SVB also invested a significant share of those deposits in bonds which are reasonably conservative, but they bought so many of those bonds at/near the peak of the bond market such that they couldn’t liquidate them to cover withdrawals. Banks are supposed to keep a certain ratio of insured:uninsured deposits as well as liquid:illiquid investments and SVB broke both of these rules and regulators let them do it.
And a reason that banks have had so many withdrawals is that their deposit interest rates have not kept pace with money market rates, so a lot of people, especially if they had a lot of cash in a bank, have been moving their cash to money markets.
But long-term Treasurys are liquid, they just lost value. Be careful not to equate the two.
And bizarrely, capital requirements don't require banks to account for duration risk, which is what screwed SVB (and is screwing a lot of other banks now).
It’s the combination. Either factor by itself might have been ok, but when 80% of depositors are not insured and the bank has a liquidity crunch, it can spiral out of control quickly.
Yikes regarding the low appraisal waiver... This is the entire point of appraisals - to protect the bank from over-lending and the taxpayer from the moral hazard of having to bail out poorly run banks.
Without knowing the details of why it got waived, it's hard to know whether that was reckless or not. And remember, it wasn't (unrecovered) mortgage defaults that sank FRC.
Do you think the mortgage originators working on commission trying to push deals through are able to assess if waving an appraisal reckless or not? Why even have appraisals?
That's not my experience and understanding. Rates can vary substantially between Banks. Are from the US?
Today's 30-year Treasury rate is about 3.8% which put the bottom limit and the average 30-year mortgage is 7.5%. This gives about 3.5 percent spread. How much of that you can negotiate back will depend on Bank policy
My comment is actually citing a real world 2008 case from The Big Short By Michael Lewis (undisclosed bank writing the mortgage however).
It was an interst only mortgage.
History doesnt repeat itself but it often rhymes. In 2008 the teaser low rate that the fruit picker got went up, and they got wipped out, in 2023 the teaser low rate that regional banks bought government bonds at went up and they get wipped out. In a way it is poetic.
That wasn’t the only reason. It was a cascading effect from junk mortgages and a bubble burst on the inflated housing market that people were unable to sell their homes. So they had to change laws under Obama and things started to get better about 2012-2014.
We now have a new mortgage rule requiring those with good credit to secure a mortgage for those with bad credit by charging them fees on the mortgage. Here we go again.
In Canada where we have a couple large banks and no real choices or competition, that sounds like a dream. Unfortunately it looks like the U.S. is moving rapidly in that direction too. That’s a shame. I can tell you, it’s much worse when a small number of giant companies control the market and lock out competitors.
This is interesting. Competition aside, I would think that having fewer big banks is worse than many smaller banks because big banks become “too big to fail” such that tax payers end up needing to bail out the bank itself (rather than stopping with the depositors). I’m surprised to hear this is how the Canadian system is set up?
This is the case in most of the developed world. 2-5 giants and another few minnows. The US banking sector with thousands of independent banks is unique, at least in the West.
It’s how every country is set up, including the US. Having smaller banks doesn’t affect systemic risk much if there’s still big banks that are too big to fail, and the US has plenty of those.
Even if we lived in a world where big banks didn’t exist, the benefit to systemic risk might be smaller than you’d think, as bank failures tend to be correlated.
The credit union system is still fairly strong in this country (at least in my area), but we do seem to be hollowing out the middle between the small credit unions and the massive banks.
Used to bank with First Republic when I lived in CA and always had very good experiences. Unfortunately, in banking, a high degree of customer satisfaction can be a side effect of practices which ultimately land the bank in trouble.
Unfortunately, the party of freedom and business decided to roll back financial regulations that allowed a corrupt and incompetent bank (SVB) to run itself out of business and trigger a bank run.
Even a coauthor of the Dodd-Frank act said that the repeal didn't contribute.
> "I don't think that had any effect," said Frank, who retired from Congress in 2012. "I don't think there was any laxity on the part of regulators in regulating the banks in that category, from $50 billion to $250 billion."
Should we bring up 2008-2012 again? Shall we discuss what’s about you happen with subprime mortgages (again) or the current financial issues the country is facing?
This seems like a silly thing to say when it’s the left focusing on getting people into houses or otherwise spending money they can’t afford.
The feds are stuck trying to tame inflation, and the skyrocketing interest rates are crumbling regional banks. Big banks are a lot more hesitant to lend to small businesses, and many otherwise viable businesses will fail if credit freezes.
Big banks are getting even bigger as depositors flee, and concentrating risk (even more) imo.
I guess the higher interest rates are doing their job in slowing the economy down, but it's wild that we're stuck with whatever the feds do with their blunt toolset because congress is seemingly dysfunctional.
Tax the rich. That is the fastest way to get excess money from inflation out of the system. All of the rhetoric about $1400 checks being the problem is just smoke and mirrors. The trillions of dollars of PPP loans, money printing for corporations, etc. was the real problem. That excess money needs to be taken back and wealth taxes would do it.
Inflation is excess demand for goods and services. We raise interest rates in an inflationary environment because we want people to accumulate wealth in the form of financial assets instead of spending on real things.
Raising taxes on high-income people could help if it goes far enough that we actually reduce our consumption. High income people have low marginal propensity to consume - that’s why it’s better to give regular people money when you want stimulus. Tax hikes targeted at the very high income would have to be very steep, or they’d just be absorbed by lower savings rates.
As long as we’re entertaining weird taxes, progressive consumption tax is probably what you want here. Special sales taxes on big ticket luxury items (cars, boats, watches, etc) could also do the same thing a little less elegantly but in a more familiar way.
My understanding is that, at the whole economy level, it is in fact neither of these things, but instead too much money in circulation. If the government prints more money, then the amount of goods/services each unit will buy will fall. Through ultra low interest rates and QE, governments have been doing a lot of money printing.
What are the arguments here? If it didn’t cause inflation, the USA should abolish taxes and just print trillions of dollars and buy everything in the world, and give each resident a million dollars a month as basic income.
- The nominal quantity of money ("print trillions of dollars")
- Aggregate demand ("buy everything in the world")
- The velocity of money ("give each resident a million dollars a month")
Increases in the quantity * velocity of money drive inflation in the long run: prices do not equilibrate immediately but have to be dragged up (or not, as the case may be) by supply and demand.
The government needs money to buy goods and services. Extra cash chasing the same pool of goods and services is definitely inflationary.
It also needs money to do weird, dark magic with bank balance sheets so that businesses can continue to acquire the capital to maintain and grow the supply of goods and services. It’s less clear what extra money sloshing around the financial system does. In the post-2008 era, people were freaking out about it not doing enough.
I mean, to some degree, that's what the US has historically done and can do, as a consequence of being the world trade (and therefore reserve) currency.
A side effect of that position is decreased sensitivity (aka inflation) of that currency to money printing.
Because you're effectively amortizing each new dollar's dilution of value against {everything the US uses dollars for} + {everything the world uses dollars for}. Which is a much larger denominator than national-only currencies.
(And side note that being a trade currency is somewhat of a Faustian bargain, because it carries an expectation/obligation that you will create sufficient amounts of your currency to facilitate international trade)
If the US keeps using the dollar as a fast pass to imposing unilateral sanctions internationally, and de-dollarization expands, there will be a very different level of correlation between monetary policy and dollar inflation.
The argument that is peculiar to the Austrian school is that monetary policy is the _only_ thing that causes inflation. Not that it can’t contribute to it.
And personally I think the last 15 years have done a pretty good job as a counterpoint to that school. The whole QE regime was chugging along without generating a large amount of inflation and then we had both the supply and demand numbers go bonkers. Then inflation.
I think this period will be studied for years (though because it’s economics I doubt there will be much decided).
Some people (including me) actually do think this is exactly what the USA should do.
I think people think printing money causes inflation, and in general “know” that you shouldn’t “spend more than you make”… but I think things are different when you can print money.
It would actually be a very efficient means of fund raising (vs the current tax code), as well as fighting income inequality (the basic income), and even if it did cause inflation, that’s basically just a very efficient progressive wealth tax (when coupled with a universal basic income).
Inflation is the most regressive form of taxation there is. I'm in favor of basic income, but if you try to just print it all, prices will increase to the point that there won't actually be a meaningful increase in purchasing power.
Imagine if the Fed just printed up 10 million dollars for everyone tomorrow. Do you think everyone would then be wealthy?
In terms of policy making, the independent central banks of many countries (e.g. BoE) have been mandated to follow this model pretty closely - when inflation (a primary metric against which they are judged) rises (like now), interest rate increases and 'QT' are the response.
I'd prefer to see fiscal policy being used more - then the expansion/contraction of the money supply can be better directed for social good, and interest rates can remain nearer their 'natural' level in terms of correct pricing of time/risk.
Indeed! But governments can control the money creation process by adjusting interest rates (specifically the rate that banks can borrow from the central bank), and market operations like QE
This is more of a political / philosophical view than economic. It's a less rigid extrapolation of the gold standard argument. Not to equate the two, but there's a connection.
Ah the gold standard was about pegging the amount of money in circulation to the quantity of Gold 'in the world', roughly speaking.
Of course with a growing economy this makes no sense, as you need more money to facilitate this growing exchange of goods and services, and so the gold standard is inherently deflationary (see also Bitcoin).
(Fiat) Money of course is just a signalling mechanism, it is not 'real' - money supply / velocity / inflation are concepts for understanding the mechanism, not much politics or philosophy involved.
> inflation is either from excess demand or constrained supply
Inflation is always about the balance between supply and demand
> the reasons for inflation matter when trying to address the problem
Less than one might think based on the either or thinking. Even when a change in supply causes inflation, reducing the demand side will bring it back down.
The exception being for specific items where demand is not very elastic in the short term, such as fuel or basic food items.
But even increasing interest rates (a demand side intervention) may not affect those prices by much, it will affect other prices enough that aggregate demand can stay low.
Strictly, inflation is too much money chasing too few goods/services. Hence money printing (with low interest rates facilitating credit expansion, and QE activities) causes inflation, and the reverse will reduce it.
True that the rich will tend to save money thrown at them, but they also tend to sink it into assets (like property) hence the 'everything bubble'. As you point out, wealth taxes won't move the needle on the price of bread, but may help reduce the costs of housing.
That’a not ‘strictly’ what inflation is, it’s how the Austrian school defines it. But it’s much complex than that (monetary velocity etc.), so trying to model the economy using the quantity theory of money tends to not yield useful results.
Agreed that velocity is an important component, but I hope we can also agree that dumping large amounts of money into the economy (ultra low rates and QE) will result in price rises.
At the whole economy level, I'd suggest that supply and demand don't really cause inflation - at least, not the kind of disfunctional inflation that we should guard agains. For example, if the supply of bread is reduced, then necessarily people will eat less bread (and price signalling will ensure that it is the poor that eat less bread). So long as this does not trigger e.g. a wage price spiral or other pathological effect, then this is 'fine'.
Assets being overvalued is a different thing from inflation. It's true that the cost of housing is up, but that's also borne out in rents. It's true that most people are homeowners, but the quantity actually included in inflation statistics is "owner's equivalent rent." House prices acquiring a premium over and above rent on comparable properties is not inflation.
> We raise interest rates in an inflationary environment because we want people to accumulate wealth in the form of financial assets instead of spending on real things.
