Brent Nyitray
Fairlington Blade
Let the mutherfuker burn!
jnc4p
Kevin S. Willis
Michigoose
lmsinca
markinaustin
Arcanaut
novahockey
quarterback
ScottC
yellojktSuppose you own a store and want to protect your inventory from shoplifters. You probably pay to install video cameras, and may even hire a security guard to wander around. Suppose you are a celebrity, and want to protect yourself from adoring and perhaps not so adoring fans. You probably pay to hire a bodyguard to travel around with you. Suppose you own a cache of diamonds and want to protect it from theft. You probably either pay to have a safe installed in your house, or you pay for a safe deposit box in someone else’s safe.
The common thread here is that, if you want to protect something, you generally have to pay to get someone else to protect it. Oddly, however, when we want to protect our money, what do we do? We deposit it in a bank and, rather than pay them to protect it, we expect them to pay us for the privilege of protecting it. This makes no sense whatsoever.
The truth is that the only reason that banks are able to pay interest on deposits with them is because, far from protecting our money, they are putting it at risk. That is precisely what interest represents…a premium received as payment for taking the risk that one may not get back one’s money. And that is precisely the service that banks perform when they take deposits. They do not protect your money. They help you earn more money by putting what you already have at risk.
The federal government has obscured this fact, and through its federal guarantees on bank deposits led people to believe that they should be able to earn money with their money without ever taking any risk. FDIC offers up the possibility of a free lunch. This is a nonsensical view of reality.
There are some real economic benefits to FDIC insurance, but they derive mainly from tricking people into taking risks with their money, through the promise of a free lunch, that they wouldn’t otherwise take. If you really wanted to protect your money, you should rent a safe deposit box at a bank. This is a service that banks do provide, and you have to pay for it. But if you put your money on deposit with the expectation that it will grow, you should be prepared to take the risk that your money might be lost.
The common thread here is that, if you want to protect something, you generally have to pay to get someone else to protect it. Oddly, however, when we want to protect our money, what do we do? We deposit it in a bank and, rather than pay them to protect it, we expect them to pay us for the privilege of protecting it. This makes no sense whatsoever.
The truth is that the only reason that banks are able to pay interest on deposits with them is because, far from protecting our money, they are putting it at risk. That is precisely what interest represents…a premium received as payment for taking the risk that one may not get back one’s money. And that is precisely the service that banks perform when they take deposits. They do not protect your money. They help you earn more money by putting what you already have at risk.
The federal government has obscured this fact, and through its federal guarantees on bank deposits led people to believe that they should be able to earn money with their money without ever taking any risk. FDIC offers up the possibility of a free lunch. This is a nonsensical view of reality.
There are some real economic benefits to FDIC insurance, but they derive mainly from tricking people into taking risks with their money, through the promise of a free lunch, that they wouldn’t otherwise take. If you really wanted to protect your money, you should rent a safe deposit box at a bank. This is a service that banks do provide, and you have to pay for it. But if you put your money on deposit with the expectation that it will grow, you should be prepared to take the risk that your money might be lost.
Filed under: Uncategorized |
All Things in Moderation 
scott, great topic for discussion. But at first blush, I think you're far out there on this one. Maybe it's a question of changing the $ limits and/or rules on FDIC insured, but we cannot literally put our money in a mattress. Modern times require that we make at least minimal electronic transactions, which requires a bank account of some kind. So we effectively mandate that citizens must have some kind of deposit account that the financial sector can crater with abandon as they wish and we have no recourse? Second, I think you really are conflating. Does FDIC require that institutions pay interest on deposits? Is that not a marketing competition matter between the banking institutions totally separate from FDIC deposit guarantees?
