But why would you need a private corporation to put peoples money in T-Bonds? Why not just make the government do that directly? I don't see how these corporate profits benefited society. They didn't fill some hard to do function, they just risked others money and planned to skim the gains for profit, why should society encourage that? And they didn't even risk the money in growth areas, they just gave it to the government, I could see their value if they actually took some valuable risks, I don't see the value of a private corporation that skims profits by investing into the government.
The UK government owns several banks, one of these banks is for exactly this purpose.
National Savings & Investment Bank (NS&I) does not offer loans, but money you save with this bank is in practice just part of the country's general fund, they're paying you interest on your savings because if they borrowed that money commercially they'd have to pay interest too.
This has one obvious big advantage for the saver - it's inherently safe, you aren't saving with a bank, who might gamble your money away and then go bankrupt, if the whole country fails then it doesn't mean anything to lose the Pounds in the savings account, Pounds are now worthless anyway. Also if you live there you have more immediate problems.
Since the government owns it, it's also allowed to do things which would otherwise be illegal, at least potentially e.g. NS&I Premium Bonds are basically savings except with gambling, or scratch-offs except you get your money back if you don't win. Your deposit is safe, but instead of say 1% interest on £10 000 you might have 0.1% chance to win another £90 000 for a total of £100 000.
This is technically worse than the 1% interest but it's exciting and people buy lottery tickets so who am I to argue?
Edited to add: Somehow the word not was missed in my second paragraph during editing. Fixed now.
Three modest notes about premium bonds. Firstly, you can cash in bonds at any time, so it's effectively an instant access account. Secondly, the current rate is 3.30%. Thirdly, the payouts are tax-free.
3.30% on an instant access account is actually pretty great (best i see elsewhere is 2.51%; i see a six month fixed term deposit at 3.28%), and getting it tax-free without having to have it in an ISA makes it even better.
>But why would you need a private corporation to put peoples money in T-Bonds? Why not just make the government do that directly
What you're describing is pretty close to a "narrow bank", minus the "owned by government" part. The Fed doesn't like it for several reasons:
>The Fed raises three main objections. 3 The first is macroeconomic: The Fed worries that narrow banks could mess with the implementation of monetary policy, because if they succeed they will keep a lot of money at the Fed, increasing the size of its balance sheet. 4 They might also make other short-term interest rates (like fed funds) more volatile, because people who would otherwise participate in those markets might park their money at narrow banks instead, making it harder for the Fed to target interest rates. 5
>Second, it worries that narrow banks will take funding away from regular banks, making it harder for those banks to trade stocks and bonds (a business largely funded by repo), and maybe even making it harder to make loans:
>Third, the Fed worries that having too safe a bank would be bad for financial stability: In times of stress, everyone will flee from the regular banks to the super-safe narrow banks, which will have the effect of bringing down the regular banks.
> The Fed has shareholders, pays dividends, and are partially owned by the biggest banks.
Those statements might technically be true, but the implied conclusion (ie. that the fed is beholden to banks because of its ownership structure) is not. The federal government essentially controls the fed because the president appoints all the board members, and nearly all of its profits are paid to the treasury.
>The federal government sets the salaries of the board's seven governors, and it receives all the system's annual profits, after dividends on member banks' capital investments are paid, and an account surplus is maintained. In 2015, the Federal Reserve earned a net income of $100.2 billion and transferred $97.7 billion to the U.S. Treasury,[22] and 2020 earnings were approximately $88.6 billion with remittances to the U.S. Treasury of $86.9 billion.[23]
Well now you're questioning the necessity of banks in general. Additionally, the government regulates them into these securities.
>Why not just make the government do that directly?
If I understand, do you mean why not cut out the middle-man and have people buy the T-Bills/Bonds themselves? If so I completely agree, to some degree, that banks nowadays are nearly complete scams as far as warehousing your money, while providing near 0% interest, with the backdrop of 4 to 5+% risk free short term rates from the government as alternative.
I myself have taken out a bunch of cash and deposited into various tenors of treasuries at TreasuryDirect.gov
And many others have as well, which is why depending on which data you look at there has been a massive withdrawal of cash from commercial banks in recent months, with people either buying treasuries or putting the cash with their brokers (who are buying treasuries etc).
