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The Register has a eminently readable explanation of why big banks are considered too big to fail, and get government bailouts after mismanaging their financial situations.
We seem to rage every time this happens, Let them go Bankrupt! seems the cry from the man in the street.
But that is a juvenile approach which will hurt far more people than those few officers miss-managing the bank or its funds. Banks don't have funds. Its all your funds. And if the bank fails, you mostly get nothing.
The article explains just what banks are (for those of you who slept through Econ 101), and what they are not. Its worth a read! And don't skip the comments section on the article. Many posters had no problem with bailing out the banks, but railed against bank management officers who rarely or never face any serious charges.
When you look at it this way, the federal "Stress Tests", and Forced Closures (over 500 since 1998) imposed on US banks, large and small, was the right course of action when combine with holding our collecting noses and bailing out the big ones.
Its too bad the stress tests, measuring a bank's ability to withstand withdrawals, loan defaults, and deposit slow-downs from unemployed depositors, weren't imposed far earlier. Local and national Banks have learned at least part of the lesson, and are closing money losing branches at a record rate, in favor of ATMs and digital services.
(Score: -1, Flamebait) by Anonymous Coward on Monday May 18 2015, @09:54AM
You have no fucking clue, do you? No, it does not at any time become the bank's money, and the bank does not give you credit. The bank borrows your money and pays you interest for the privilege of borrowing your money, idiot. If the bank fails, and they do, the government guarantees that you will not lose your bank balance. Ever heard of the FDIC? No, I didn't think you had, you ignorant shit.
(Score: 1, Funny) by Anonymous Coward on Monday May 18 2015, @10:12AM
Jeez, take a valium and go lie down, you're going to rupture something.
(Score: -1, Redundant) by Anonymous Coward on Monday May 18 2015, @10:17AM
if a big bank fails, the FDIC aint gunna save you
do you have any idea how much deposits are insured by the FDIC? no, i didn't think you did, you ignorant shit
(Score: 2) by Dunbal on Monday May 18 2015, @03:56PM
Yet another person who didn't read the fine print when they opened an account. Possession is 9/10ths of the law. Yes I've heard of the FDIC. Your deposit is "insured" up to 250k. So when the bank disappears with their - sorry - your - money, then you get to wait in line and fill out forms and eventually you can get "your" money back. Provided you meet all the criteria. You know there are exceptions, right? Now maybe you can think a little bit about why oh why the government went through all the trouble of making special laws to bail out the banks instead of using existing laws and mechanisms to cover deposits at risk. Hmm, what a conundrum. Also - umadbro?
(Score: 2) by jmorris on Monday May 18 2015, @06:33PM
Yup, it does. Banking is a huge crime as it is done in pretty much every 'civilized' country. Study the term 'Fractional Reserve Banking' and then Google the Dark Enlightenment term for it, 'Maturity Transformation' and then tell me which one more accurately describes reality.
When you deposit a thousand into the bank you are told three contradictory things:
1. That it is your money, you can write checks against it freely.
2. That banks work through the magic of loaning out most of your money and collecting interest on it.
3. If you figure out the inherent impossibility of both being true if the economy in general doesn't hum along normally they bring in the FDIC insurance, which just pushes the problem back one level. Instead of losing all/most of your money if one bank fails to a mindless panic or actual failure of the management to do their jobs, you only lose your money if a lot of banks fail and the whole economy comes crashing down.
The underlying problem is that you are not depositing your money like they say, you are giving them a zero duration loan at zero interest (usually, fees can make it a little negative and if you can still find interest bearing checking you get a fraction) and rolling it over. They on the other hand are loaning out your money for longer duration at higher interest. They are transforming the maturity and depending on a very small reserve backed by a larger drawing capacity from larger banks in a chain all the way up to the Federal Reserve to maintain the illusion you can freely withdraw.
The problems with this pyramid like scheme are many and shouldn't have to be listed in a conversation among the mathematically literate. So long as they can depend on 'too big to fail' it does make banking highly profitable without any of the risk that used to accompany the industry. So atop an immoral business practice we now slathered on a layer of crony capitalism where success is reaped as profits and losses are socialized. The incentives are to make risky loans, riskier covering trades and pocket big bonuses until something goes wrong and then let the FED and the taxpayers worry about it.
But one of the problems must be called out. The creation of virtual money implied in fractional reserve banking is THE cause of the economic cycles of boom followed by bust. Solve this one problem and a lot of other problems become more tractable.
We need to demand 100% reserve banking. That means no loaning out checking deposits and changing savings to involve fixed duration to match the loans so that at any time a bank could be perfectly liquidated by matching deposits vs loans with no mismatches in maturities. No depositor needing immediate access being told they must wait for a thirty year mortgage. Yes this makes banking a much higher volume, lower margin business and it means fees rise. But systemic risk in the economy plummets. And with the modern financial markets it isn't even as bad as it sounds. Lots of financial instruments are out there to 'cover' things. Just make sure we don't smash one pyramid only to build a more hidden one under all that secondary market stuff.