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Scott, couldn't you argue that the fees banks pay for FDIC results in a charge to me, the depositer in the form of, for example, lower interest rate paid? Also, if tax dollars are required to make an FDIC account whole again, that results in,'eventually, higher taxes, or at least reduced spending in an area that I may prefer (like defense?)The cost, or fee to "watch" my money is built in already, so maybe the point is how much of the deposit is insured. I get the reasoning behind FDIC, and I also recognize that interest paid is no guarantee. Further, just because a deposit needs to be made whole through the insurance doesn't necessarily mean there was criminality or malfeasance behind that loss. Interesting, and makes me wonder if FDIC max should be determined by the accountholders desire for return.
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Was this your controversial idea? I'd say so. Isn't FDIC a two way street in that it protects the banks as well. If the banks start to keep my money in a vault, with my name on it, then I'll pay them to protect it. Otherwise they're making plenty of money in fees for services, interest on various loans and credit cards . I remember the week before WaMu fell, the only thing that prevented a run on the bank was FDIC.I think your idea is a libertarian fantasy, no offense. I don't understand the fascination with undoing the meager protection the general population of modest means barely hangs onto.Do you think this would benefit society in general in some way or is it just to be consistent with a free market approach to all things?
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I couldn't get that FCIC link in the Link Dump to work. I can find it elsewhere when I have more time, just thought I'd mention it.
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okie:…we cannot literally put our money in a mattress.Sure we could. It would be bad for the economy overall, which is one reason why the government encourages people to invest their money with banks by providing a guaranteeing.Modern times require that we make at least minimal electronic transactions, which requires a bank account of some kind.I am not arguing against the existence of bank accounts. i am simply saying that if you want to hold your money in a risk-free environment, you shouldn't get paid for it.So we effectively mandate that citizens must have some kind of deposit account that the financial sector can crater with abandon as they wish and we have no recourse?No, that is the exact opposite of what I am saying. I definitely don't think citizens should be mandated to have any kind of account. (And that includes a health insurance account. 😉 ) And, again, I am saying that if you want an account that cannot possibly "crater", you should have to pay for it. There's no reason for you to get paid interest for such an account.Does FDIC require that institutions pay interest on deposits? Is that not a marketing competition matter between the banking institutions totally separate from FDIC deposit guarantees?To be sure, paying interest is a way for banks to encourage you to give them your money. But to what purpose? To take your money and put it at risk, that what! That is what banks do. My argument is not with interest being paid. It is with people expecting a return on guaranteed funds. The return comes from taking risk. If you don't want the risk, don't expect a return.
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McWing:Scott, couldn't you argue that the fees banks pay for FDIC results in a charge to me, the depositer in the form of, for example, lower interest rate paid? Yes, it definitely lowers your return. But since your funds are fully guaranteed, any return is too high. You are not taking any risk, so for what are you being paid?
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This is an interesting and provocative idea. Perfect for the group. I'll now proceed to tear it to shreds. I'm just keeeeeeeeeeeeding. ;-)I think you miss one basic point. The concept of insurance is far from novel or limited to the FDIC. Has anyone here bought a house? Let me guess. You probably paid a few thousand for title insurance. FDIC premiums cover the cost of closing down the occasional insolvent institution. Sure, it's a government sponsored institution, but don't kid yourself that abolishing the FDIC would change anything.The other problem being that there is an entire parallel system known as money market accounts. If you want higher returns with a little risk, be my guest. You don't have to participate in FDIC. Put your money in a money market account. You can even get checks to draw on it.I would argue that Scott's approach was disproved in the financial crisis. When the buck was about to be broken (in other words, that MM accounts would lose money), the government stepped in as the alternative would have been catastrophic.To sum up, it's a great idea. Events have proven that it doesn't work.BB
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Hit post too fast. I remember the week before WaMu fell, the only thing that prevented a run on the bank was FDIC.Yes, that is definitely a benefit of FDIC. It prevents runs that might bring down a bank which otherwise could survive. (Not WaMu, obviously.)
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More to say…must run. Will be back. (May even use first person pronouns then).
