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bank failures

Started by kaysixteen, March 13, 2023, 08:37:47 PM

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Narrow banking is a better way:

The idea is that your checking account money goes into a mutual fund of your choice, including one that keeps your dollar bills in the cellar. Your checking account can become worth more or less, but hardly worthless. You can still write checks. You bear the risk. If that's too high for you, put your money into the fund that just puts your dollars into the cellar. 

Banks would no longer be able to make money from demand deposits, just from raising capital  or borrowing in the form of bonds and lending that out. Such a bank could still fail, like any other company, but it would leave the depositors, and hence the financial system, intact. No more bank runs. And bureaucrats would have less to do. Therefore, will never come to pass. :-)
That's not even wrong!
--Wolfgang Pauli


Quote from: kaysixteen on March 14, 2023, 10:00:24 PM
If a run begins on one particular bank. couldn't the govt, instead of chloroforming the whole institution (another quote from George Bailey), merely shut it down temporarily and impose temporary restrictions on the amount of money any given depositor could withdraw, along perhaps with requiring the bank to liquidate some of its assets to bolster its cash on hand?

That sounds far more likely to cause widespread panic than making depositors whole the next day or so. It seems to me that depositors made whole would mostly deposit the money in some other bank, as a message is sent that depositors are safe, whereas if access to your money is restricted, that means that depositors WILL be affected (limited access to their own money) which creates an incentive to keep money as cash under the mattress, crypto, etc. These are not just theoretical considerations - Argentina once went down the restricted access route (granted, this being Argentina it applied to all banks, not just some) and it was catastrophic, not least because it restricted people's ability to spend. But if applied to just one or a few banks, I don't see how it would save them - depositors would surely withdraw, spend or transfer every penny they could, as fast as they could, out of the restricted accounts, have any income deposited into another bank, etc.


This is not necessarily wrong, but it may keep the bank alive, whereas what is done, as in the case of SVB, kills it completely.  I am not sure that a bank's total demise is a good thing.


Contagion is a real worry:

--First Republic Bank  is going down the tubes even though a group of banks deposited $30 billion with First Republic.

--Credit Suisse will borrow up to $54 billion form the Swiss Central Bank.

This ain't over yet.
That's not even wrong!
--Wolfgang Pauli