Yes and no. The Fed has a not-so-subtle goal of taming inflation in part by capping asset prices with its interest rate hikes.
Much of inflation is being driven-by corporate concentration, so the answer is to not tax wealthy individuals but corporate profits at much higher rates:
Sure, but the parent was talking about how taxing wealthy individuals would not tame inflation because of their (relatively) small impact on demand. The same is not true about how corporate profits filter back into the economy.
Wealth taxes are a not the best idea. Being taxed on something illiquid that can’t generate cash flow is the pinnacle of dumb taxation. For example, you have a piece of art. You’d have to sell something just to hold onto the art, and if you don’t have anything to sell, you’d have to sell the art itself just to pay for ownership of the art. It would make some sense to increase capital gains taxes instead of slapping people with a wealth tax. I say this as someone that would not be hit by a wealth tax.
Also, the rich can simply move assets out of the country, and then you erode the very thing you want to tax.
> Being taxed on something illiquid that can’t generate cash flow is the pinnacle of dumb taxation
My house isn't very liquid, can't generate revenue very effectively, and I'm taxed every year on its current value. Guess us regular folks are already subject to a wealth tax.
And you can sell otherwise non-revenue generating assets if you need to.
If you want to say it's difficult to tax illiquid assets, that's fine. But it's not impossible and while it would just change people's relationships to these types of assets (maybe in a good way for society), it's not going to be the end of the world.
Didn’t say wealth tax, just tax. Taxing unrealized gains would be dumb.
It’s pretty easy, hit dividends, income for social security and Medicare purposes without caps, etc. Eliminate deductions for margin interest, tax filing, legal, other fees. Put an excise tax on LLC formation and annual reporting, and require an annual filing of beneficial owners of corporate entities. Charge a higher fee for foreign and corporate owners.
Every year there are new "tax the rich" plans and some become law. Over the long haul, the government just blows the money and asks for more. Theses schemes are easy to sell to the voters but all they really do is let the government spend and waste more.
In practice the government will mis-interpret any theory and attempt to build a financial perpetual motion machine that revolves around printing money. Then everyone will feel very poor while being told they are rich.
Fairly similar to how at present they have done exactly the same thing and generally try to call it Keynesianism from what I can tell. They skipped the parts of Keynesianism that would involve spending less which I suspect is a contributor to the progression of 2000-2007-2023 where every 10 years the crisis gets bigger.
The situation is not that complex. We need people to, by and large, create at least as much value as they consume. There are enormous efforts to find an alternative to that basic balance by creating lots of money and they by and large aren't actually working.
Also the rich don't consume that much stuff in absolute terms, so taking stuff away from them can't help other people to an great extent. The taxing has to be on the middle class who do most of the consuming. There are no alternatives. Can't tax the poor because they have no money, and ironically can't tax "the rich" because although they nominally have money they don't own that much real stuff as a group.
That actually sounds closer to Austrian concepts of inflation than MMT. Reducing the money supply in itself doesn't affect consumer prices, if it only affects money that was not in circulation anyway.
In order to use taxes to counter inflation (when it is defined as increas in consumer prices), you need to tax those who would otherwise spend most of the money. The most efficient way is to tax the upper middle class.
I save most of my money, but supposedly I was going to spend it anyway so actually it should be taxed? Infuriating take.
Edit: Forgot to mention the obvious, if this is how you feel, why isn't a higher sales tax on certain items ideal? People scoff at sales tax proposals because they'd target the poor, but sales taxes could be implemented progressively too. Tax new cars, smartphones, etc. More expensive items get a higher tax, reducing the impact on poorer people.
I'm not arguing for or against higher taxes. Just stating what I see about facts about the relationship between taxes and inflation under MMT thinking. (And I'm not a fan of MMT, btw.)
Inflation happes when there's an imbalance between supply and demand. MMT argues for increasing deficit spending to fund all sorts of social programs. It also argues that the purpose of taxes is not to "balance the budget", but rather to tamper the inflation that tends to follow overspending.
The alternative (increasing interest rates) doesn't work properly under MMT, since treasury bonds cannot have a real interest rate, or the deficit spending would eventually break down. That means that under MMT, purchasing power of consumers must be pulled back using taxation of various sorts, which only works if you tax the consumers.
The problem with MMT (the way I see it) is that adjusting taxes to regulate inflation is probably an even more painful approach for most people than using the interest rate.
Anyway, the fact you need to tax the actual consumers to fund social programs remains the same, even in more traditional social democratic/keynsian approaches, even if they use the interest rate to regulate inflation.
If you look at northern Europe (where I live), taxes on the middle class are much higher than in the US. They're also higher for the poor, but with the increased social benefits, free healthcare, etc, it matters less for them.
Oh, btw, a lot of the taxes collected ARE, as you propose, collected as sales or luxery taxes, as well as employers taxes (hidden income taxes) Where I live, the direct income tax is "only" around 45%. However, the base sales tax is 25%. The employers tax (tax on employers for paying salaries, in other words a hidden income tax) is 25% (if you make more than $100k). For some items, such as cars, fuel, alcohol, tobacco, cosmetics, sugar/candy, etc, there are additional taxes, often well over 100% of the base cost.
All-in-all, I suppose, out of the salaray budget that my employer allocates to me, 75-80% ends up as taxes, somehow.
And I'm middle class, not rich and not poor. If the left in the US really wants to have a European style welfare state, this is about the level that allows for that.
If given the facts about this, I doubt many American's would want to switch. On the other hand, few people over here would want to switch in the other direction, too, since they're used to the taxes and the benefits they buy.
Conservative here. We don't want to go "back" to anything - we reject the Whig history notion of linear history entirely. Rather there are things we want, and things we don't want, and enormous income taxes is decidedly one of the things we don't want.
In 2020:
Top 1% paid 42% of all collected income taxes. (1.5 million tax payers paid $722 Billion)
Bottom 50% paid 2.25% (78 million tax payers paid $1.7 Billion)
The trend that is more troubling is the effective tax rate for the 1% of earners is falling (34.47% in 1980 vs 25.99% in 2020) yet their share of total taxes paid is rising (19.05% in 1980 vs 42.31% in 2020). This just highlights the growing income gap between the 1% and everyone else.
The top 1% had almost 40% of the wealth in the US, in 2012.
And that video is from 2012, from before Covid, now it's much, much worse, because since 2020 the top 1% have captured about 66% of the extra wealth created.
It's not just the expense of getting around taxes, but also the difference in sources of income. If most of the income is on a W-2, there are just not as many ways to get around any income taxes. But if it's mostly business or investment income, that's like Minecraft for accountants.
And a lot of people always throws around terms like "almost nothing" without defining it in terms of actual dollars. Is it like 50M is nothing compared to their 10B net worth? What are we talking about/comparing here?
Privately, I know how to make investment income go to zero if you have enough of it. It’s all rather fascinating. Really, the top 5% of the top 1% could do it. But if you have less than $1m income (or cap gains), then it’s likely not worth it.
"In 2020, the bottom half of taxpayers earned 10.2 percent of total AGI and paid 2.3 percent of all federal individual income taxes. The top 1 percent earned 22.2 percent of total AGI and paid 42.3 percent of all federal income taxes."
According to https://taxfoundation.org/publications/latest-federal-income....
Why do people like you always exclude payroll taxes and state taxes in counting who paid the most taxes. You only cherry pick the most progressive piece of the entire taxes paid
I'm not even American mate. I was just interested in the statistics and looked it up online (maybe poorly) and posted it here since I assumed others would be. I didn't even comment whether this was good or bad!
Do you have the numbers you talk about?
I'm glad you pointed this out. The parent comment to yours is the equivalent of people seeing a big red map of the US during the presidential race and saying "how come the Democrats win when there's so much red?!", as if land can vote -_-
Still not land voting. Seeing as RI gets the same number of votes as AK. And both senate candidates are selected by popular vote in the state, so even if most of the state is red, big blue cities can swing the vote.
RI has the same approximate population as AK. What people mean when they say land votes, is AK compared to NY. AK has a population of < 1M while NY has a population of > 8 million. Proportionally, Alaskans have > 8x the representation in the senate that New Yorkers have.
Rich people pay own companies, which pay corporate taxes.
LA just enacted a wealth tax on 5m+ real estate.
My point is how many times have we been sold the concept of "if we just bond or tax X, we can solve problem Y". These always turn out to be Big dreams where billions get spent and nothing really gets better.
Justin, I don't know who you are but I’m so glad you are there. Ive be bombarded with tax the rich posts on a variety of my news outlets and theres always this echo chamber of supporters who are incapable of understanding that taxes just end up bloating the inefficiency of governments. If we really are about taking wealthy folks money, we are much better off if that capital enters the economy without government clipping the ticket.
Here is Elon Musks 1 billion dollars in taxes. With his 1 billion dollars we can fund a wide ranging web of wasteful bureaucrats, or we can let Elon use his 1 billion to fund a capital project that generates jobs, technological advances, and builds a product that can be exported worldwide so that there is a positive impact on GDP. I prefer 1 billion of Elon capital projects over 1 billion of government programmes Every. Day. Of. The. Year.
> All of the rhetoric about $1400 checks being the problem is just smoke and mirrors.
It was far more than $1400 checks. Student loans are STILL paused for goodness sakes. $3000/yr per child given to families. The enhanced unemployment checks were larger than regular checks for some people - even my wife who makes Ok money broke even without having to work for several months. For a couple years there was 2.5% 30yr mortgage financing and refinancing for everyone. That's just off the top if my head. It wasn't all for corporations, an insane amount of cash was thrown at regular people.
The $300,000,000 of stimulus checks was to ensure the population would pass the
$6,100,000,000,000 of funding.
It worked great, every tax payer got a few thousand and an indirect +$40,000 tax bill (the government has to get money from tax payers for it) they will be paying out PLUS inflation and other side-effects for years to come.
Props to the rich for figuring out how to bait the people.
The rich are not driving inflation from consumption, the middle class is. The top 1% has 40% of the wealth, but they aren't buying 40% of groceries, gas, and consumer goods.
Money sitting in a bank accounts doesn't drive inflation, consumers spending money does.
> The top 1% has 40% of the wealth ... Money sitting in a bank accounts
I can assure you, the wealthy are not keeping their net worth under a mattress. They are purchasing and paying for assets like property and businesses.
Not that they can't have cash they are waiting to deploy (AAPL, MSFT, & GOOG sure do) but they are wealthy because they own assets and use that to purchase other assets.
I totally agree that the money isn't in a mattress, but it might as well be for the impacts on inflation. Inflation is driven by consumers ability and willingness to pay higher prices.
The 1% are not walking into the supermarket and buying up all the butter and driving up prices
Inflation is because of the money printing. We have the same amount of assets, but suddenly there is over triple the amount of money floating around.
More demand, but the same supply of resources means prices go up. Take a look at the feds balance sheet in 2008 and compare with now (https://fred.stlouisfed.org/series/WALCL)
It's no surprise we've had a bull run for over ten years.
Again, I agree with most everything of what you say, but how it connects to inflation. Printing money only leads to consumer good inflation when it circulates and gets into consumer hands.
If you print the money and put it in the incinerator, you have no inflation. If you put it in a mattress, no inflation. If you print money and put it in APPL stock, no inflation. However, When you pay nurses, construction workers, software devs, and other workers, then you get consumer goods inflation. The problem with printing money is the trickle down effect.