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Wow, Scott! Talk about out there!! First, I'd have to say that if you think my bank is paying me to keep my money there, I want to know what bank you're keeping your money in! I currently have >$7,000 sitting in my checking account (since I'm getting ready to close that's higher than average, but nonetheless) and I made exactly $0.01 on that in interest on my last statement.Second, okie's comment is spot on: in today's world, you can't get away with NOT having a bank account. Many employers won't cut you a check anymore, they require you to have direct deposit; what happens if your bank fails the evening that your paycheck gets deposited? And that mandate is not being made by the government, but by individual employers large and small.Third, we've already performed this experiment, and it turned out abysmally if you listen to my grandparents.
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BB (OT):Desert Edge Pub is still there, although you'd be amazed at the changes in Trolley Square. They've built a huge Whole Foods there now which takes up about half the block. Changes!You'd be pleasantly surprised in the change in the beer scenery here now, though; a couple of really good larger local breweries (Squatters [one of their top sellers is Polygamy Porter] and Wasatch breweries) along with several microbrews. Plus, the homebrew movement is alive and well.
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Problem, how do you indicate just what you are responding to without lots of initial posting of quotes?This disagrees with the initial post as i haven't yet read the comments.Nonsense. What determines how much risk you should have to accept is whether you are expecting reasonable returns, (right now 5% is excessive, since Loans on good mortgages are less) or excessive returns. Banks should not be allowed to offer particularly excessive returns, because they would have to speculate in order to generate their own returns in order to have the income to provide those excessive returns. Banks have a privilege, the ability to create money, given them by the government, and should therefore be held to conditions that might otherwise be themselves excessive. You want excessive returns, then play the poneys or the stock market or become a derivatives trader or run a Ponzi Scheme. Banks should be what they are intended to be, sources of safe loans using fundamentals that help insure safe returns. That means using statistics to set rates that normally produce income, and retaining enough reserves to deal with the awkward times when investments fail at more than normal statistical rates. The law of large numbers protects banks and fair insurance companies. Speculation arrives when you decide you know a way to circumvent the Law of large numbers. When you think you have a system to beat the House in Vegas, you deserve to lose big when you get your lesson in Vegas, which is the House always wins.We should be able to insist on our bank savings being perfectly safe.
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Now You may seek even safer money storage, by using a Credit union, but you usually get only slightly better minimum returns. They are more regulated than Banks, of course.
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"how do you indicate just what you are responding to……………………………………." Cef, this is much like the old Who Runs Gov site without nested replies. The easiest way is to address someone by name and maybe just a small part of their comment you're responding to. You'll get so used to it you'll eventually object if someone suggested we change it. It might take a little while though. It is much more stable as well.
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I agree with cef 3:10, I don't think there is a reasonable argument against, unless a person styles himself a "libertarian", which is, sorry, to be a laughingstock, not serious in any case.
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"And that is precisely the service that banks perform when they take deposits. They do not protect your money. They help you earn more money by putting what you already have at risk."Hilarious. Ridiculous.Pass book savings account, exotic CDO "products", what's the difference? You deposit it, they risk it, case closed.
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They obligate themselves to pay you some tiny rate of return and they'll put you all in, for themselves. They lose you lose, they win, you get your little return. So what is the alternative? People ignoring banks and bankers and then we're back to feudal investing. Or, we could get in the shirt pockets of bankers and make sure they don't play, we win you get a little, we lose you lose it all games, with our money. Bankers think it is their money, since we could "choose" to shove it into mattresses. "We will not protect your money" Does it say that in your advertising?
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Luckily banks learned their lesson that they'll be no bailouts. Wait… What?" …to be a laughingstock, not serious in any case. Ahh, the "delegitimize"' gambit. Well played. The laughter soothes the ears.
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Shrink, may have jumped the gun here. Is it your your belief that Scott argues above for the elimination of the FDIC? And/or, do you think interest should be guaranteed on an FDIC account?
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Medical profession says, you treat yourself, or, you pay us whatever we want and if we are totally incompetent, you lose! But we will not protect your health, we are here to make you better, is that it? You protect your own health at no risk, but you come to us, you put your health at risk, no we'll put your health at risk for a fee, you might get better, or not. I like this model, no FDIC, no malpractice.
