I have this innovative idea for business. Imagine you charge money from depositors for keeping their money in a big safe vault. No trading or lending their money. You just keep it safe.
That's just a waste of capital and leads to zero business investments. It's exactly what happens in crypto because it's deflationary, and it's the main reason there is no crypto economy beyond the price speculation.
Yes, this is essentially correct. Every few months the idea of narrow banking is re-discovered and presented as a magic cure-all.
What played out over the past week was all fine. The FDIC and Treasury worked.
The contagion was the VCs freaking everyone out. It was a bad week for “leaders in tech” fomenting FUD when they could have been calming the situation down.
SVB had safe assets. They mismanaged interest risk. The government stepped in. It’s fine.
No it just increases the hurdle rate for valuable investments. It just means that entrepreneurs have to prove that their ideas are worth more than the security of knowing your money is safe. Is that so bad??
If you expect individuals to evaluate investments, then you're nuts - but if you're saying that the bank should do it for them, then you're suggesting the same system that already exists.
It's not that weird. It's basically a checking account. Lot of countries those have fees attached. It's also the historical origin of banks. strong men with vaults to store your coins. It's no longer attractive because of fiat currency, which has strong inflatuonary pressure; and because of the fish-in-water effect of two
centuries of capitalism, people no longer can distinguish between savings and capital, the divider between those two conc3pts is no longer part of the mental model of forms of wealth.
Narrow banks are no longer attractive because lending out depositors’ money has positive externalities. It’s used to fund mortgages and small business loans. That’s a positive.
Are there downsides? Sure, but what we saw this past few days is that the system worked. SVB was dumb, the federal government stepped in to save deposits, management was fired because they did dumb things, and the shareholders were likely zeroed out because they owned the company doing dumb things.
Yes, we could pull money out of the financial system, but that might well be worse for everyone.
I know it's very trendy to advocated for that, but we do know that the removal of the gold standard was an attempt to keep the United State economy from melting down too, right? It's not actually a solution to all our economic woes. Sure, removing the gold standard created a new class of problems but going back isn't going to stop the ones we used to have.
>I know it's very trendy to advocated for that, but we do know that the removal of the gold standard was an attempt to keep the United State economy from melting down too, right?
I'd rather it was let to melt down, learned the lesson, and we went for a more sustainable model.
In big business it's called Treasury, which derives from Trezor or Safe.
For example Apple will have a Treasury department to manage it's cash. They don't put it in safes anymore, because, well you seem like an honest person, but your predecessors had a tendency to steal the money from the safe.
You generally don't put it all in one Bank either as they have a tendency to either steal it or gamble it on the markets.
A treasury I worked at had software that would pull money from banks across the world into more trusted banks. That's called cash pooling.
Then traders in the treasury market would buy up government bonds from stable governments.
This costs money and is big business.
So perhaps there's a market for treasury as a service (TAAS).
Interestingly, even the current, very inefficient and clunky set of popular cryptocurrencies can fit that role quite well. You can quickly buy and sell millions in BTC and ETH and no bank can go and gamble with it even if you leave it there for years. The only obvious problem is volatility, but that goes both ways.
> A narrow bank takes deposits and invests the money in interest-bearing reserves deposited at the Fed. Because that’s all these banks would do, they would be very low cost and hence could pass along to depositors the interest earned on reserves, minus a small fee. Narrow banks could attract many large depositors, who currently receive much lower interest rates on their deposits at ordinary commercial banks.
This does not sound like keeping all the cash in a vault, this looks like reselling a service of the government not meant for this use.
It could be interesting to see if a service oriented to very low interests (or even negative) rates would be (in theory) feasible.
I'll add on to that idea. What if that is considered a basic human right. One line in a database with your name and a number. And governments, the most powerful entities on earth offer it for free.
Doesn't seem very expensive to offer compared to the amount of times we have to bailout banks....
The problem there is the idea of "money". You can keep your float variables safe in a big vault called a distributed acyclic graph, but there's not much we can do about how people view what those numbers mean compared to the price of a toilet seat.
You're talking about the gold standard, there's better things to do with gold.
These crisis are like car crashes, they happen. But in the end, it's still fun to drive cars really fast, overloaded on wet, winding roads at twilight.
Your money becomes less valuable in a bank too, as a bank account is not an investment vehicle anyway. It's just that now you also have the added risk of the bank defaulting like SVB.
If you want to invest, invest. If you don't, you shouldn't have the added risk tied to your "sitting in the bank" money, just inflation.