patrick.net

yeah and hire some affirmative action folk to run it too...See how long before all the money is gone.

Our Treasury Secretary says not all deposits over $250k will get covered. Only those held at Systemically important banks.

You may know maturity transformation as “fractional-reserve banking,” which is one common case of the practice. A financial institution practices MT whenever it “borrows short and lends long,” i.e., promises to deliver money in the short term based on the fact that it is owed money in the long term. For example, in a classic fractional-reserve bank which takes checking deposits and uses them to fund mortgages, the bank’s promises have a term of zero (your money is available whenever you want it), and its mortgages are repaid across, say, 30 years.

In a free-market financial system, interest rates would be set by supply and demand. In this hypothetical system, which has existed in the past but does not exist anywhere today, every borrower has an equal and opposite lender. If you want to borrow money for 30 years, find someone who wants to lend money for 30 years.

This design is stable because, borrowing genuine and exogenous cataclysms (asteroid strike, pandemic, etc), neither the demand for, nor the supply of, loanable funds, has any reason to change rapidly. Anything that cannot change rapidly is stable. Duh.

That would be capitalism. This is not how our financial system works. Our financial system is powered by continuously increasing systemic debt which is never repaid:

Specifically, we need a bank that puts 100% of its assets in overnight treasuries and makes zero loans. The bank would not need any loan officers or many operational personnel for obvious reasons. There would be no need for FDIC guarantees because there would be zero risk of a run and zero risk of losses. We can still keep the FDIC term in place, but realistically it would not be needed. In essence, we would create a 100% reserve bank.

Such a bank might pay one percentage point less than the Fed 's overnight rate for safekeeping. If the overnight rate fell below 1 percent, the bank would charge a fee for safekeeping. The bank could also do term deposits at a slight discount to corresponding treasury yields. Depositors would be required to hold assets to term.

To prevent runs on existing banks right, we would let every bank participate in this offering. Customers would have a chance to place their deposits into safekeeping accounts at existing banks.

Bank Lending

To make loans, I propose banks would have to attract investment money instead of lending money into existence. They would do so by offering higher than market interest rates on term deposits, but those deposits would not be guaranteed.

As an added benefit, this setup would end fractional reserve lending. We would have a full reserve system, unfortunately one that is not backed by gold, but it would be a huge step in the right direction.

The immediate economic reaction would likely be contractionary, but that seems to be what the Fed wants now anyway to rein in inflation.