The Fed set the reserve ratio for banks to zero percent in 2020 which absolutely contributed to this latest banking crisis. I wonder why they haven’t reversed course as that would seem a prudent course of action to protect depositor funds from being used for leverage speculation. [0]
Changing the reserve requirement won't fix this. Banks no longer have the deposits, they used those customer deposits to purchase debt (t-bills, corporate bonds, mortgages, etc.).
The debt they own has decreased significantly in value since because who wants to own a mortgage at 3% when new mortgages are at 6-7%? The sooner banks are forced to sell this debt, the more they lose.
Thus increasing the reserve requirement would force early sales of debt and make the bank go further into the red.
To be clear, I agree that you can’t raise reserve requirements now, but zero reserves was supposed to be a temporary Covid measure. We are here in 2023 and the banks are all insolvent having speculated using 100% of depositor funds as collateral.
The Fed tells us everything is fine and we shouldn’t worry our pretty little heads. The Fed is the problem here. They are too close to the banks they regulate. This is yet another example of regulatory capture. Propping up a failed fractional reserve banking system now featuring no reserves.
I don’t want innocent depositors to lose their money but I do think it is high time to reconsider this experiment that is the Federal reserve.
What regulators should have done starting a year ago, and can still do now, is force banks to restore the mark to market value of their equity cushions via share sales.
I agree with that as a short-term strategy to address the immediate crisis. However if we want to avoid more crisis in the future I think it is necessary to re-examine the fundamental assumptions of the existing model.
Also, we have to do something about the issue of regulatory capture. The Fed knew that hundreds of banks were insolvent as far back as September [0], yet they did nothing to protect depositors. Why not and why should we trust the Fed going forward given their terrible terrible track record?
The Fed gave us a decade of zero interest rates. The Fed told us there would be no inflation, then they told us inflation was transitory. As far as I am concerned the Federal Reserve is nothing more than a centralized public relations arm of the banking industry.
There isn’t a liquidity crisis. The government debt that triggered all this is highly liquid. The banks have a solvency crisis. Hence the cash giveaway disguised as a lending program.
A bank which is insolvent/bankrupt but has plenty of cash on hand doesn’t need this, only banks which are both insolvent AND need to recognize that fact because they don’t have cash on hand to meet current withdrawals?
Otherwise they can keep Wil-E-Coyote’ng off the cliff for quite awhile longer as long as they don’t mark to market.
I agree, but a crisis is the ideal time to examine the root causes that led to the crisis and to re-examine the assumptions upon which the environment that led to the crisis were based on.
Fractional reserve central banking is a giant Ponzi scheme that leads to bank failures again and again. Any business that will fail if 20% of its customers use the product as intended (withdrawing funds from a demand account) is fundamentally unsound.
If we fail to learn from our mistakes we are destined to repeat them.
If smoking led to the patient’s heart attack and the patient is still smoking on the hospital bed, I think it is justified for the doctor to tell the patient to stop smoking.
If a heart attack patient were still smoking in their hospital bed, how much impact would this have on their treatment and recovery in the immediate aftermath?
If I were the doctor and the patient had survived the heart attack I would absolutely do my best to get him to stop smoking in order to prevent the next heart attack.
In other words if you don’t fix the root cause of the heart attack (or fundamentally unsound fractional reserve banking system) you are effectively begging for another failure down the road.
But the root cause of the crisis still exists. If you only address the symptoms without solving the root problem that caused the symptoms, then the crisis is likely to happen again.
How many times do I have to come on here to point out this nonsense?
People read “reserve requirements have gone to zero” (which is true) and assume it is so that banks can keep lower reserves. In fact, reserve requirements became meaningless because banks had (and continue to have) so much more in reserves than they were ever required to have under the prior system.
The point wasn’t that reserve requirements were “lowered”; they were removed - because the Fed moved to a different mechanism to set short-term interest rates.