Like you said, it is supply and demand. AAPL corp or Jeff Bezos are not walking into a grocery store and buying all the butter. Prices go up when your worker is willing to pay more for butter.
For some reason, many people think that if only we taxed the rich and gave it to workers to spend, then the price of butter would go down in the market. This is insane.
I think you're discounting how connected everything is.
When you buy XYZ stock the company is able to borrow more and at better rates. They are able to attract buyouts, pay higher salaries, hire more employees and generally spend more in a number of ways.
When individuals like Jeff Bezos add another zero to their net worth they are able to borrow against their own stock holdings as well as are more likely to splurge on other things (like his new yacht) such as funding Blue Origin and Project Kuiper so Musk doesn't pass him as the richest man in the world.
All this results in more money spent and entering the economy ultimately trickling down to purchases of milk, bread and starter homes while making many other stops along the way.
Again, I 100% agree on the connectedness of the economy and trickle down effect.
If I understand you correctly, I think where we disagree is the effect of Taxation. If the government tax the wealthy and incinerated it, then yes, I agree that would reduce job growth, wage competition, and inflation. However, if taxes are increased and the money is distributed directly to the workers, I would expect this to increase inflation.
Do you think job creation from capital reinvestment is a stronger driver of inflation then putting that money in consumer pockets?
The only ways to reduce inflation is to increase product Supply or reduce demand. I don't think that taxing the wealthy will increase Supply and I do think that giving workers more monetary transfers or a lower tax burden increases demand.
You simply can't reduce inflation and while increasing consumer purchasing power while holding supply constant.
I too agree with your comment, I must be missing more context.
> if taxes are increased and the money is distributed directly to the workers
This is unlikely, taxes and laws are always overseen by lobbyists who are funded by the wealthy. I can't imagine a situation where they would vote themselves into a worse situation.
If they ever appear to, know the harm they face would be to their advantage (such as crushing startup competition or preventing litigation).
Perhaps this seems like an overly jaded take, but please reference this Princeton study that found the wishes of the US population have had no real effect on laws for decades.
I'm not sure I agree with that cynical of a take, but even if is true, I don't see how moving money from one wealthy person to another would be an effective tool to fight inflation.
Furthermore, I don't think that is the underlying assumption held by people who say we should tax the rich to fight inflation.
Granular progressive taxation is the best answer to your question.
Trying to define buckets with arbitrary thresholds is futile.
It greatly benefits the top outliers, since the top bucket will have a huge disparity between its strictly defined lower bounds, and an infinite upper bound.
There's no need to "define rich". A formula without defined bounds (this is the most important part) should determine how much tax you pay, and it shouldn't discriminate between different forms of income. More importantly, all net worth gains should be taxed equally.
Pretty sure they're getting at what the wealth is stored in, not monetary bounds. Those are the details that often get ignored when the "tax the rich" soundbite is used.
Well, these are really difficult implementation details to agree upon. There's no chance anyone will agree to something like this without seeing those details.
Unironically I have watched this repeat out amongst friends and colleagues all my life. People with $5 million homes that are below average (but consider themselves to be about average globally at least) because there are houses worth 10 mil in the same street.
> The feds are stuck trying to tame inflation […] and many otherwise viable businesses will fail if credit freezes.
That’s what “taming inflation” means. It means cooling off the economy, which means that businesses which would otherwise be viable fail, reducing demand, reducing upward pressure on prices.
To the extent that unexpected banking issues accelerate this, within a fairly wide band, from a monetary policy perspective that just means the Fed can back off the brake pedal a little sooner.
I think more to the point was that much of this pain from the feds blunt toolset wouldn’t be necessary if congress could cooperate on a fiscal & monetary policy.
This was happening prior to the monetary policy issues. This is a result of the mass amount of money spent during COVID. But interestingly it’s Congress that’s supposed to set the budget. But now you have the Senate and POTUS trying to force their say.
I understand that these are things to be avoided, but don’t understand how they impact small/large businesses. Do you have some resources to better understand the subject?
Honestly? They've got to let the damage happen. Were in this mess because every time we got close to a recession the central banks would cut interest rates to keep the economy going, more money would get pumped into the economy and asset prices would keep on rising. We need a recession to kill inflation, destroy unproductive assets and give us room to grow again. The aversion to recession is destroying us.
The aversion to recession comes from people disliking the idea of losing their job, house, way of life, hell maybe even their family. This is like saying some people need to suffer and lose everything for the greater good.
> Resume student loan payments and inflation goes down in a couple of months.
But... inflation already has gone down. Oh, yeah, everyone cites the headline 12-month trailing inflation, but if you look at the monthly data, the high inflation period was sometime in 2021 (where depends on if you look at CPI, as is most often cited, or PCE, which the Fed uses) through the first half of 2022.
Only due to shifts in food and energy prices, which are both highly volatile. Exclude those, and there is still 0.3% month-on-month inflation, or 3.6 annualized, which is still almost 2x the target.
> If the high-inflation period had ended in the first half of 2022 as you said, then the 12-month rate would already be back to normal. It's not.
It would be absent in the first release in which the high inflation period was 12+ months in the past. That would be the release covering June 2023; the most recent release. covers March 2023.
Kind of weird that you’d answer “in which month would the high inflation ending in Jun 2022 be just part of the baseline prices and not a factor in the 12-month trailing increase?” with some answee that is March 2023 or earlier, and not June 2023.
While I don’t think it would fix the problem, the fact that I’ve yet to hear a single source in the media take the Biden administration to task for this is absolutely ludicrous. Feeding gas the the fire for votes is absolutely appalling.
They've couldn't take him to task for not resuming payments earlier because they were all-in on the plan to forgive student loans. It would have undermined the narrative if they'd wanted both.
If millions of people have to restart spending a chunk of their income on loan payments they will have less money to purchase other goods and services. That will reduce demand in many areas leading to relatively lower prices.
Consumer price inflation is generally driven by demand. Decrease N people’s monthly budget by $X, and you decrease aggregate demand by Nx$X. Student loan payments is one of the few tools the federal government has to manipulate large swaths of the population’s budgets.
So what’s this, if some people make more money it’s fine, but if everyone makes more money the entire economy tumbles? The system cannot handle actual increases in wealth for everyone? Our goal should be to have MOST people be poor so that some can remain rich?
Wealth is measured by how much material objects and services you can buy, not by the actual numbers in your bank account. If you literally added a zero to everyone's bank account overnight, what would happen? There'd be some turmoil, but essentially pretty quickly a zero would be added to every price in every store, and we'd be exactly back to square 1.
When the government suspended student loan payments (and started paying extra time for staying home, and other pandemic benefits), it indirectly put cash in the hands of people who were used to living month-to-month. No doubt some were fiscally responsible and put the money in stocks, which made the stock market have a crazy big rally, but that's a different story. Most just went out and bought things they might not have bought otherwise, or which they had been waiting/saving for. But the supply of things didn't increase--in fact if anything the supply went down because of part shortages. What happens when demand goes up and supply goes down? Prices skyrocket. And this is measured as increased consumer prices (aka inflation).
Now the supply shortage has been mostly worked out, but prices remain high. They are sticky--that's the actual, technical term. A demand shock is required to unstick prices, a core part of getting inflation under control. Suddenly reducing the available monthly budget of those same people who were driving inflation in the first place would do that. So resume student loan payments.
There's no way it'll happen before the next presidential election, however.
Your example undermines your point — in the face of actual, material ability of people to live more than month-to-month and have an actual nice thing, well, we have widespread shortages lasting for years.
Supply shortages lasted months, not years, and are largely over. Chip shortages are an exception. People did buy a lot more than they had been buying previously. This is very well documented.
It's been three years and prices have yet to come down. Interest rates have soared, and who knows how that's going to make new stuff appear. It's quite probable prices will never return to 2018 levels, and somehow this is the result of a temporary increase in people buying stuff. The system is fucked.
That’s inflation and sticky prices for you. The prices won’t go down. There was too much free money given away in the pandemic for that. But steps could be taken to reduce interest rates, if there was political will. Resuming student loan payments (and interest) would go a long way towards that.
Wealth is increased by what money can buy (availability and accessibility of goods), not by the number on the currency you hold.
If that was the case, then Zimbabwe made a massive mistake when switched to the US dollar after having had to print 1, 10 and 100 trillion dollar notes because inflation was pushing 230,000,000 percent.
Well, unfortunately, yes. It's a sad fact that economy, or wealth in general, builds upon inequalities, otherwise there is no need to put regards between the rich and the poor, and there is no need to compare each other.
Currently set to resume in June or July, I believe.
But I find this line of thinking dubious. It costs more than $1700/month for 10 years just to pay for med school? ($160k total cost at 5% interest — and both of those values are at the low end.) That’s an incredibly stupid situation for our economy to be in. That is a massive barrier to entry for a some very important careers.
And on top of that, we’re saying that these massive payments are crucial to getting inflation in check?
Maybe you’re right that this “helps” superficially reduce inflation. But the root problem is much deeper, which is that our economic system cannot handle people making a decent money.
The root cause is likely a lot closer to big companies jacking prices of basic goods and services, blaming inflation, and making record profits in the meantime.
Our economy can handle a lot more people making more money. It just can't handle it suddenly. Especially during and right after a global economic shutdown.
Companies are still catching up with supply. Lots of chemicals and other base materials are still in short supply. A lot of this stems from China still having shutdowns and taking a long time to recover.
Companies also don't want to spend tons of money expanding production when they don't believe the increased demand will continue forever and especially while interest rates are increasing. After supplies catch up, and student loans resume, they likely expect demand to return to pre-pandemic levels.
I think there are factors there that is going to cause permanent reductions of production capacity in many economies, though:
1) Demography: Boomers have started retiring in large numbers, and a lot more retire in the next 5-10 years. There are not enough young people to fill all of the openings they leave behind. Also, work participation rate among young people is falling for various reasons. Unlike their parents, the boomers have a lot of saved up wealth and less of the frugality of those who remembered the 30s, meaning many will continue to have high levels of consumption into their retirement.
2) Reversion of globalism: Covid made many realize that global supply chains are fragile during emergencies, and many countries are re-shoring essential and strategic production, such as medical supplies, chips/electronics and agricultural products. The cost of this improved resilience is lower efficiency.
3) Increased world tension: With the invasion of Ukraine and the possibility of war between the US and China over Taiwan, world spending on armaments is going up, taking production capacity away from consumer goods. The same tension is already causing reduced trade.
4) Populism/socialism/environmentalism: There appears to be a surge in populist, socialist radical environmentalist sentiments in many places, with demands to "tax the rich" and other actions that will make investments less attractive.
In sum, I think these factors will have noticable effects on the supply side in many years to come, causing inflation and/or interest rates to stay elevated for 10 years or more.
Unless there is a sudden surge in automation, of course.
> But the root problem is much deeper, which is that our economic system cannot handle people making a decent money.
The value of money is defined by what you can buy for it. If there isn't enough stuff to buy, either prices go up or there will be shortages of those products. If I have to chose between paying 20% more for the bread or to find the shelves empty half the time, I prefer to pay 20% more.