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Troll, no and no.
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Troll are you a libertarian?Really? Are you really?
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"We will not protect your money" Does it say that in your advertising?I want an answer to this.
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Shrink, I'm a registered Republican with a strong, Arizona Goldwater Libertarian tendency. Along with a belief in the E. Abbey solution to illegal immigration.
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Michi, I'm processing tomatoes (or tuhmade-uz, or toe-matoes) so I can't yak, but he is in bad shape, I hope he gets the help he needs.
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Troll, what was Abbey's solution to illegal immigration? I don't remember it, but since I thought his solutions to everything were a little simplistic I'm guessing that I'll have to disagree with you on that one. Trying to keep an open mind, though.Ohhhhmmmmmmmmmmm
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Mich:First, I'd have to say that if you think my bank is paying me to keep my money there, I want to know what bank you're keeping your money in! Well, it is certainly true that banks are currently paying essentially no interest on deposits. But that is a function of the current interest rate environment, not a function of the guarantee on deposits.
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shrink, so long as you aren't processing toe-nails like bernie I'm happy.
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True, Scott. But I still think you're out there on your anti-FDIC idea!
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He thought illegals should be given an M-16, a box of condom and then returned to Mexico (or parts south.). Simplistic? Yeah. He was a Erlichian vis a vis population however. I don't accept that. The solution, thanks to Justice's "Gunwalker" insanity, is implemented.
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Mich:Third, we've already performed this experiment, and it turned out abysmally if you listen to my grandparents.Which experiment? Not paying interest on guaranteed deposits?
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Earl:We should be able to insist on our bank savings being perfectly safe.If your deposit has no risk whatsoever, why should you be paid any return on it?
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shrink:Pass book savings account, exotic CDO "products", what's the difference? You deposit it, they risk it, case closed.Nope, not what I said.
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shrink:They obligate themselves to pay you some tiny rate of return and they'll put you all in, for themselves. They lose you lose…Uh, no. That is precisely the point. Even if they lose, you don't. That is what the guarantee does. So why should you get returns for that?
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Scott–no, the experiment was not having a backstop for the deposits if the bank went under (which was NOT due to the depositors' faults).
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(Scott. . . you're enjoying this, aren't you?)
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"We will not protect your money"Does it say that in your advertising?If you want people to recognize that no one is protecting downside risk apart from their own jobs, I'd support that! Then everyone knows what a bank really is. Full risk, a casino poker game, they're in, you're in. If that is what it is, people would leave banks alone. Is that what it is?People think
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oops, that they have something in banking. Something other than a puny return or lose it all. If that isn't true, then bankers need to get a job, generating wealth (digging irrigation ditches) and we'll create investment banks that work.
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Scott: You got one chance and blew it. You go back in my do not read or respond file.
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Earl, are you still around? Jump to the Bits & Pieces thread for a second if you are, I've got an OT for you.
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Earl:Oh, can't I have just one more chance? Please? I so crave your attention and approval.
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Obviously anyone can just ignore whomever they choose but it might be best just to do it. Just my opinion.We've all been looking forward to a post from you cef, hope you're not giving up on us already.We're still just getting started so if you have any suggestions or ideas we're all ears.
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shrink:Just because something isn't guaranteed doesn't make it a casino bet. And I never said no one is protecting against downside risk. I just said that to get an upside, there needs to be the possibility of downside. There is no fre lunch.
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ScottWhy should there be a downside to a savings account as far as risk to the depositor. That money goes back out in much higher interest loans that the bank generally makes a nice profit on. I just don't see calling a nearly 0% interest savings account a free lunch. If some of the profits the banks make on their depositors capital, the banks are essentially holding, pays for insurance to protect the depositors, that seems like a good deal for the banks and their customers.