If banks choose to keep lots of reserves (because you’re paying interest on them), it’s hard to change the willingness of banks to lend by changing the reserve requirement, right?
In economic terms, the supply of reserves is meeting the demand curve for reserves in an inelastic region.
So the Fed decided to announce a new approach; the so-called “ample reserves regime” where short term interest rate control would be achieved by administered rates rather than by the reserve requirements of the “limited reserves regime” that went before.
Honestly, "but reserve requirements went to zero!" has become a dog-whistle of some kind. There are many things to pay attention to in the behavior of the Fed, but this isn't one of them.
I don’t understand how the so-called “ample reserves regime” works but I would argue, given current circumstances, that it does not provide for ample reserves.
Could you explain how this new regime works and why it is safer for depositors?
From my read it appears that under the current regime banks can use 100% of depositor funds for leveraged speculation.
How is that safer than reserving at least a portion of depositor funds to support demand withdrawals?
I don’t understand the dog-whistle comment - seems dismissive without evidence. You claim that the move to zero reserves isn’t worth paying attention to but failed to explain how the new regime works or how it is safer for depositors. Clearly it isn’t.
>I don’t understand how the so-called “ample reserves regime” works but I would argue, given current circumstances, that it does not provide for ample reserves.
The ample reserves regime is "banks keep a lot of reserves because the Fed started paying them interest on them, rather than keeping as little as possible because it was more profitable to lend interbank".
It is factually the case that it provides for ample reserves. I invite you to look at this time series: https://fred.stlouisfed.org/series/TOTRESNS ... we can agree that $3tn is more than say $60bn, yes?
>From my read it appears that under the current regime banks can use 100% of depositor funds for leveraged speculation.
... no; because capital adequacy measurements (see the Basel Accords) are a thing, and control risk-taking much more than reserve ratios, which were more of a monetary policy control for short-term rates.
>I don’t understand the dog-whistle comment - seems dismissive without evidence. You claim that the move to zero reserves isn’t worth paying attention to but failed to explain how the new regime works or how it is safer for depositors.
People who are more-or-less clueless about the subject matter latch onto it, and draw inappropriate conclusions from it. If you want to claim that the Fed having zero reserve requirements is encouraging risk-taking from banks, you probably ought to have a theory of "why". It is nonetheless a popular soundbite from the "banks are out of control and the fox is guarding the hen-house" crowd.
The perspective that the Fed's reserve ratios are there to protect depositors is decades out-of-date and (to analogize with subject matter more familiar to most posters here) is about at the level of confusing Java with JavaScript.
If the Ample Reserve Regime worked as intended, then why did SVB (and apparently close to 400 other banks) choose to buy US Treasuries instead of keeping these funds at the Fed?
Clearly the Ample Reserve Regime didn't help in this case since these banks have taken 100% of user deposits and used them for speculation (likely leveraged).
I'll admit that I am not an expert on banking regulations. However since the 2008 Great Financial Crisis revealed the enormous amount of fraud perpetrated by the banks, I've grown skeptical of the Fractional Reserve Banking system and the Federal Reserve and have done my best to educate myself on the topic.
I don't need a theory of why banking with zero reserves is risky for depositors. I can simply point to the evidence of the recent bank failures under the Ample Reserves Regime where the banks clearly did not have ample reserves.
I don't think your condescending tone is warranted, especially given the track record of the banking industry. We are all trying to learn here and could do without the snark.
They're not "banking with zero reserves"; they're just banking under a different and more complicated set of regulations on those reserves than that one simple ratio. In principle that's a better and finer-grained set of regulatory tools, though it obviously didn't work too well for the SVB.
The SVB's problem was that they were allowed to ignore the mark-to-market losses on their long-term bond-like assets when interest rates increased, because they said they were going to hold them to maturity. That let them keep gambling that their losses would reverse, instead of raising capital after they became MTM undercapitalized but before they became insolvent. I'm not an expert here, but as far as I know the reserve ratio would have accounted for those assets in the same way and had the same problem.