In "other economic systems", meaning socialism, empty shelves are pretty common.
if they increase spending, you get more inflation, and then they have to eventually pay higher rates on their own debt
if they cut spending, they can deflate the economy, and they can't attract the tax revenues to pay their own debt
no good options in a society that has OD'd on debt since the mid 90s
if we were honest, the President would go on TV and tell us we are just going to be poorer for a while, which is something most people already know anyway
Those are all things that increase the size of the money supply. A fiscal policy that cracks inflation needs higher taxes and lower spending, which in turn reduces the amount of money in the system.
> A fiscal policy that cracks inflation needs higher taxes and lower spending, which in turn reduces the amount of money in the system.
Why would you want a fiscal policy to crack inflation? Better to crack it with monetary policy and use fiscal policy to mitigate adverse distributional effects of the monetary policy, since its easier not to overshoot badly that way than with contractionary fiscal policy.
You would ideally not like fiscal and monetary policy working against each other. Having them work in opposite directions is what got us in this mess. Also, you can't stop inflation while also mitigating the adverse effects of it. You stop inflation by making people poorer.
Also, while monetary policy can be adjusted more frequently, those adjustments take a while to move through the economy, so maybe you want to be careful with it or you will crush a few too many banks.
> Also, you can’t stop inflation while also mitigating the adverse effects of it.
Yes, you can stop inflation while also mitigating the adverse distributional effects (adverse short-term aggregate effects, no, but that’s not what I said to mitigate.)
> You stop inflation by making people poorer.
You stop inflation by making people poorer in aggregate. Ideally you want to do that by compressing available resources, rather than doing so in equal proportions across the spectrum of means, and either of those is better than disproportionately making those already poor poorer.
Monetary policy is good for addressing the aggregate target, but its not a very good tool for tuning distributional impacts; fiscal policy is much capable of steering distribution of impacts.
I think you're generally ignoring the velocity of money. A dollar held by a startup or a poor person is much more inflationary than a dollar held by a big company or rich person - those dollars are moving fast. I assume, from your comment, that you are interested in protecting those two groups.
If you want to combat inflation, you need to reduce demand, which really means removing "hot" dollars from the economy, not "cold" dollars.
So no, you likely can't mitigate the adverse "distributional" effects the way you want, while also effectively fighting inflation. Everyone needs to get poorer.
> I think you're generally ignoring the velocity of money
No, I’m not.
> A dollar held by a startup or a poor person is much more inflationary than a dollar held by a big company or rich person
Rich people have to lose more money in aggregate for the same inflation effect as poorer people losing the same amount of money, sure.
But that's fine, because its a lot less bad for rich people to lose a lot of money than people whose ability to meet basic needs is marginal to lose a little money, so, yes, my statement that the distributional goal should be compression when the broad goals is anti-inflationary was exactly what I intended, even including consideration of velocity of money in the domestic economy.
I'm pretty sure there literally isn't enough money held by rich people to have the effect that you want.
The top 1% own about 25% of assets in the US, and of that the vast majority are likely illiquid and non-cash. If you assume that the top 1% hypothetically hold 10% of the cash, then draining their cash accounts to 0 and burning it would be equivalent (not counting money velocity) to everyone else taking a 10% haircut. If you attempt to account for the velocity of money, that would likely only be a small single-digit percentage. The CPI is higher than that, and many lower- and middle-class families are seeing a much bigger loss in purchasing power thanks to increases in the prices of food, fuel, and housing.
Moreover, the last 2 years have been an experiment in exactly what you are proposing - using monetary policy to control inflation while using fiscal policy to attempt to prevent it from hitting most people. It has not worked, and it will not work in the future. In fact, the policy has had the opposite effect that you probably want: real wealth is increasingly concentrated in the hands of the wealthy, and inflation is largely concentrated in products purchased by the poor.
core pce just printed at 4.6 and ur worried about deflation?
services inflation printed at 7.3% and ur worried about deflation?
that's not a valid opinion atp. we're so far from overcorrecting its scary. spending is still up over pre corona levels. ppl still drawing down excess savings. bank crisis is a real concern and prob reads through to equivalent of a few rate hikes (slok @ apollo says 150bps, most say lower)
> if they increase spending, you get more inflation, and then they have to eventually pay higher rates on their own debt
You can spend in a dis-inflationary manner: increasing production capacity, facilitating resource extraction, and generally anything that helps on the supply side of things.
But absolutely, given the current Administration and the Democrat agenda, this is anathema. If anything they would rather spend to destroy supply as much as possible, since this is generally what the SDG, DIE, and Green agendas consider "success".
A great example is the Inflation Reduction Act. The "green" portions were estimated to cost $390 BB initially, but are now estimated to cost $1045 BB (yes, over a trillion dollars), and this number will almost certain go up[1].
Not a penny of it goes to anything that would increase supply of what you'll need for the "green" infrastructure, it's all pure demand, the bulk of it EV incentives. You would have trouble coming up with a more inflationary plan if you tried.
This is so easy. Increase corporate taxation. Increase the minimum corporate tax rate from 15% to 50% until taxation comes down. Prohibit share buybacks.
If necessary put in a temporary price and wage freeze. This was done under Nixon.
for starters adopt a Canadian style banking model. The country largely runs on 5 very tightly regulated banks that haven't gone bankrupt in a hundred years. These regional banks fall over in every little crisis and they always end up being bailed out anyway (see SV bank), so you might as well consolidate the sector for good.
Lots of credit unions in Canadian traditional finance (taking deposits, making loans), and they haven't been failing left and right.
I think a bigger diff is that Canada doesn't do 15/20/25 year fixed rates. Usually at most 5 years fixed and then you renegotiate and see what you can do. And a lot of variable rates.
The size of a bank has nothing to do with portfolio diversification. You can, as an individual, keep a well diversified portfolio of $100.
Perform better is objective since you provided no metric for anybody to compare, same with resiliency.
Auditing can be done electronically, even via AI now.
It sounds like you’re saying since they have more monetary resources they are more stable, which is true for large companies. Banks don’t own their assets though, a customer can come at any time and remove money. In fact this was rumored to happen in Canada last year, where your 5 major banks went offline after Trudeau opened his mouth about the Freedom Convoy.
My fear is not these "small" banks failing. It's that everyone runs to the top 3 large ones and they will get so huge that their failure will be unthinkably bad. Even if they do not fail their power to for example debank people would be a huge problem. Sadly I don't see congress breaking them into small units or adding stronger regulations.
When SVB was failing, I told anyone who would listen we need 100% FDIC insurance for all normal bank accounts. The usual response was we need to punish startups for being reckless, and we need market forces to encourage banks to be well-managed. It turns out having the time or know-how to identify poorly managed banks is rare (and if you did, you should be in the business of short selling, not making widgets), but we all know which banks are too big to fail, so just move your money there.
There is a reason we don't want billionaires to feel safe with their assets sitting places. We want them actively using said assets to make the world better. Not just living off of leveraged value forever.
To that end, I'm not sure I see good argument for 100% protection. Money sitting in a bank deposit only creates wealth if we have the banks actively lending. And, annoyingly to me, the largest form of this for the "too big to fail" banks seems to be credit card schemes. Which I actively despise, at the moment. It also incentivizes banks to hunt out places to loan money. Which is why we have ridiculously complicated securities to back mortgages. The amount of those that have been made is only "safe" for the banks with a ton of the extra machinery they have put on top. Which has costs.
Edit: I should add that I'm not 100% on my stance here. Would love to be challenged on any of the above. Can only help my understanding.
> There is a reason we don't want billionaires to feel safe with their assets sitting places...
Between inflation and income taxes, you don't need to worry about this. I literally can't remember the last time banks paid enough interest to beat inflation and cover 37% income tax (almost 50% if you're in CA).
Billionaires care very little on either of those things? Leveraged income is not taxed. Is why you don't pay taxes as income on the loan to pay for your house. And inflation they have beat with other returns.
If anything, this is reason to keep the insurance rate low. After all, they only "lose" the uninsured part that is not recovered in bank seizure.
The scare quotes about people losing 100% of their money in SVB was just that, scare quotes. The assets did not disappear 100% and depositors are first in line.
If anything, that should incentivise wealthy people to pay attention to how a bank is being run. Full insurance means I don't give a shit.
But if it is, let's say 7 million dollars, even earning 0 interest, it can be used as collateral for loans that they can then use in places that has something to beat inflation.
Notably, this has a finite lifespan on how often you can do it. It is not some magical process that has no downside. But, to pretend the people that will buy yachts care about inflation loss on things is silly. Every single asset they buy will result in worse loss than inflation. Having safe assets that they know won't be taken is a very nice source of collateral. And note that I never envision them putting their billions away, in this manner. Just many millions. Because they have many many millions.
The problem you’re talking about doesn’t exist. Billionaires are never going to leave much of their money sitting in a bank account, because there’s always going to be better performing assets for them to invest it in. Even if they did, the banks would be putting most of that money to work themselves anyway.
I don't see them leaving all of it. I do see them leaving enough to have collateral for a loan that they can live off for a long time. Heck, just the rate that is common for bump CDs right now is not too shabby and makes me regret not setting up a savings ladder sooner.
That said, your point about better performing assets is why I don't think they care about inflation, as my response to the other thread said. I also agree that the banks should be putting them to good use. Sadly, we have active evidence that the banks are not too good at that. They seem to think it means either credit cards for the masses (which, yes, pays well for the bank), or convincing everyone to refinance their homes. Neither of which feels that good to me.
Tech stocks have screwed this up by fucking up the idea of profit versus non-profit companies. Not paying out dividends to shareholders has made that a near meaningless distinction and made it so that living off changes in the market is all folks can do. That is, you cannot own stock in a company to get residuals while they make the world better for you.
So, to that end, how do you think the banks should be putting that money to work?
This comment describes a moral judgement about consumerism, and maybe that’s perfectly reasonable, but it doesn’t relate to issues around the productive use of capital.
Not what I meant, amusingly. I seriously meant it as a question of what you think they should do? Funding consumers is somewhat fine, as far as money making goes. But our rules are made to drive to outcomes we want. So, what do we want banks doing?
I don’t presume to know what’s best for other parties to do with their capital. I think the kind of central planning you’re alluding to only produces bad outcomes for everybody involved. My only point is that the risk of capital controlled by billionaires being withdrawn from productive use basically doesn’t exist.
I'm not aiming at Central planning any more than anyone else here. My question isn't a moral based one, either. I don't like credit cards for reasons, but I am not saying they should be outlawed, either. Same for mortgages.
My question is specifically what use do you want banks making of deposits? That is better than having active participation in investments?
I think that's mostly true. You don't get to be a billionaire by sitting there. The person who just wants to live on interest stops at $5M of principal. Meanwhile, Buffett is still going. The one exception is someone who inherits a billion and doesn't feel the need to prove themselves.
Ish. I didn't intend it as a "set all money in bank and live off interest." Rather, more like put 10% in a safe place where I know I will make 5% on it. Then, 30% in 10 gambles that may make bank again, kind of thing.
Realistically, no individual is managing billions without literally having staff accountants. Such that they can and will be more sophisticated. My assertion is in that sophistication will be pockets of "safe" assets. And I am further pushing that there are benefits to smaller caps on those safe assets
My argument: Accounts seem to be de facto fully protected anyway, or at least close enough. So making it official allows the FDIC to assess the proper rates for what they're actually insuring (which is necessarily super-linear due to increased variance). Anyone who wants to park lots of money without paying the FDIC insurance cost can buy Treasury bills/notes directly.
