Levine- sigh. This is academic speak where you get to define things at the outset and then move on. Arnold, your point about the transformation is spot on, but it goes deeper than that. If you define something as low risk or risk free in a regulatory environment you cause it to become risky, because you are artificially creating demand for a product and so supply must follow. Government debt is not risk free despite what academics might say, and finance does not work on the principle of getting your principle back. Always ignored in such proposals is that money is only good as a medium of exchange, getting $100 nominal dollars back means nothing as far as risk is concerned as the value of the money has to constantly be able to satisfy the chain of obligations (not debt). To take the money market fund example does Levine mention that the Fed is losing money on those interest payments? That they can print to pay for those payments is a major mistake in judgement. With QE they purchase (or really create an asset swap) securities which means they can either sell them back to the market and neutralize part or all of their purchase in the future, or they can collect coupon payments and retire those dollars. With interest payments they have no asset to swap back into the market if they want to reverse the effects of their monetary policy. The opposite action would be to charge interest on reserves, but they cannot force such reserves in the first place. Even without the market transforming risk from self interest you get a transformation of risk- from bank runs to currency runs. In short the imagined 'stable' system would be vulnerable to the greatest destabilization- hyper inflation and the death of the currency.
Levin seems to confound two different kind of risks that bank might undertake a) term transformation risks: depositors want their money that has been lent out at long term and b) interest rate mismatch risk: the rate needed to hold deposits or replace them with other short term liabilities rises but investments have been mad ein long term-_fixed rate_ loans. This was the S&L problem of the '70's. Banks and regulatora apparent ly for got about this kid of risk and how to avoid it
The poor are getting richer, AND the rich are getting richer. And the rich are getting richer FASTER - so inequality is increasing. Finance & interest issues are not unimportant, but direct & indirect gov't spending to help the gov't-friendly rich get richer is a bigger issue.
Economists are not being accurate about USD being "risk free", nor US T-bonds nor any asset. All assets have risks, even the lowest-risk USD (?) or bonds or anything.
The Fed shouldn't pay interest. It was only Oct 1, 2008, when the Fed started paying interest on reserves. They should set that rate at 0 or even rescind the power to pay interest.
"Starting July 29, 2021, the interest rate on excess reserves (IOER) and the interest rate on required reserves (IORR) were replaced with a single rate, the interest rate on reserve balances (IORB). "
Mostly the rich have such reserves (90% ??), and this policy is designed to make the rich richer, with lower risk. The required reserves for Big Banks should increase - and those required reserve should increase until there are no banks nor financial institutions "Too Big To Fail". They all get smaller.
Mergers and size consolidation can, slightly, increase efficiency - but always makes a more tempting public-private fascist partnership, where the private company does things for the gov't that the gov't wants done but doesn't want to do directly. We need more smaller banks, not fewer.
"The average asset size across the top 250 banks listed is approximately $83 billion. (For comparison, the average credit union in the top 250 has $4.8 billion in assets.) The median asset size, by contrast, is $14.7 billion." https://www.mx.com/blog/biggest-banks-by-asset-size-united-states/
We need more banks bigger than median but smaller than average; and more banks in general. The narrow banking is interesting, and should be explicitly deregulated for banks with assets less than median, with minimal gov't deposit insurance.
I hadn't thought of money markets being able to act like narrow banks - that seems useful. I've always thought it would be nice for large corporations who have to manage very large cash balances to have the option to deposit their cash in something that is truly risk free. I wonder if it's possible for a money market mutual fund to credibly promise to do this all the time. For that matter, I wonder what's to prevent banks (who have master accounts at the Fed that earn 10 bps more than the repo rate) from doing the same thing?
Local comunity banks should loan depositors money to local businesses and non businesses. (And they do) Small business loans are risky of course but it's the grease that keeps local communities viable. The state and Feds need to figure a way to maintain this vitality at the local level with protects in place. Also the mega banks that shun community lending should carry some of this risk by Federal/state mandates as well. The too big to fail banks need to realize protecting local banks protect their well being, too. That's my 2 cents of opining.