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"Scott: You got one chance and blew it. You go back in my do not read or respond file."Lol some things never change. Scott is exactly right about this, and cef (to pick someone) completely misapprehends the nature of reality here.What most or all of you seem to be missing here is that "store my money for me, and keep it completely safe," and "hold my money for me, and loan it to other people to use, and pay me interest for this benefit I am providing you," are two entirely different arrangements with entirely different and inconsistent implications. As Scott said, absent government insurance, if you wanted to keep your money safe, you could put it in a safe deposit box for which you paid rent. You could put it in the mattress or a coffee can buried in the back yard. Or you could in theory just "deposit" it with a bank with the agreement that it will hold it in safekeeping in a vault.This is not what you do when you put your money in a bank account. You are paid interest on deposits only because you allow the bank to lend your money to other people, which means it is at risk. And it would be ridiculous for someone to say to a bank, I'm putting money in this safe deposit box, and I want the same interest I would get on a savings account. You would be laughed out of the bank. The bank is providing you a service: keeping your money safe in a vault. It can't make any money on your money, because it has to keep it in the vault, so it is literally absurd to think that the bank should pay you to provide this service.When you deposit your money for the bank to lend to other people, on the other hand, you are providing the bank with a service, for which you are appropriately paid interest. But your money only makes money for the bank and you by being put at risk — exactly the opposite of "keep my money safe." And, absent government insurance, it would be equally absurd for anyone to say to a bank, I want interest on my money and at the same time I want you to keep it 100% safe. Interest accompanies from risk, plain and simple.Folks, if all this were not true, FDIC would not exist. And the only thing that obscures the reality of the risk involved is the FDIC. Government has stepped in to bear the risk at which your money is placed to earn interest, making it appear from your perspective that your money is completely safe and earning interest at the same time. It isn't completely safe; the government has simply assumed the risk. Whether this is a good thing can be debated, but the economic reality behind it cannot be.
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The modern necessity of having a bank account for payment purposes, btw, is completely irrelevant to this reality. It is no different from the safe deposit box. You could put your money in a bank account to be kept safe and to use to pay your bills, without earning interest. But you would have to pay for this service the bank is providing to you. The fact that you need an account to make payments from isn't a basis for you to tell the bank it should pay you interest on the money that you have asked it to hold — in safe keeping and not to be lent to other people.
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"Why should there be a downside to a savings account as far as risk to the depositor. That money goes back out in much higher interest loans that the bank generally makes a nice profit on."I think the first mistake here is posing this as a normative question rather than a descriptive one. Your money is in fact at risk, The bank has to lend it to someone else to make more money on it. It might not be repaid. If your money is not paid back to the bank, it can't be paid back to you. Thus, asking why your money should be at risk just because it is lent to somone else is something like asking why you should be at risk of diabetes because you eat too much sugar, or why your car should be at rsk just because you let your 16 year old borrow it.
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You both (qb and Scott) seem to think that the average, rational, reasonable person deposits their money in the bank assuming that he's taking a risk.You're both wrong. Sorry.