> Anyone who wants to park lots of money without paying the FDIC insurance cost can buy Treasury bills/notes directly
This brings up the interesting question of what the role of banks should be. When savers have access to money market funds investing in short-term government debt (this is basically what SVB bought), why bother with the intermediary? We're also in a world of securitized mortgages where banks are just the originators. There are also mortgage originators that just do mortgages. These days, the only unique services banks provide are retail services and small business loans.
This is mainly from poor coverage of what happened with SVB. The main thing protected there was the value of long term bonds. Last thing that fed wanted was for those to plummet at auction. Not the large deposits that would have gone down with them.
I don't understand the argument you are making. Regardless of any additional reasons it happened, depositors at SVB were bailed out, right? And it's widely held that depositors at the TBTF megabanks will be bailed out similarly, right? So unless/until a bank fails and the feds actually make large depositors take a haircut, then it seems that large accounts are de facto covered.
To me, it would seem the dynamic is not one of "large depositors can do their own diligence and giving them FDIC coverage would be a burden", but rather "banks and their depositors aren't responsible enough to accept the consequences of uninsured accounts".
My argument is that they were "bailed out" to the tune of 20% or so. And really only if they insisted on pulling their money out immediately. Not "everything over the insurance number." (Which, for many of these was 0. They were completely uninsured, is my understanding.)
Per reporting I can easily find (in that I'm not searching too hard on this), they had 167 billion in assets, and about 119 in deposits. Per the reporting, the sale that was managed by the FDIC sold off part of those assets for 72 billion, at a reported discount of 16.5 billion. About 20%. Now, granted, it is possible that the other 90 billion of assets are somehow way worse, but I have not heard further panic on those?
But, just going by those numbers there was clearly never any risk that depositors lost everything over 250k. Which is how this is largely getting reported.
> But, just going by those numbers there was clearly never any risk that depositors lost everything over 250k. Which is how this is largely getting reported.
For sure! The news coverage bothered me too because it seemed to be implicitly treating the SVB failure like a cryptocurrency exit scam, where most/all of the money is just gone. If depositors did have to take a haircut it might have even been lower than 20%, as my understanding is that the FDIC has some power to claw back withdrawals that were part of the bank run. I still think it's fair to call it a bail out because since those accounts weren't FDIC insured then the policy was supposed to be for them to not have been made whole, and they were.
But I don't really see how this affects my original argument. Whether subsequent banks have 5%, 20%, 50%, or 100% of their assets vanish, the political calculus is going to be the same.
>There is a reason we don't want billionaires to feel safe with their assets sitting places. We want them actively using said assets to make the world better.
Okay, but the $250k cap doesn't do that, it just encourages them to do the exact same thing, shuffled across multiple banks.
Oddly, it is worth noting that many of the accounts at SVB were completely uninsured business accounts.
At any rate, yes. But you can only split billions across so many 250k banks (I haven't checked the numbers, but I'd assume this is limited by number of banks). And presumably, that means that many more locally focused places managing more funds. That is, the spread is part of the point.
Yes, but it's just as "with their assets sitting places"[1] as it was before -- the shuffling doesn't address the problem you raised in your comment[1] and proposed that as a solution to.
I'm not sure I follow? Use some charity in this, as I am on a phone most of the time. But, sitting many places is better than fewer. And smaller amounts is better than larger.
But! This is just like lines of code. No "true" value answer. And pathological is pathological.
So, did I propose a solution? I specifically think 100% covered it bad. Not clear what number we want.
You don't follow... your own argument, that you were advancing? You were bringing up the insurance cap to support this argument:
>There is a reason we don't want billionaires to feel safe with their assets sitting places. We want them actively using said assets to make the world better.
That is, you advocated the cap as a means to make billionaires use their assets to make the world better. I replied[1] that the cap doesn't make billionaires do that (that= "make the world better"), but simply makes them do the same thing they were doing before, but shuffled across many banks. (i.e. "feel safe with their assets sitting many places, rather than one").
Then, you forgot what argument you were making, including this core point, and are now asking me to re-explain it to you, having since drifted off to a completely different point about whether there are other benefits, unrelated to this point, to storing a billionaire's stash in many places vs one.
Normally, I accept that people might miss key points from earlier in the thread, but here, this is your own argument, and you seem to have forgotten you made it. Come on, show some respect to the people who try to engage with you.
I don't follow how my argument is that any "safe" money is bad. You seem to be taking my argument to the absurd? Of course I don't want to make it so that nobody has safe assets anywhere.
You could be arguing that having the money spread out is not its own good? But, I have specifically posited that having the money spread out among many banks is a good, in itself. What is the number? No clue. Is it guaranteed that having it in several places is better than having it in one? Not really, but the odds of any one bank doing great things with the money seems lower than the odds of any of several banks doing good things with it.
Despite pointing it out three times now, you don't seem to realize that the discussion is about whether the insurance cap is a good solution to the problem of rich people not using their money to make the world better, as you originally proposed, in the comment I originally replied to. You're not taking this discussion seriously. When you want to acknowledge the existence of the point I was engaging with, the point you raised, we can continue. Until then, I'll just use this thread as a reminder not to waste my time with you in the future.
You aren't really engaging. Is it the best and sole solution? I never asserted it was. Unless you go with the weakest read. Which, charity to the argument, if you want to engage.
So, my assertion a little longer spelled out it that I don't think we want giant caches of wealth in small numbers of places. I would prefer active use, I think. But diverse use by many actors is a good means to that. So, if it gets 250k in 100+ banks, that has better odds that someone finds a use that isn't just "credit cards."
That said, I confess I also see little value conversing with you. I hope others have a better experience with you. Good luck.
>So, my assertion a little longer spelled out it that I don't think we want giant caches of wealth in small numbers of places. I would prefer active use, I think. But diverse use by many actors is a good means to that. So, if it gets 250k in 100+ banks, that has better odds that someone finds a use that isn't just "credit cards."
Great! This is the first time you've actually said anything that connected "rich people making the world a better place" with "stashing money in multiple banks rather than one". It's still a dubious argument, because in both cases the money would be getting invested, as opposed to gathering dust, and the bank would just invest any excess money it had with other banks, creating the same investment.
It's also really frustrating to have to keep reminding you of what your argument was, in order to get to that point. It would have been much more productive if you had said from the outset "okay, whether rich people's money gets invested at all is a dubious benefit to the insurance cap. But there might still be other benefits, like reduced systemic risk...".
But you didn't do that: instead you acted shocked that I was asserting there were no benefits at all to spreading money across multiple banks, and spoke as if you didn't remember the original benefit you were asserting.
>That said, I confess I also see little value conversing with you
Correct: people that force you to be rigorous in your comments, and don't let you change the topic to hide previous dubious arguments, are going make you look bad. I understand not wanting to get called out on these unproductive tactics, especially if you prefer looking smart rather than learning something.
It isn't like these banks are really that badly run. They've just inherently got interest rate exposure. It isn't like the 80s S&L crisis or the 2009 financial crisis where the paper was backing bad investments or mortgages which had defaulted. The problem is just interest rate risk and that the current value of the paper has gone down. That only creates a problem if the bank is forced to sell those assets, and if there wasn't a classical bank run then the bank wouldn't be forced to sell those assets. This is exactly the kind of borrow-short-lend-long risk that all banks inherently run and is why we supposedly have the FDIC to stop these kinds of bank runs. SVG had worse issues where their deposits were inherently draining due to the startups using them for their corporate accounts, and then they went out and sold some of their paper, booking their losses, instead of looking for financing.
For those looking for the punish-the-rich morality play, the real winner here is likely to be JP Morgan or PNC which may bid to buy up the assets, which is just the rich-getting-richer and a large bank swallowing up a smaller community bank and more consolidation and monopolization of the financial sector.
Yup, that is basically inherent. In order to hedge their interest rate exposure they'd have to find some counterparty that can afford to do it - there is no magic hedging or insurance fairy - which with previous interest rates would probably wipe out all their interest income and expose them to counterparty risk at the same time if they could even find anyone.
In reality, there is no such thing as a "bank" in the sense that it's a big vault of money so you don't lose it in a house fire.
Every bank today is really a Highly-Levered Bond Fund. If we increase FDIC insurance to 100%, without commensurate changes in what banks are allowed to do with customer deposits, this seems like it would create a moral hazard where banks would be allowed to do all kinds of crazy shenanigans because they know they'll be bailed out.
To be clear, I'm for 100% FDIC insurance, but if we get this without getting much more stringent duration risk transformation standards (e.g. don't load up on long-dated treasuries in a low-rate environment), I think it could actually make the banking stability issue worse :(
Banks are unstable but that is good because we want maturity transformation. A great society is one where old men are paying young men to plant trees with money that would be sitting around instead.
> It turns out having the time or know-how to identify poorly managed banks is rare
The intended solution isn’t for you to vet your banks, it’s to not exceed the insurance cap. People appear to be willfully ignorant of this.
No, it’s not hard to stay under (cash sweeps and money markets exist). Yes, these products are actually beneficial and not just accounting tricks (cash sweep diversifies bank’s depositors as well, reducing systemic risk).
We are a small business (less than 100 employees). We have about 50 large paying customers. As soon as SVB happened we transferred almost all our money out of FRB to our other banks and only left a small amount of the money ($185k) under the ‘insurance cap’. But we still have payroll going out, we have deposits coming, etc. so we started transferring all that over. It’s not simply “not exceeding the insurance cap’. It’s a huge pain and takes a very long time since our customers are huge companies and updating our banking information with them is a long drawn out process.
Well, we transferred most of the customers over this last month, but one of the customers just yesterday made a deposit of $485k. $485k + $185k is well over the insurance limit. I believe it takes 3 days or so to clear so we wouldn’t have been able to transfer it out immediately. Maybe we can ask them to cancel it on Monday, i am not sure yet. As a small business our cash flow is very tight. We don’t have experts on the team to juggle multiple banks and make sure all deposits are less than $250k or watching out in case the bank fails the day after. Maybe there are tricks like you mention but most small businesses do not have experts on this stuff and I don’t think we should have to be.
Sure, maybe changing is hard in the short term. The solution would have been to not do highly consolidated banking over limits in the first place.
> We don’t have experts on the team to juggle multiple banks and make sure all deposits are less than $250k
My key point is that there are products that do this and also yield higher than retail bank accounts. Difficulty is a straw man. If retirees on bogleheads can do it so can you.
There is no social value to raising FDIC limits as a technicality via financial engineering. The money spent to maintain these schemes is pure dead weight loss on the economy.
No it’s not. Sweep accounts reduce systemic risk because your money is at different banks. MMFs are an independent product.
Consider SVB. Bank run aside deposits were poorly diversified and many depositors needed money at the same time because they were burning runway. Even without a bank panic this effect alone could cause losses on banks with large HTM portfolios. Unlimited insurance does not solve this problem, except in paying out, which the FDIC ideally would not have to do.
Deposit diversification does solve this problem, and the only reason it’s incentivized for depositors is because of the insurance cap. The overhead of sweeps is quite low and money markets even lower (MMFs with the fed outperform best bank deposit rates even after management fees).
Honestly retail banking is the real dead weight loss. Sweep accounts often offer better rates than the underlying banks give their customers because the sweep accounts have low overhead for the bank and pass on the savings. Same goes for other banking products like CDs: banks offer better rates on the market than to their own customers.