I don't know the answer to how this is resolved, or banks place in the economy... they are supposed to provide credit and money creation for business investment. Since the 2008 crisis, lending has been subdued... there are probably many causes for this. Banks have terrible apps, user interfaces, user experience moving money quickly (in the US) and terrible returns provided to you for lending them money (most people don't realize this is what you're doing when you deposit). So yea, they are a legacy, protected industry that scams their customers out of the spread between the treasury yields they are getting.
The alternative to banks is a credit union where you are a shareholder and their rates aren't necessary exciting either. There's a cost to maintaining infrastructure both digital and physical. Not to mention providing various financial services to shareholders.
The moving money problem is a bigger issue with the American financial system as a whole and basically the business mentally of underinvestment and "don't break what works".
FedNow will hopefully reduce alot of the time delay related friction in the coming year or two that comes with ACH.
T-Bonds tie up money for a long time, bank deposit are largely retrievable on demand. Banks take a fee for bundling lots of deposits together to invest and depositors trade upside for convenience.
If you know you have a 10-year horizon, by all means buy treasuries instead of depositing at a bank.
But that doesn't work if the bank is allowed to put your money into T-Bonds, then your money is locked there just without the upsides.
And you can sell T-Bonds, they are as liquid as any other assets, the bank just lost money on it. If the T-bonds hadn't lost value they wouldn't have collapsed, they would have just sold the bonds.
It works usually. The bank can spread out the maturity dates of money such that they'd generally have enough cash on hand to be able to meet withdrawals. The higher yields mean they can still have some cash on hand and still pay some interest to their depositors.
Na, taxes create demand for currency, which maintains the currency's value. Then you just print or borrow the currency into existence to fund the government.
People are forced to acquire the currency to pay their taxes or risk being assaulted by the violence of state and dispossessed of a lot of their stuff and/or freedom.
Is this MMT? There was a flurry of articles about it a couple of years ago, airily explaining that it’s fine for all the governments to print unlimited money now because they can just curb any inflation by raising taxes.
Ignoring the fact that elected governments do not, of course, do that.
"Fiscal Theory of Money" is a nice story. Economists often tell worse stories about money (Graeber).
Fiscal Theory of Price Level seems to be inspired by Fiscal Theory of Money.
"The literature on the fiscal theory of the price level (FTPL) integrates discussion
of monetary and fiscal policy, recognizing that fiscal policy can be a determinant,
or even the sole determinant, of the price level"
>> government doesn't need taxes to fund anything, it can just create money and sell bonds.
This is a nice fiction a lot of people spout. The consequences of that are inflation or default. Inflation is very unpopular but defaulting ends the game because investors won't buy the bonds after that. There are consequences to ignoring debt.
My country has an 8% budget surplus before interest payments, and 2% deficit after. What would be the consequences of ignoring/defaulting on that debt exactly? Seeing as how it's already doing fine with an 8% surplus.
I can think of other (political) consequences, but not economical per se, if you assume that a loan has a risk of default priced into its interest rate.
The obvious consequence of defaulting in your debt is that it becomes difficult to go to the capital markets in the future if you need to.
Probably more politically disastrous is that if the debt is denominated in the domestic currency, it’s likely that a substantial portion of the bond holders are domestic and they will not be happy about having their wealth confiscated.
Speaking from my German perspective. Our (European) central bank printed central bank money like crazy the last 10 years, and apparently it was not a problem. Prices only shot up once there were supply shocks due to Covid and Putin. And sure enough, the supply shocks are slowly waning, and hence YoY inflation rates are also rapidly declining.
Yet everyone keeps talking about how the money supply is causing inflation, even though there is no plausible direct connection [1] between the amount of money in some bank account somewhere and consumer prices. The bakery down the street does not look at federal reserve rates when figuring out their bread prices.
[1] I'm guessing that someone will be able to explain this to me. But keep in mind that your explanation should cover how we could have over a decade of near-zero interest rates and the respective money supply inflation without seeing any significant consumer price inflation.
It's not accurate to say the EU has been printing money like crazy for 10 years, when for most of that time, the money printing was minor compared to 2020-2022.
Europe, much like the US, was printing money, at a fairly steady rate from 2008 to 2020, at which point they doubled the money supply in a little over a year. That is, they printed more money in ~18 months then they had since the EU was formed.
At a very basic level, more monies in circulation means each individual money is worth less than before. If each individual money is worth less than before, you need more monies to buy something. This is fine if you have more monies on hand to compensate, but generally this isn't the case for individual persons.
Thus, you have inflation: The price of goods inflate(!) because the value of monies drops inversely to the monies in circulation.