The Canadian Banking system is an oligarchy akin to a model where the US only had only too big to fail banks. In Canada all the big 6 banks are too big to fail and they hold disproportionate power over the government.
As an example, during the great financial crisis the Canadian taxpayer bailed out the Canadian banks to the tune of hundreds of billions of dollars, only this was done in secret.[0] The Canadian government blatantly lied to their citizens and pretended there was no bailout. To this day most Canadians are unaware the Canadian banks were bailed out at all
Also a problem is that the primary lever we seemingly have to impact the economy is the feds manipulation of interest rates, but what happened to taxes? The have been so politicized that all is left is the wide scatter shotgun effect of rate changes.
Banks have a bunch of assets (mortgages, long-term government debt) that still has its full value, but only 10 years later, people want their money out now, the Fed is issuing bridge loans to cover the gap and avoid bank runs.
Since I haven't seen it yet, I'll throw the notion out for dissection: Is this economic warfare (maybe against China)? Was the SVB run triggered by specific, identifiable individuals, whose ties to whatever states could be proven or disproved? The other banks likewise, are they all dominoes or were they kicked by linked forces?
There's all this commentary about how easy these bank failures were to see and how widespread the instabilities caused by interest rates rising are. It's easy and fun to be Captain Hindsight but really, no one whose job it was to foresee and prevent these things, saw this coming? No one suggested steering the banks a bit better?
So the Fed hikes in order to cause fiscal pain, succeeds, then bails out the international banking cartel with unlimited liquidity secured by bonds under par. Where is the liquidity bailout for single parents who lost their jobs due to Fed hikes? Can they get HELOCs at sweetheart valuations so they can survive the rate hikes, too?
It's abundantly clear to me at this point:
1) Fractional reserve banking is inherently unstable and no amount of regulation or insurance schemes can prevent bank failures. A major rethink of our monetary system is in order: One that keeps credit allocation and money creation in the private sphere without guaranteeing interest rate arbitrage on all new money to a privileged class of authorized Ponzi schemers.
2) The Federal Reserve Bank is merely a creature of its owners: The international banking cartel. It does not serve the people--rather, treats them adversarially--and the mechanisms of accountability that exist are obviously insufficient. However, increasing the political accountability of the Fed will likely result in a failed political monetary policy. We need to re-evaluate whether the Fed is fit for purpose.
3) At the very least, the Fed must be forced to grant charters for narrow banks, be put in public trust rather than continue under private ownership, ban bank employees from staffing Fed positions, and become radically more transparent in virtually every way. Oversight must be reorganized and democratized. The toxic nexus of fractional reserve banksters and their political and governmental enablers must be destroyed.
I think it’s just 1). Without 1) there is no purpose to the Fed really, since all their tools amount to manipulating interest rates and spending (printing) money unauthorized by the legislature.
If there’s no fractional reserve, new money is only created by government spending via spending bills passed by congress. People can hold deposit accounts with the government directly (via the treasury) so there’s no possibility of losing deposits. Investments can be left to the market. Interest rates for loans can better reflect real risk, instead of
an imaginary number backed by inflation.
When a bank that has made loans fails, the people who took the loan keep the money and collateral. There would be no risk to deposits or housing by bank failure. And the market selects for banks that are actually better at managing risk (imagine that!)
A similar system was proposed as far back as the 1930s and was known as the “Chicago Plan”.
As a teenager during US history class, I just could not wrap my mind around the viciousness with which politicians would fight about issues like central banking. I used to think the 'abolish the Fed' people were kooks.
As an adult, I totally get it. I even believe that, without the Fed, things would be more unstable. However, it seems to me that the cost of the Fed's stability is the creation of a 'super-banked' aristocracy. At the end of the day, normal people have to bear the costs, while the aristocracy is bailed out with an expediency almost unheard of from our government.
What does this mean to give individuals unsecured loans from the Fed? Who would trust a currency that does that?