> many depositors needed money at the same time because they were burning runway. Even without a bank panic this effect alone could cause losses on banks with large HTM portfolios.
Seems like there should be a market for a bank that advertises “no long-duration HTMs unless we hold a duration and interest-matched CD” and “short-dated investments only on checking acct balances”.
If that doesn’t exist, it sounds like big depositors were ignorant or quite happy to get some extra interest (or fancier offices/marketing) in exchange for that risk.
Sorta. The problem is big corps do a lot of transactions in their account and can't predict when that $850k (or $850m) transfer is on the way in as their bank is collapsing. And even debits can't always be predicted, but I doubt big payments are pre-authed like that.
Not sure if a bank would be 100% protected if they had a script that checked their balance every minute and sent it to a MMF.
Bank depositors should have a choice depending on their risk tolerance. There should be fully insured accounts which charge a fee to safely hold your money. And there should be uninsured accounts which pay interest. But the notion of earning interest on insured accounts is essentially financial alchemy: it appears to create something from nothing and ends to causing serious moral hazards.
AT1 bond holders at Credit Suisse knew that those are risky bonds but now they are all filling legal actions because they lost them.
You would see the same issue. Everyone would go for the risk and when the ship sinks it will be "we are to to big to fail! Who could have predicted this? It's a special situation, etc. etc.".
The FDIC Fund has to know how much cash to keep on hand to cover total insured deposits. The minimum is something like 1.35% of all insured deposits if I'm not mistaken, which they have actually been under for a while now. If all deposits are covered 100% the find would have to be dramatically larger, do they just take AL of that from the banks immediately?
Up the rate and ammortize it over the next 20 years. The alternative is to kill the regional banks and concentrate power in the few really huge banks. I’m not much for conspiracy theories, but the problem is so obvious and the solution so simple, it does make one wonder if that’s not intentional.
The fund is already below their minimum requirement though and didn't actually have enough cash to cover SVB insured deposits when it failed. Amortizing over 20 years likely means tax payers will cover it if any more banks fail in the near future
The funny thing is, if you insure everything everywhere then why would anyone pull their money out of a bank to begin with? That ends the bank runs and the deposit flight right there. It probably wouldn’t come to that.
Beyond that, if all money is insured 100% why would banks keep any reserve? And what keeps a check on the risks banks are willing to make?
I'd be happy to see us abandon the fractional reserve system all together, but that means blowing up the system entirely and getting rid of the concept of debt. Short of that, I don't see how we could keep fractional reserve while making deposits completely risk free.
The same thing that keeps them from doing that now. Banks are required by regulation to keep enough liquidity on hand and have restrictions on what kinds of assets they can hold. They don’t do it out of an abundance of common sense anyway.
Regulation doesn't have much teeth when banks are too big to fail and all deposits are insured. Fines related to breeching regulation often come years after the infractions started and never amount to the gains banks wanted in the meantime. In the end regulation amounts to a slap on the wrist and the feds just getting a piece of the pie.
We don't necessarily need those regulations of the money isn't insured though. Banks should be deciding how much to keep on hand based on their own risk profile. If they make a bad bet and lose the bank folds, depositors get priority on asset liquidation, and other banks take note.
Did you vote from 2004-2008? If so, you had your “say”. The USA is a representative democracy. If you elected idiots unable to do the job it’s on the royal “you”.
There's a whole generation of people who were too young to vote in those elections who have to live in this 'bail out' world. I'm 34 and I couldn't vote in 2004. 2008 was my first presidential election. We definitely didn't get a say and a lot of us don't agree with our elders.
The good thing is you’re old enough now, so let’s see if you vote to continue or end this. We’ll definitely have another 2008 again, potentially in the next decade or 2, as the current administration is setting that up now with special mortgage rules for those with good credit to help secure mortgages from those with bad credit.
There is no legal technicality in which Trump won. He received a huge amount of votes, there's no denying that, but voter fraud on any meaningful scale was never proven after they looked under every rock they could find. Beyond that, the electoral college and Congress finalize election results and they don't appear to have breached any protocols.
Claiming that casting one view in one election means that we all made the specific decision to deem some banks as too big to fail is a bastardization of how or system works to begin with.
If I candidates I voted for lost, I had a chance to partake in democracy but how did I actually have a say in a decision made by someone else?
And if the entire question of banks too big to fail want even a talking point in 2004, how was I voting on that?
For me to have a say, at a minimum my elected representatives would have had to engage with his constituents on the new issue. Even better we could handle those situations more like the Swiss, putting it to a ballot vote.
In no way is casting a vote when effectively given a choice between two major part candidates equivalent to ne having any day in how the government makes a fundamental decision to change the banking world.
Banks being too big to fail is a bit common sense unfortunately. We cannot let our financial infrastructure implode as the damage will be much more severe than some inflation.
> And if the entire question of banks too big to fail want even a talking point in 2004, how was I voting on that?
The question is who caused them to fail, and did you vote for anybody that had anything to do with it? This event started in 1994 and didn’t really end until near 2012. You probably voted a few times in that timeframe.
You could have written a letter to your representative that expressed that you'd vote for them if they let the big banks fail, even if that ends up causing a Great Depression 2.0 that ends the dollar's global supremacy that we all take for granted. Of course, 99.9% of voters aren't going to express the same view.
>I told anyone who would listen we need 100% FDIC insurance for all normal bank accounts.
I'm not an accountant, but the fine print does say "Up to at least $250,000.00.", so FDIC insuring the entirety of savings like they did this time around isn't exactly unexpected. They kind of need to if the goal is to shore up the commons' trust in banking, anyway.
This all being said, it doesn't take a rocket scientist to understand it's a bad idea to keep all your eggs (savings) in one basket (savings account). If you're fortunate enough to have enough liquid funds that all of this is a significant concern, definitely consult an accountant about spreading those funds around to mitigate damage and not lose out if the FDIC decides covering the entirety of savings is not something they want to do on that particular day.
I just don’t understand how none of the 5000 banks in USA haven’t renamed themselves as “safe bank” and promises to only invest in t-bills or maybe just floating rate low-ltv loans. That’s great for entities finding themselves with millions in their checking account.
Interest rates would suck, but that’s the price you pay for insurance.
Anyone chasing higher rates or pricier customer service (or going with whichever bank blows their budget on marketing) is playing with fire.
As recently as 1 year ago, the fed funds rate was 0.2%, which isn't enough to pay the overheads of a bank.
Banks don't move fast enough to reinvent their whole business and churn their whole portfolio into T-bills on that time scale, and take too long-term a view for "let's just shutter the business when rates go back to zero" to be a business model they will consider. Having a single product - a single account type that is backed by T-bills - is not something regulators will allow a bank to do: all deposit accounts has to be backed by the bank as a whole.
However, there are non-banking businesses that don't have these constraints, and some of them are doing exactly what you suggest. They are called money market funds and business is great for them right now. You can get the returns and safety of short term Treasuries in return for foregoing other services your bank provides (physical branches, credit cards) and accepting a minor liquidity risk that the fund could pause withdrawals.
because they're not taking the same risks, but yeah, if there are banks that can take risks while someone else bailouts any losses from those decisions, then yeah, I get going with the latter.
"Normal" bank accounts do not have more than 250k. The only thing that should change is that the limit should apply to one's total assets in all FDIC banks, not per bank.
Counterpoint, they should just get rid of the FDIC.
And if you flagged me, fuck you. The blatant adversarial tone of this comment means it should be flagged just on its own. Flagging my comment without flagging this moronic nonsense is clear evidence of bias and gaming the flag system on HN. If you don't like the obvious counterpoint that the FDIC probably shouldn't exist at all given the moral hazard it creates for all bank depositors, you're a smoothbrain.
I didn't flag you. My comment is not adversarial. The vast majority of Americans have less than 250k in their account. Thus having above this amount is abnormal.
The vast majority of Americans have less than 250k in all their savings accounts
> that everyone runs to the top 3 large ones and they will get so huge that their failure will be unthinkably bad
Outside BofA, their balance sheets are healthy. There isn’t serious speculation of contagion out of the regional banks. We put in place regulations to prevent this after 2008. Numpties rolled it back for “community banks” in 2017 [1], and that’s why we have this problem.
Woah, let's not over-exaggerate in times like these. Bank of America has about $110bn of unrealized losses on HTM securities, but that is against $200bn of Tier-1 capital. Comp that to SVB who had $16bn of unrealized losses against about that much Tier-1 capital.
BoA has a worse balance sheet that peers, but not an unhealthy one.
Neither regulations or good capital and liquidity ratios helped Credit Suisse. Banking is about trust, if people are getting worried about you, it doesn't matter what your financial statements say, you are done.
> Neither regulations or good capital and liquidity ratios helped Credit Suisse
Different regulatory regimes. But it helped make their takeover possible.
In Credit Suisse’s case, specifically, it is difficult to see an alternate endgame. The regulations worked to ease the unwinding. And Switzerland’s lack of receivership showed.
They do! But it won’t tank the bank. Because they’ve been working on them for years. Because they’re still under Dodd-Frank’s liquidity coverage rules.
> Why are you blaming 2017 numpties?
They rolled back the regulations that would have, if not prevented this mess, caught it much sooner. BofA has similar issues, but it’s subjected to stress tests. As a result, the risk has been managed in a way it wasn’t at these banks.
Mostly. The other component is how we pretend HTM Treasuries both hold their value and are liquid. Europe marks to market daily. I think you should get to choose: mark at $1, but they don’t count as liquid, or mark to market and they contribute to your liquidity ratio. (The rollback meant nobody was measuring liquidity. SVB would have failed its LCR in March 2022.)
JumpCrisscross is wrong; the 2018 modifications had nothing to do with SVB's collapse (or what is happening with First Republic). SVB collapsed because it made a bad bet on where interest rates were going (and did not hedge for risk), making it vulnerable to short-term liquidity issues. That has nothing to do with the 2018 raising of the minimum AUM for application of Tier 1 capital requirements from $50 billion to $250 billion. SVB's Tier 1 ratio was 12%, among the highest for US regional banks. <https://www.morningstar.com/articles/1144363/which-bank-stoc...> Listen to Larry Summers and Dan Tarullo explicitly confirming that SVB would have passed a Fed stress test in 2022. <https://www.youtube.com/watch?v=cYgz4KSRPww#t=5m10s>
While SVB and Credit Suisse's collapses' causes are directly unrelated, depositor outflows were involved in both, as opposed to fundamental issues with their balance sheets. Credit Suisse's Tier 1 ratio was as good as that of UBS or any other big European bank. <https://www.wsj.com/articles/credit-suisses-death-gives-birt...> At the end of the day, a loss of clients' faith in a bank is something that no stress test can directly measure ahead of time.
I’m inclined to agree with the fed, since the 2018 change to the law is what made it legal for SVB to make the bad bet that put them out of business.
Also, they were aware of the regulation in question, since they paid lobbyists to get that specific rule rolled back specifically so that they could structure their holdings to overinvest in treasuries.
>I’m inclined to agree with the fed, since the 2018 change to the law is what made it legal for SVB to make the bad bet that put them out of business.
As Quarles says, the report does not actually provide any evidence of this.
