by okie1
The senate banking committee and the fed are getting all geared up to impose new rules on banks, in response to what happened to SVB.
Here’s the thing, though. There is no solution to this problem outside of preventing people from taking their money out, one way or another. Everybody should understand that. The banks took your deposits and flipped them into long term treasuries because they thought rates were never going up ever again, and now they’re sitting on all these unrealized losses (that get realized if you withdraw your money).
But even that’s a mischaracterization of the problem because the problem isn’t that people are withdrawing their money prophylactically, like regulators are implying, they’re simply going about their day to day business: paying rent, buying groceries, etc. This isn’t a traditional “run” on the banks like they’re claiming.
It also wasn’t insider information that led to SVB’s failure, as they’re also claiming. The bank was going to fail no ifs ands or buts, and that is why the insiders took their money out. Would the bank have limped along for another few days or weeks had they not taken their money out? Perhaps. But the crew doesn’t abandon its own ship unless it’s already sinking.
This isn’t the 1930s when people had a lot of savings in banks. The vast majority of depositors only have in banks what they need to pay their immediate bills. People simply don’t store wealth in banks anymore. The few who have wealth keep it in 401Ks and IRAs. So a traditional run on the banks, where the masses are prophylactically withdrawing their personal fortunes, isn’t even possible.
The reason the banks are failing is because the money supply is shrinking. It’s not that people are withdrawing their money and stuffing it in the mattress, like the regulators claim, it’s simply that the money supply, and therefore also deposits, is shrinking due to people making payments on existing loans. The money supply is shrinking the same way it grew, in reverse. Money is created when it’s loaned out, but the money supply shrinks when it’s paid back and no new loans replace the outgoing ones.
So what’s likely to happen from here is they’re going to start talking about limiting withdrawals in the context of large accounts, which will give people the impression that these new rules aren’t designed to affect them. But the regulators aren’t dumb; they know what the root of the problem is.
This is very much like the politics surrounding tax increases. They always sell it as something that’s only going to affect the rich, and when it actually passes it turns out that it excludes the rich and ends up being nothing but a tax hike on the average person.
This is likely to be the same. They’re going to let people believe that these new rules are designed to prevent wealthy people from being able to crash banks by mere panic. In truth, however, the rules are going to be likely to affect how ordinary people are able to use their money for day to day expenses.
In other words, what they’re really talking about are bailins.