Levine- sigh. This is academic speak where you get to define things at the outset and then move on. Arnold, your point about the transformation is spot on, but it goes deeper than that. If you define something as low risk or risk free in a regulatory environment you cause it to become risky, because you are artificially creating demand for a product and so supply must follow. Government debt is not risk free despite what academics might say, and finance does not work on the principle of getting your principle back. Always ignored in such proposals is that money is only good as a medium of exchange, getting $100 nominal dollars back means nothing as far as risk is concerned as the value of the money has to constantly be able to satisfy the chain of obligations (not debt). To take the money market fund example does Levine mention that the Fed is losing money on those interest payments? That they can print to pay for those payments is a major mistake in judgement. With QE they purchase (or really create an asset swap) securities which means they can either sell them back to the market and neutralize part or all of their purchase in the future, or they can collect coupon payments and retire those dollars. With interest payments they have no asset to swap back into the market if they want to reverse the effects of their monetary policy. The opposite action would be to charge interest on reserves, but they cannot force such reserves in the first place. Even without the market transforming risk from self interest you get a transformation of risk- from bank runs to currency runs. In short the imagined 'stable' system would be vulnerable to the greatest destabilization- hyper inflation and the death of the currency.
Levin seems to confound two different kind of risks that bank might undertake a) term transformation risks: depositors want their money that has been lent out at long term and b) interest rate mismatch risk: the rate needed to hold deposits or replace them with other short term liabilities rises but investments have been mad ein long term-_fixed rate_ loans. This was the S&L problem of the '70's. Banks and regulatora apparent ly for got about this kid of risk and how to avoid it
The poor are getting richer, AND the rich are getting richer. And the rich are getting richer FASTER - so inequality is increasing. Finance & interest issues are not unimportant, but direct & indirect gov't spending to help the gov't-friendly rich get richer is a bigger issue.
Economists are not being accurate about USD being "risk free", nor US T-bonds nor any asset. All assets have risks, even the lowest-risk USD (?) or bonds or anything.
The Fed shouldn't pay interest. It was only Oct 1, 2008, when the Fed started paying interest on reserves. They should set that rate at 0 or even rescind the power to pay interest.
"Starting July 29, 2021, the interest rate on excess reserves (IOER) and the interest rate on required reserves (IORR) were replaced with a single rate, the interest rate on reserve balances (IORB). "
https://fred.stlouisfed.org/series/IORB
Mostly the rich have such reserves (90% ??), and this policy is designed to make the rich richer, with lower risk. The required reserves for Big Banks should increase - and those required reserve should increase until there are no banks nor financial institutions "Too Big To Fail". They all get smaller.
Mergers and size consolidation can, slightly, increase efficiency - but always makes a more tempting public-private fascist partnership, where the private company does things for the gov't that the gov't wants done but doesn't want to do directly. We need more smaller banks, not fewer.
"The average asset size across the top 250 banks listed is approximately $83 billion. (For comparison, the average credit union in the top 250 has $4.8 billion in assets.) The median asset size, by contrast, is $14.7 billion." https://www.mx.com/blog/biggest-banks-by-asset-size-united-states/
We need more banks bigger than median but smaller than average; and more banks in general. The narrow banking is interesting, and should be explicitly deregulated for banks with assets less than median, with minimal gov't deposit insurance.
I hadn't thought of money markets being able to act like narrow banks - that seems useful. I've always thought it would be nice for large corporations who have to manage very large cash balances to have the option to deposit their cash in something that is truly risk free. I wonder if it's possible for a money market mutual fund to credibly promise to do this all the time. For that matter, I wonder what's to prevent banks (who have master accounts at the Fed that earn 10 bps more than the repo rate) from doing the same thing?
very cool -sorry I won't be able to make it.
Local comunity banks should loan depositors money to local businesses and non businesses. (And they do) Small business loans are risky of course but it's the grease that keeps local communities viable. The state and Feds need to figure a way to maintain this vitality at the local level with protects in place. Also the mega banks that shun community lending should carry some of this risk by Federal/state mandates as well. The too big to fail banks need to realize protecting local banks protect their well being, too. That's my 2 cents of opining.