Let me repeat: At 12%, SVB's Tier 1 capital ratio was well above the industry standard (5-7%). SVB collapsed because of a liquidity crisis driven by its unusual depositor industry concentration. Nothing SVB did would have been illegal pre-2018; to put another way, poor risk management is not inherently illegal, any more than any other bad investment that ends up losing money is illegal.
> I’m inclined to agree with the fed, since the 2018 change to the law is what made it legal for SVB to make the bad bet that put them out of business.
Of course you are, you’re clearly biased against the right so without even trying to disprove yourself you just automatically believe anything against them.
No we wouldn't. This is not a repeat of 2008, the rules written to keep 2008 from happening again wouldn't have stopped it, and the media has been bullshitting people about this for, basically, partisan reasons. 2008 was caused by default risk and in particular, by the banking system failing to adequately protect against the fact that lots of loans would default at the same time in a recession or housing price crash. The rules were focused on stopping that. The current problem is duration risk - banks hold a bunch of extremely safe but long-duration fixed interest assets like US Treasures and government-backed mortgage securities, the Fed has increased interest rates very rapidly, and that means the interest banks have to pay on their savings is now higher than they get on those asssets. None of the rules foresaw such aggressive interest rate rises, and to some extent this kind of duration mismatch is just how banks work full stop. The media is misleading people about this because they really, really want it to be a story about right wing anti-regulation politicians causing a repeat of the last crisis.
> None of the rules foresaw such aggressive interest rate rises
The Fed has stress tested for duration since Dodd-Frank. The unsophistication of SVB’s duration simulations was specifically flagged by supervisors ex ante.
Subjecting SVB, Signature and First Republic to LCR requirements would have thrown up early red flags. (You’re partly correct in that the definition of liquid assets is too broad: Treasuries of all kinds get equal weight.)
> media is misleading people about this because they really, really want it to be a story about right wing anti-regulation politicians
Except 1929 didn't happen again, the problems in 2008, and in 2023 were completely different.
The problems in 2023 were made significantly worse by the rollback on liquidity rules in 2017, which, if we may recall, was not a year that Obama was exerting any influence on banking rules.
No, it’s not fraud. There was not misrepresentation. The structures were largely straightforward and the requirements for a bond to be rated AAA were no secret. There were good faith decisions that were foolish in retrospect, but in general credit tranching works.
If people blindly invest their money this is somewhat inevitable to occasionally happen. Its great when regulations can prevent it but thats an ideal, not a 100% attainable reality.
Moodys rates mortgage backed security as A when many mortgages lacked proper documentation and underwriting and were not worth the amount of the mortgage at time of issuance. [0]
They were rated as prime but were actually junk.
There was no criminal investigation because the US DoJ decided not to. Civil suits didn’t get far because it was hard to gather information without criminal jurisdiction.
Obama got almost $50M from Wall Street for his 2008 election and it paid off well for his donors. [1]
With that much fraud, there should have been more criminal convictions rather than bonuses as usual.
The models used by the rating agencies were open and available to investors. The number of low doc/no doc loans as well as no appraisal loans were tracked and specified. Given the number of loans in a particular category, the rating agencies required certain levels of protection via credit tranching, over collateralization and insurance. These models proved to be poor. But no one was hoodwinked.
Now you may argue that banks accepted fraudulent applications that a prudent man would not have and then sold securities based on those, and all the big banks paid out multibillion dollar settlements over that.
Why no criminal prosecution? Two reasons. IANAL, but I believe the standard for criminal fraud is higher than imprudent decisions. Second, and more importantly if you start charging bank employees criminally, you really need to start charging the fraudulent borrowers who by many accounts number in tens of thousands. No one made them commit fraud. They were not victims of fraud, they were literally beneficiaries, though ultimately foolish as well.
In several deals mortgages were claimed to met underwriting but a substantial fraction had not. There was significant civil litigation on this matter but no prosecutions in part because showing knowledge by a particular person was hard.
> In 2013, he (Attorney General Eric Holder) unwittingly earned his place in history for telling the Senate Judiciary Committee, “I am concerned that the size of some of these [financial] institutions becomes so large that it does become difficult for us to prosecute them,” which became known as the “Too Big to Jail” theory.
It has now been established as precedent that if depositors of "regional" (or "systemic") banks have enough clout/create enough panic, they can get infinite protection.
We will see if FR depositors' money over the FDIC limit is made whole.
If that happens with FR, then Congress should legislate to raise or index-link FDIC limits, for everyone. (If not, we have moral hazard for both depositors and well-managed banks; and also smaller banks have to compete at an ever-increasing disadvantage.)
It's actually happened before that. Limit was retroactively raised from $100k to $250k after IndyMac collapsed. But that was for everyone by law (first temporarily by https://archive.fdic.gov/view/fdic/3388 then by Dodd-Frank retroactively & permanently).
Even then I thought it was a bad idea because it discouraged depositors from spreading around their assets.
Whether we'll see them treat future failures like SVB or not, TBD!
Not sure what you mean, but they were ad-hoc and retroactive to bank failures, not explicitly to inflation numbers on a five-year schedule. Allowing FDIC limit to be revised for inflation is a new regulation.
Strictly, that never happened. Unless there were literally no assets on seizure. You would lose what couldn't be recovered. Not everything over the insurance mark.
Who did lose everything were the investors in the bank. And that still happened.
No, that has not happened in 15 years. Every bankruptcy since IndyMac has ended with depositors being made whole. The precedent is a lot older than the recent bank failures.
And what I said is banks used to be allowed to fail (and FDIC wasn't directed to make depositors in excess of the insurance limit whole). Ok so the last time reserves didn't cover depositors was 2008 not more recent.
My remark is that alloeing banks to fail is no longer happening, and that's setting a really bad moral hazard. Some even suggested during SVB there should be infinite FDIC coverage for 2 years, which would have destructive side-effects towards the end of that period. It's strange to hear people (esp. libertarians) complain about the politicization of the IRS (Taibbi/Twitter Files), but not the FDIC.
That's a long term issue, but the contraction of credit is my shorter term concern. When deposits flow out of regional banks into big banks, it limits the capacity of those regional banks to fund themselves and forces them to cut lending (not the least to not consume their liquidity).
On the other hand the big banks might receive more deposits but they can't lend it either because they are constrained by capital requirements, not funding.
So logically you should have a contraction of credit, which combined with higher rates, is going to be ugly. Clearly the markets aren't pricing that right now.
SVB had some idiosyncrasies with its customer base that most banks don't, so I understand why it failed.
I didn't think First Republic was big in the startup space, so I'm curious what got them. I know they hold a lot of mortgages on their own books, but other than that, was it just another bank run? Was it exasperated by their customer base becoming very aware of FDIC limits and the potential of failures because SVB was in the same region? The median Fifth Third customer doesn't have $250k, and sees all of this as "rich silicon valley problems."
It was mainly just the mortgages. The quirk is that they marketed to extremely high-net worth homeowners—I think this is the penthouse condo crowd. In order to attract them, they offered 3% interest-only loans. Without principal pay down, these mortgages are more sensitive to interest rate rises, leaving the bank with roughly $35bn in losses as interest rates have been rising. They have been insolvent for several months, but a typical bank didn’t have losses on their mortgages which were nearly so steep.
As compared to SVB, this is the same basic situation: interest rate losses led to insolvency, which could be temporarily ignored because they were “small” banks. However, once deposits started fleeing, the losses could not be ignored when they needed to sell the impaired assets for actual cash.
They have been in limbo for a few weeks thanks only to the injection of $30bn from other banks.
Another similarity in the two banks’ situations is that the same catalyst of rising interest rates cause asset losses and drive deposit flight.
It’s a weird quirk of accounting that they are allowed to ignore these losses for the life of the assets. But the other extreme is weird too, because sometimes the market value of assets can undergo a “V” shaped dip before recovering, and it would be bad to make a bank insolvent because some flash crash. The accounting rules try to split the difference by letting the bank partition its assets into buckets that take losses immediately, or at the end of life of the asset. This is an easily abused system.
It seems, hopefully, that the three failures were exceptionally badly run banks, and that this doesn’t indicate a wider wave of bank failures. Not yet.
> They have been in limbo for a few weeks thanks only to the injection of $30bn from other banks.
This will be weird/interesting. JP Morgan know what it's doing. It looked at First Republic's books before doing this. So either JP Morgan was wrong or there was a deal that they'll be made whole if First Republic goes under. It almost has to be the latter because JP Morgan's only incentive to make the deposit is promoting the appearance of financial stability.
Or JPM coldly calculates that, after this all shakes out, they will account for 30% of the banking sector, and burning $30b now is better than burning >$100b later.
FDIC rescues are paid for by (essentially) a levy on the banks.
Genuinely curious: How are these mortgages more sensitive to interest rate rises than average? I’m sure I’m missing something but it seems like a mortgage on the books is a done deal, so long as the homeowner pays up.
Because the principal isn't paid down, the weight of the future loan repayments is more years away, and they get more affected by interest rate changes.
Exactly. As an example, a typical 30-year fixed will be halfway paid off after 15 years, and so is about half as sensitive to interest rates as a 30-year interest-only.
This should not be a surprise to the management of First Republic.
In theory that's true, but a substantial proportion of all US mortgages are fixed rate and originated in the last few years when interest rates were at record lows, so they're still going to be pretty sensitive to interest rate changes and the bulk of the repayments still pretty far into the future assuming they're structued in the usual way with fixed repayments.
Wild. I wrote a "junior equity analyst" autonomous agent and this was the reply a couple of days ago "First Republic Bank's growth prospects may be limited by its narrow focus on high net worth clients, which may not provide sufficient diversification in the event of an economic downturn. Additionally, the bank's high cost structure and low efficiency ratio may make it vulnerable to margin compression and increased competition. Finally, the bank's exposure to the California real estate market may pose significant risks in the event of a housing market downturn. "
That isn’t at all what the person you’re replying to wrote. the key to what they wrote is the loans were highly vulnerable to interest rate swings as there were no principal repayments.
The bank didn’t bust due to HNW people going bust.
That's still not right though. They didn't hit trouble because the market had a downturn. They hit trouble because when the loans were highly sensitive to rate rises.
If you have $1,000,000 in principle, at 3% you pay $2500 per month. At 9% you pay $7500 per month. Even if the house is still worth a million you can't necessarily afford the payments.
First republic had a lot of high net worth individuals. Similar to SVB their high bank balance made a percentage of them moving away very damaging and it looks like it accelerated.
With a regular bank, you would have much smaller accounts so a proportional number of accounts leaving Wells Fargo would have less of an effect.
It seems the trillion dollar coin idea is being spoken about more seriously than both raising taxes and cutting spending at the same time.
I do wish we'd do that though. Seems like the adult thing to do, and it's the sort of compromise that would get me emotionally on board with my taxes going up. We could start the cutting with the Defense budget, but I won't hold my breath.
You call passing a bill through Congress "immediate", and you think it can be "undone quickly"? I think the long-term budget deficit is too high, but the budget process is not responsive enough to be used to control inflation. (It's also too slow and clumsy when used the other way, as fiscal stimulus.)
One way of using the deficit deliberately as an economic control dial would be for Congress to grant the Federal Reserve the authority to adjust payroll tax rates within a given range. I doubt this could ever happen politically, though.