(Score: 2) by monster on Wednesday May 20 2015, @07:58AM
Sorry to pop your bubble of thinking, but you have it backwards. Fractional reserve banking goes backwards at what you say, being much younger than virtual money. A bit of history:
Modern banking gets its roots in the medieval religious orders, mainly the Knigths Templars and Knigths Hospitallers. To put some perspective, in those times if you wanted to get your money to another city to pay for something (goods, soldiers, repay some loan, whatever) you had to take your gold there, fighting if needed to, risking losing it to bandits, the sinking of your ship, treason and many other issues. So, when you have a "transnational" organization with rock-solid reputation, huge possessions and the backing of the Pope which offers you a service in which you take your gold to one of their delegations, exchange it for a document of pay (a primitive IOU) for the same amount that you can take with you much more easily and without raising suspicions, get to your destination and change it back in another delegation, it was a huge boon to commerce. People got to work with them because it was very secure (much more than the alternatives) and convenient.
Now, you may think that nothing of what I said allows the Knights to "create" money, since the IOUs are given against money taken. That would be shortsighted, however, because even them would lose ships sometimes, and if they were carrying gold... bad luck. But they also had castles, fiefdoms and frequent donations of their own, so they could easily not only back up those losses but also offer credit (without interest, in principle, because taking interest goes against christian doctrine). But since each delegation could only send "upwards" the information about their loans, there was no physical mechanism to limit the ratio of lending against what the order really had, so it was really working on virtual money and "creating" money all the time.
So, centuries passed, empires rose and fell, banks opened and closed, but all of them worked on the same principle inherited from the orders of basing their operations on trust: You trust that the money you take to the bank will be given again to you when you reclaim it because you trust the owner(s) of the bank. You trust it to use it wisely and give you interest on it (the "taking interest" issue was resolved centuries ago). You trust that the bank will not lend too riskly, or too much at a time, because the bank has the backing of their owners and nothing else. But because humans are humans, sometimes some banker would take the money and run, or hide it and claim that he was broken, or some unexpected event would ruin the previously wise invests (like in "Count of Monte Cristo"), or overlend so much that when too many people wanted to take some money back the bank was unable to comply, ruining its prestige (the trust in it) and the whole bank would collapse because people would no longer put their money in it or accept its IOUs as valid. That was a too frequent problem, so much that some kind of restraint was needed to avoid unscrupulous actions, so it was legislated that banks could only lend based on the amount of cash it had received. If it rose, the bank could expand its credit, but if it fell, it would need to stop lending until it got back enough lent money to be again in the correct ratio. Also, a minimum fraction of the money of the bank was legislated as money the bank could not lend and would need to keep (reserve) in order to fulfill ordinary operations.
As you can see, Fractional Reserve Banking was born as a guarantee against overlending, to limit the risks of virtual money, and not the other way. There already was virtual money before FRB.
As for your claim for 100% reserve, it would mean the end of credit, with all what that means. That currently there are incentives to make risky lending does not mean that lending is bad per se. Be careful what you ask for, lest you get it.
(Score: 2) by jmorris on Wednesday May 20 2015, @09:10AM
Banking is very old. Fractional reserve, or loaning more money out than you have in deposits was considered wrong until modern times and the 'new math.' Of course it happened, it is the most common reason a bank fails then and now. And the FDIC doesn't really change it and make it safe anymore than the power and majesty of the Church did. Just makes for a bigger kaboom!
But I want to mainly object to your final statement:
As for your claim for 100% reserve, it would mean the end of credit, with all what that means.
Not at all. It would mean society would have to incentivize savings again so there would be money to lend. Something that every economic model agreed was an essential thing up until the modern Keynesian foolishness that encourages rampant consumerism and passing off responsibility to the State instead of people saving for their own needs. Instead of the stock market lottery being the be all and end all, normal people would be investing more in various grades of bonds. The world would simply be different.
(Score: 2) by monster on Wednesday May 20 2015, @01:30PM
No, it is the way things were for centuries. It's a logical consequence of having multiple branches of your bank at different places without efficient, fast communications. Until the bank could reconcile its books and transfer the difference of funds, any branch could loan more money than it had, and on aggregate even more than the whole bank had. That's why the bankers backed the loans with their own properties, at least until corporations were legislated. But meanwhile, a trusted bank issuing IOUs was just like having the money at hand, so there already was the 'printing money' issue even before fiat money was the norm, it's just that it was privately-backed money and not by the government.
Also, the most common reason for banks to fail were failed loans and that means that either with or without fractional reserve the bank is doomed, it just changes the size of the problem. The FDIC is there not to avoid the bankruptcy of the bank but to avoid that the depositors lose everything. It's like lifeboats in a ship, they will not avoid the sinking, but will allow to save at least some of the people on board.
You seem to think that before Keynesianism was stablished, there was some kind of paradise or 'just world' that Keynes corrupted. Such vision is so much at odds with history [wikipedia.org] it's breathtaking. As for the stock market, just remember the Crash of 1929 [wikipedia.org]. That's before Keynes, you know.