[edanm]

Or perhaps the experts at Treasury, FDIC, etc, actually made this decision because they think it's true in their expert opinion, not just because VCs said so?

They're the officials appointed to be the experts at these things by the people elected to run the government, what better mechanism is there for making this kind of decision?

[berniedurfee]

I wish this were true. This is how I thought things worked when I was a kid.

Or did I miss your sarcasm?

[edanm]

I think it is true. Not sarcastic at all. Curios why you think it's not?

[berniedurfee]

Jaded, I suppose.

I don’t think the majority of legislators truly align the best interests of individual citizens to their decisions and actions.

[RandomLensman]

I think the issue is that 15 years after the GFC, again the government seems to be needed to prevent a systemic banking crisis. What ever rules where enacted etc. had maybe very little effect if a small bank (and the 16th largest bank isn't a mega-bank) can bring down the system without a government backstop.

If lending to banks is too risky for most, then perhaps most should not be allowed to lend to banks. Are bank deposits really the right way to fund banks if they come with these systemic risks or should it all be bonds etc. (and then also have very narrow limits for regulated investors)? Maybe a lot more should be direct lending and not bank lending?

[edanm]

I'm not sure I follow.

The depositors aren't lending to banks. They're putting money in a bank. What's the alternative? Have them stash all their money under a pillow?

This wasn't (to my knowledge) an investment bank like Goldman Sachs etc, where people put in money to get upside. It was a bank like any person uses to store their money, cause it has to be stored somewhere.

> [A]gain the government seems to be needed to prevent a systemic banking crisis. What ever rules where enacted etc. had maybe very little effect if a small bank (and the 16th largest bank isn't a mega-bank) can bring down the system without a government backstop.

I mean, the whole original point of the FDIC deposit insurance was because bank runs happen. We prefer people put their money in a bank, it's better for many reasons, but as long as we allow fractional reserve banking (which we should, IMO,) people will always feel at risk, which either makes them not use banks (bad,) or cause a bank run if they do use a bank (also bad.)

The whole point of deposit insurance is to put a government backstop to all potential bank runs by promising people they will always be able to get their money, which causes the system to keep working.

The only difference here is that it's for money corporations put in a bank instead of people (and of course that the amounts are much bigger.) But the same logic applies - we want companies to put money in a bank, and we don't want companies afraid that their bank will fail and they'll suddenly be out all their cash. That would cause worse effects in the long run.

And I'll emphasize, the people getting "bailed out" are the depositors, not the shareholders. They're the people who just trusted the bank to be a normal bank, and that weren't in a position to affect what the bank does. "Punishing" them doesn't help resolve any systemic risk, because they couldn't have acted differently! (Except for spread money across multiple banks, which is against the point because we want people to trust banks and not have to worry about where to store their money, cause that comes at the cost of doing more important things!)

[RandomLensman]

Depositors are lending to banks - the bank is not just storing the money!

For me, what isn't clear anymore is, if we really prefer deposits to be in banks or rather in some other more narrow "thing". If people just want to store liquidity very safely, then maybe there is any offering missing in the market (and in some countries things like that existed prior to GFC but got shut down afterwards. In Germany, anyone could directly deposit daily liquidity with the Bundesbank for while, for example).

Yes, it would take some cheap funding away from banks, but if that were to be long-term bad or not we don't know as different funding equilibria with different market participants might not result in worse lending situations for the economy as a whole.

Btw., of course, depositors can affect what a bank does: if they don't give their deposits or pull them away if they deem the business to risky it does matter. At what point is lending then risky? If a corporation buys a bank bond with excess liquidity not needed daily - should they be made whole, too?