People can dodge taxes, and the blame for spending cuts falls directly on the government which is politically dangerous to them. Raising interest rates is crude but very very effective, it's what crushed the high inflation of the 70s
They've been cutting spending for 40 years now. Unless they are going after the military budget, the spending isn't a problem (at least, the amount isn't). It's the lack of taxation and enforcement to fund it.
The last thing we need is to raise taxes, which would further hamper our economy when we need growth in the face of rapidly growing China and the East.
What we do need is to cut government spending, especially social welfare, of which first and foremost should be Social Security and Medicare.
Oh, didn't know it is that simple, but incompetents everywhere :)
So that's certain? How does the tax development over the last 5 centuries look? Won't this just make the rich richer and the poor, who already struggle a lot, poorer? There are a lot of different ways to distribute tax load...
Yeah, haha, that's right. That's why democracies in the 2021st century and 2020th century do. Look at EU, growth at 1% per year in Real GDP. US real GDP lower and lower over time
Likelihood that uninsured deposits will be made whole? What happened to the billions that larger banks "deposited" into FRB just a few short weeks ago?
Ultimately it will be the big banks paying more to the FDIC to cover the shortfall anyways. So that will be pretty much a wash either way. It's the non-bank uninsured depositors that matter.
That's the interesting question, isn't it. Does the FDIC hose a bunch of depositors by taking over a zombie bank that could have ambled along for a while, or do they make everyone whole and kill the (dumb) industry of sweeping deposits into <=$250k accounts at many banks?
> kill the (dumb) industry of sweeping deposits into <=$250k accounts at many banks
I like that system: it props up several banks instead of just one "winner-take-all" that does the most risk and externalizes the costs to uninsured depositors (and sometimes FDIC) when it blows up.
The alternative system doesn't have uninsured depositors at all. Arguably this could be better for the multitude of banks. It's mostly worse for the businesses offering sweep services for a fee / net interest margin.
What i do not understand is that this happens while the bank still has enough liquidity to cover 50% of deposits. At least from what I understood. Seems like there will be quite a few banks with less than this.
interestingly, most of FRCs loans seemed to be residential real estate to wealthy people
at crappy rates now (like most mortgages written in the last few years), but these borrowers seem extremely unlikely to default (and they can't refinance advantageously now so they are kinda stuck paying FRC)
The issue isn't that the loans are likely to default, it's that the present value of those loans has gone way down as even short term securities have higher interest rates now. If you need to sell those loans you'll take a large haircut on them.
Levine needs to stop taking vacations. His vacations seem to have caused Crytpocoins to crash, Twitter buyout problems, SIVB failure and now First Republic Bank.
I'm wondering what is going to happen to the banking sector as the commercial real estate apocalypse starts to manifest in full ... banks have a lot of interest bearing loans for commercial real estate that is going to continue turning into increasing quantities of illiquid pure junk in the very near term as leases end coincident with a mass cost cutting environment and occupancy rates drop even more ... obviously this has been a concern for awhile but seems like we are approaching a real inflection point
Still have a little ways to go for this, but yeah, agree. IMO, CMBS has the highest likelihood of being the next MBS catastrophe.
https://finance.yahoo.com/quote/HPP/ Hudson Pacific is who I've been following to track the health of San Francisco's commercial real estate market. I believe they have the largest public position in SF real estate. They're down 85% since 2020. This tracks with articles like https://www.wsj.com/articles/san-francisco-commercial-real-e... implying some commercial real estate in downtown SF is being devalued by 60-80%.
Read the balance sheets and income statements. Every credit union will publish them. And as you own shares, you can pose questions to their investor relations and ask questions at their AGM.
Not "probably". The government is the ultimate backer of the FDIC and would be obligated to step in if FDIC were somehow unable to cover its obligations.
There is no legal obligation for the government to step in. If the FDIC runs out of money, it runs out of money. Everyone expect that IF that were to happen, then Congress would step in and provide legal authorization for the FDIC to use treasury funds, or whatever other scheme is chosen for backing the FDIC's obligations. Because presumably in that situation letting the FDIC fail would be a far worse outcome. But this is not how things are required to play out, with existing legal authorizations. It's just speculation.
Right now, according to the law, if the FDIC rainy day funds run out there is no further source of funds to bail out banks.
https://i.redd.it/ooln252yxjna1.png - Here's a visualization of the size of the banks which collapsed. It does not include FRB which was comparable to SVB at about ~200B AUM.
As you can see, we're nowhere near the number of banks that could collapse, but, with the collapse of FRB, we've passed the total AUM of banks which collapsed during the height of the '08 GFC. So, that's a little staggering...
Personally, I'm not expecting any others to collapse, but I also wouldn't be surprised to see up to five more. Moody's downgraded six banks when SVB collapsed - one was FRB. All of the others seem to be doing okay for now, but only one (Western Alliance) is trading higher than its price at time of downgrade.
My layperson understanding is that this is a Bad Thing, but not the surprising outcome SVB was. The market, other banks, consumers, etc had a long window to digest this, so it won’t cause new panic the same way.
Considering all of the stops the fed pulled out to prevent future bank liquidity failures, this probably means some gross negligence was revealed by the market state that goes well beyond even blatant risk mismanagement.
Businesses go under sometimes, that's the free market. Banks are a weird type of business which is why the FDIC exists, but this isn't a broken market, it's the market working.
So for FR customers, what does this mean? Is there a risk of funds being inaccessible? I normally only keep enough in that account to cover two months of expenses.
The FDIC generally likes to do this on Fridays so they can reopen the bridge bank and everyone can access their funds on Monday. If you're under the insurance limit you're almost certainly fine.
> If you're under the insurance limit you're almost certainly fine.
If you're under the insurance limit of $250k per type of account and not fine, the whole world will find ourselves with some much larger problems to solve.
Yes, it's still a very unlikely scenario but the TGA running low and debt ceiling brinkmanship at the same time banks are going under does make me think there's some nonzero chance of some insured depositors in some banks having to wait awhile for their funds. But yes, low probability at the moment.
As to be expected, many people on reddit's wallstreetbets made or lost futures as this saga unfolded. I dunno why anyone would invest in bank stocks. Too risky. Index funds offer comparable return but without the tail risk of bank run.
It's an interesting question in this case because last month a consortium of banks made a big show of depositing $30B "uninsured" as a show of confidence, and it's not clear whether it's still there.
> First Republic Bank was collapsing for more than a month. If anyone still kept uninsured money there, it's mostly on them.
The big banks deposited 30-billion dollars uninsured to try to rescue FRC. Are you saying that you don't want big-banks trying to rescue smaller banks anymore?
Moral hazards, all the way down. We like the deposit they made, but they did so because FDIC seemed to offer assurances to cover even uninsured deposits. We're back to SIVB questions and just delayed by a month.
> If anyone still kept uninsured money there, it's mostly on them.
It's been very difficult for small businesses to open accounts at other banks to move money to. The waiting list is very long, because business accounts require a lot of KYC.
And importantly, the moving out of uninsured deposits (by people who were fortuitous enough to have other accounts to move it to) actually caused the problems we see today.
...Actually, there is no disincentive built into the FDIC for people to participate in bank runs. In fact, the entire point of the FDIC was to insulate depositors from banks doing stupid things with everyone's money.
Now that the Fed has bailed out the creme de la creme, I'd like to see the argument employed when the FDIC hasn't got the liquidity left to backstop every other depositor in subsequent bank failures.
They don't have to argue anymore, this isn't the era you grew up in, that world is gone. A reporter who has a question about it won't be selected to ask one.
Except for the incoming question being on there, per your link:
> While it was notable that a potential question was written on Biden’s card, every White House press office takes scrupulous care to prepare their president for news conferences.
Except for the question on there wasn't the question that was asked. Do you understand how q&a (or for that matter court) prep goes? The question on there was an example question that they expected would be along the lines of what that person would be interested in and how they would phrase it (or what particular things they would try to attack/draw out). The article you just quoted even said that.
That's just ensuring anyone over the insured limits participates in a bank run on every bank that isn't too big to fail (and the first to do so get rewarded by getting to keep their money).
No, that's ensuring that we follow FDIC rules. Change the rules, and be upfront about the cost, not relay on one-off precedences.
SV bank bailout was a scam. They said taxpayers won't pay for and it'll be paid by banks. Which means customers. I won't pay for it as a taxpayer, I'll just pay it as a bank customer - lovely.
No. The people that didn't participate in a bank run are the ones that get hurt. The whole point of depository insurance is that people like you and me with less than $250,000 in a single account shouldn't get screwed over with billionaires like Peter Thiel decide to play games with other people's money.
No. Because the people that participated got their money out leaving the people that didn’t participate with nothing in their accounts. This happens because of fractional reserve banking.
Think about it. Assume we both have an account with $1 dollar in it, and the bank only has $1 on hand. Now I create a run where I take my dollar out, but you don’t participate. I have my dollar, and now you have nothing because the bank failed.
Well, that's not the truth either. The bank is holding onto 30Y mortgages / 30Y Treasuries that will be worth $2 in the year 2050, but is only worth $1.4 (fair market value) right now.
This loan was good 2 years ago (ie: its fair-market value was $2) in the year 2021. But the Fed rate-hikes have caused the loan's value to collapse, and so here we are.
You withdraw $1, the bank doesn't want to sell the bonds because it'd lock in the loss. The Fed provides a loan at the full principle of the bond (so the Fed now backstops the missing money). The Fed is now acting as the bank of last resort, providing $2 of true dollars to backstop the $1.4 (fair market value) of the bond, which will truly become $2 by the year 2050. The Fed will exist that long so everything should be kosher, in theory.
Or so goes the story one month ago. Why didn't this work? Why is FRC still collapsing despite these loans from the Fed?
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Believe it or not, life is a bit more complicated than just "fractional reserve banking". You're missing a huge part of the story if that's all your mind is open to. I'm not claiming to have all the answers, but I think it would behoove you to at least try to understand the current situation with a bit more nuance.
That’s a lot of words to intentionally obfuscate the simple fact that banks don’t have the money on hand to allow every depositor to simultaneously withdrawal their money.
Anyone else notice how First Republic bank was bought a few years ago by Colony Capital co-managed by Thomas Barrack, who was a Senior Advisor to the Trump Campaign before being found guilty of acting as an unregistered foreign agent for UAE? https://en.wikipedia.org/wiki/Tom_Barrack
from wikipedia “Barrack recommended that Trump hire Paul Manafort as his campaign manager. Barrack first met Manafort in the 1970s when they were both working for Saudis and living in Beirut. In 2007, Barrack had loaned Manafort $1.5 million to refinance a home in the Hamptons.”
some folks wish they were too big to fail but aren’t. they’re just small big failures
> One of the three major bond credit rating businesses on Tuesday downgraded the U.S. banking system from a stable outlook to negative and put six banks, including Comerica Bank, under review for a potential downgrade following the second and third-largest bank failures in U.S. history.
> Moody's also put under review for potential downgrade California's First Republic Bank, Kansas' Intrust Financial Corp., Missouri's UMB Financial Corp., Arizona's Western Alliance Bancorp. and Utah's Zions Bancorp.
depends if the party line the media plays goes from "xyz bank might be unstable" to "small banks might be unstable". if that jumps from fintwit to cnn, houston, we have a problem
What coming crash? Even if there is a crash, there must be a lot of regional banks in good shape. If you meant only 6-8 of the essential ones will survive, there are really only that many essential banks.