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I understand Scott's model but I do not understand the use of an imperative "should".Just as one can buy insurance against loss on any other investment, one can buy insurance against loss from lending to a bank [which is what depositing amounts to]. In fact, in Texas, one can buy private insurance on one's deposits in commercial banks.That the insurance scheme available to all was one concocted in the FDR Administration in which banks pay into a federally administered fund that is used for the bankruptcy model for banks and to guarantee against loss of deposits up to a point is a fact of history. There is no reason your deposits "should" or "should not" be insured other than your willingness to deposit, insured or uninsured, and to pay or not pay for the insurance, either directly or indirectly. The banks are beneficiaries of this system as constructed, as well, as many of you have written.Again, I have no problem with the distinction you draw between depositing at risk and depositing with insurance against risk. I only have a problem with your notion of "shoulds".To be clear, there is no congressional expenditure for the FDIC. It is funded by the depository institutions. We as lenders to those institutions pay the cost in lowered return on our loans to the banks. It is thus misleading to say "the government" has stepped in to bear the risk.If I have not made this clear, let me know and I will try again with other examples.=============================Scott, on my post you asked if FDIC was negative in the decade. It was not.That is irrelevant to the discussion, however. When Sheila Bair testified in '08 she said FDIC could handle many WaMus, but it could not handle the failure of Citi or BOA. That is the issue that delineates the problem of the merger of financial services. Commercial banks are reinsured as lenders and their potential insolvency and reorganization is covered through the FDIC. But when a commercial bank in fact speculates like an investment bank its failure creates the phenomenon we called "too big to fail". And that is how we got TARP.It also seems that you overlooked the AIG case. This largest and most trusted of all insurers took it upon itself to write credit default swaps, or insurance against loss, ostensibly making the packaging of subprime mortgage backed securities "safe". There having been no banking, commodities, or insurance regulation in place on these instruments AIG sold them without reinsurance or reserve, and they were merely beanie babies. The argument AEI and Mallaby [who I cited] make here is essentially caveat emptor: no one should have bought packages of subprimes [or worse, packages of subprimes, auto loans, and credit card transactions]. The focus is on the existence of these weak collateralized debt obligations rather than on the want of regulation of them. If Congress had not pushed mortgages off on marginal borrowers then the packages would have been stronger. Well, that WAS part of the problem. But I can easily illustrate that it was not the major part. If there were 5 million bad mortgage loans out there, their total default, assuming zero recovery on the resale of the foreclosed property, assuming, that is, worthless collateral, could have reached no more than one trillion dollars, give or take hundreds of billions. But the unregulated beanie babies totaled over $60 trillion dollars and still do! Doesn't that disconnect amaze you? It should. UT 49 UCLA 20
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Scott, this historical note is for you.I think abrogation of Shad-Johnson, in the aftermath of the statutory changes, was the single most dangerous deregulation.http://www.sec.gov/news/speech/spch465.htm
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Mark: "I think abrogation of Shad-Johnson, in the aftermath of the statutory changes, was the single most dangerous deregulation."Goodness, I lack context, and that was hard for me to follow. Could someone give me the essence I could not extract on my own? What was the problem with the abrogation of Shad-Johnson?
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Mark, a very cogent and appreciated argument. Thanks. I find that having a dialogue with bankers and lawyers is going to force me to be very specific and spend a lot more time reading, yikes. That's not a bad thing but I hope I have the time and the skills. I love this place already.
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Kevin, back in the RWR Admin the SEC chair, Shad, and the Commodities chair, Johnson, reached an accord whereby it was known which body would regulate which derivatives. This was consensual regulation by traders, in part, not Congressional statute or executive branch regulation published in the Code of Federal Regulations. As I understand it, the players thought the deregulation opened the field to new financial products and that Shad-Johnson served no purpose because the two exchanges would be busy dealing with new products. But neither exchange dealt with the new products. sort of like the SS and the 2b both yelling "YOU got it" on a pop-up that falls lamely between them.I recall that in the finreg struggle of 2009 who was to regulate the flood of derivatives was an issue and the Admin punted. Folks thought this opened the way to a new Shad-Johnson type accord but I do not think there is one.On this, I wish john/banned were here because I think he was on top of that. Maybe Scott knows.BTW, why I addressed that to Scott is that I may be the only person in the world who thinks the Shad-Johnson abrogation was critical. People in the industry[ies] may think even if the accord was in place both exchanges would have said "not my job". So I wanted Scott to think about the idea and critique it to help me weigh my speculation.
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@Michigoose – It's been a busy week, so it took me a bit to get back to this. I was a regular at Squatters (loved the Jambalaya) before I migrated over to Red Rock. I actually started doing my first all grain brewing in Salt Lake City. The first beer I ever designed was Utah Centennial Ale, named for the Centennial of Utah (when I lived there). It was an American Pale Ale, using Centennial hops (natch) and Gambrimus Honey Malt. Love that stuff.I"ve been slow to start posting, but will be more active.BB
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