Your points are valid but they've been tried before in other countries and other times in the past, the late 1800s and the issue is then no one wants to use your currency and then wants to use Gold instead because they don't trust it.
- Ability to have a risk team to manage risks/entire governance system and controls
- Able to scale to millions of people
- Ability to pay off entire unsecured loan on demand
- Market based Credit rating
- Market value of securities/ability to be sold and absorbed into other institutions
- Ability to raise capital
- Ability to change management entirely
- Can live over 100 years even after its failed (accepting loan payments for example)
- No personality traits/needs in the way of commercial transaction.
- Self sustaining
In its simple form, a group of individuals is a lower risk proposition than an individual.
Banks jobs are to borrow short and lend long. So it also enables the basic structure to play out until the maturity term ends in a very predictable fashion.
Even if the institution is failed it is far more capable and can still run and accept payments for loans around processes.
I think you can only make the argument that this represents some fundamental failure if it didn't work. Obviously it hasn't all played out yet but thus far it's doing what it's intended to.
If you think reserve banking isn't stable then neither is capitalism or democracy. Human beings are not stable so any system that can flex without breaking is doing as well as anything we've ever come up with.
Reserve banking would be very stable if the central bank did it. If everyone had deposit accounts at the Fed, there would be no possibility of bank failure and no need for any kind of deposit insurance. And banks that issued loans going bankrupt wouldn’t threaten borrowers (since their money would be in their treasury account, not in the banks account).
No; these are central bank currency swaps designed to improve dollar liquidity overseas. This has essentially nothing to do with QE or anything like that.
If the assets that are swapped were in fact worth what the swap line values them at, there would be no need for a swap line since the assets could be lent out in the open market. While you’re technically correct that it’s not QE, since the fed reserve is not directly purchasing assets, it has a similar effect on international markets. Foreign central banks purchase or lend USD to their local banks for assets which can’t be used as good collateral (meaning counterparties don’t believe the market has enough liquidity and/or the assets are valued under par) then these central banks, if they run low on USD, swap their own currency for USD through the swap lines.
The net result is USD flows out of the Federal Reserve and into foreign bank reserves, while illiquid and/or under par assets flow into foreign central banks while foreign currency flows into the federal reserve.
So it’s not really correct to say it isn’t like QE at all since in both types of stimulus new USD is issued by the federal reserve in exchange for assets. The difference is in the terms, counterparties, and types of assets.
>So it’s not really correct to say it isn’t like QE at all since in both types of stimulus new USD is issued by the federal reserve in exchange for assets.
Uhhh, OK, by that definition the Fed discount window is "a bit like QE" too.
>The difference is in the terms, counterparties, and types of assets.
This is ... not a subtle difference? QE is outright purchase, vs a relative short-term swap structure; domestic commercial banks, vs. foreign central banks; bonds and MBS vs. currency.
They might call it something else but the effect is the same as QE. The FED’s balance sheet has expanded by $300 billion in the past few days [0]
That is equivalent to the past 4 months of quantitative tightening.
This money is to be used to backstop insolvent banks and like all Fed created money it was created out of thin air. Make no mistake this will lead to even more inflation.
[0]
A loan to provide liquidity. QE is the systematic increasing of bond values. These loans will have no effect on bond value and therefore interest rates because they have high interest rates and need to be paid back quickly. They just give debtors enough time to sell a few assets and wait for the situation to calm down.
See my edited comment above. The effect is to erase the past 4 months of quantitative tightening in a single week. We can agree not to call it QE but the effect is nonetheless inflationary as with all cases when the Fed creates money out of thin air, thereby diluting the purchasing power of all dollar holders.
No this is making sure distribution is in place for when the printer goes brrrr…
basically they are phoning the clubs and making sure bottles, Apple bottom jeans and the boots with the furs are there so when it’s time to make it rain the club is prepped and the money can be spent.
[0] https://www.federalreserve.gov/monetarypolicy/reservereq.htm