I think you're being a bit unfair. Proponents of narrow banking don't want exclusivity. They just want narrow banking to be allowed, alongside regular fractional reserve banking.
Right now, the Fed will not give a charter to such a bank.
If your fear is that narrow banking will cause FRB to go out of business, then they deserve to. What's more likely to happen is for both to exist with different benefits for depositors.
And then because narrow banks are prohibited, the federal funds rate is a privilege enjoyed by banks, but not by ordinary people. Narrow banking ends this privilege.
Where I disagree with Cochrane is the idea that what I’d dub fed banking would make the financial system more stable. This is by no means obvious, it could just put all of the government induced moral hazard in one fed basket. Solve for the equilibrium, which is the fed managing a greater share of the money supply and investing it in treasuries. Will those assets be correctly priced?
I think this is a key point. When reading Arnold's piece I found myself thinking "That doesn't sound too bad; so long as that pseudo-bank thing that emerges isn't backstopped by government money, it all sounds like an improvement over the current system."
The bank/central bank/government billionaire monopoly is responsible for wealth inequality worldwide. They are the scum of the Earth, enriching themselves by constantly fleecing the poorest and middle class. They also steal billions from everyone via taxpayers by claiming they are too big to fail. The Fed should be designated as a terrorist group and sent to Guantanamo Bay for some waterboarding.
While this is an attempt at rageaholic ranting/ outrage pron (like the typo better), the key point is that banks & billionaires are, in the current system, rapidly increasing wealth inequality.
The money printing goes into making the financial assets appreciate faster - which are not counted in "inflation", but should be. What will stop Apple from becoming a 4 trillion / 6 trillion / 20 trillion US$ company? Why can't its share price keep rising, while milk and bread and those who make it, increase prices at only 1-2% / yr?
"Normal banking raises the level of investment in the economy." I am puzzled by this statement. Why? You are suggesting some major violation of Modigliani Miller here. What is that? Why do bank assets need to be backed by fixed value liabilities, and not equity or risky debt? In my opinion, most people want 1) a safe asset that they can make payments with, and 2) an investment portfolio that has (some degree of) risk. For 1, the natural candidate is (an indirect claim to) Fed reserves. Let's not mix 1 and 2!
Modigliani and Miller made the clarifying simplification of assuming no agency costs. Banks are agencies and exist to reduce agency costs in assembling portfolios. People apparently *want* the mixture of your 1 and 2 that "normal banking" provides.
1) Is this deviation from MM worth the cost of the instability of the banking system and the regulatory framework we have set up to try to deal with it (not very successfully)? You are free to argue that it does, but I am not convinced.
2) I am not so sure people actually want the mix, especially as we are not even allowed to find out, as the Fed will not allow narrow banks to exist.
"To operate as a narrow bank, matching deposits with assets means holding only short-term, risk-free assets."
My understanding of Cochrane's work is that narrow banks could hold risky assets.
Regardless, I could accept that in practice they might hold shorter maturity assets, but why only government securities? Could they not hold commercial paper or otherwise assets with more credit risk than Treasuries?
Reducing the subsidies to normal banks so as to increase narrow banking - and explicitly have the Fed want more narrow banking should be a policy. It would be better to have far more banks, with more trying to fill more niches and also have more (small or med. ) bank presidents. Regulators & fascists prefer fewer, bigger banks so as to more efficiently influence the banks thru gov't semi-market actions, like the auctions for gov't T-bills & T- bonds.
We also are better off with real, normal banks doing the risk transformation and looking for better investment opportunities. Including more investing in ideas that others think won't fly, and in people that others think won't be successful.
"the ultimate need is to reduce government spending and budget deficits, " -- YES; but only reduce the gov't spending I don't like! Real cuts are not very popular.
What seems more likely, politically plausible, is a freeze on most current spending and an effort to increase the effectiveness. More anti-fraud agents, with more gov't decision makers fired when there are "accounting errors" such that it's not clear where the money goes.
8 year term limits on gov't bureaucrats would help a lot - more ex-gov't folk would know how bad it is AND no longer have that gov't job, so be willing to talk about it. Less long-term gaming.
AI should be helpful in reducing the need for so many people in gov't - with so much info by so many benefit receivers going into various databases.
Normal banking you reference should be done by normal banks. But, you might think over what is a normal bank vs the financial institutions that exist today. So much of today's banking involves packaging and selling of loans in pools of securitized bonds. Asset back loans by banks and other non investment grade corporate loans are sold to CLO vehicles which match fund the term loan they buy. The revolving credit mostly if not entirely held by bank originator and partially funded like working capital loans of the past via bank deposits.
The changed nature of the banking industry requires safeguards of money depositors put in these banks and none are capable of understanding the creditworthiness of any of the banks.
So, narrow banking, maybe, but addressing the needs of depositors who might today face more risk than in past due to changes in banking industry would be wise.
I recently heard that the US is an outlier in availability of long-term fixed rate mortgages. If banks were restricted in what they could offer in fixed rate loans, would that address the bulk of the banking risk issue?
I don't know Tyler Cowen's views all that well, clearly not this one at all, but it surprises he would take a position that advantages more government borrowing. Making it harder for small business to borrow doesn't sound so good either. I agree with the reasons you gave for continuing fractional banking though I'm open to arguments for increasing the reserves somewhat. I love your example of what might replace it. That might not come to pass but it's important to consider whether something worse might fill a void.
I agree about normal banking, taking a prudent amount of credit an liquidity risk with depositors funds. What is NOT necessary, though "normal" is to take interest rate risk, that the yield curve will change. It's probably better to spread the interest rate risk among borrowers with VR instruments than to concentrate it with banks.
One of the main problems with fractional reserve banking is, as we saw with SVB, concentration of depositor risk. When a fractionally reserved bank focuses on a particular industry, as SVB did with startups, then it turns out that its depositors' cash needs are all the same. And startups tend to consume much more cash than they deposit! So, barring some mechanism to stop depositor concentration risk, I don't see why fractional reserve banking is preferable to alternative systems.
I think you're being a bit unfair. Proponents of narrow banking don't want exclusivity. They just want narrow banking to be allowed, alongside regular fractional reserve banking.
Right now, the Fed will not give a charter to such a bank.
If your fear is that narrow banking will cause FRB to go out of business, then they deserve to. What's more likely to happen is for both to exist with different benefits for depositors.
And then because narrow banks are prohibited, the federal funds rate is a privilege enjoyed by banks, but not by ordinary people. Narrow banking ends this privilege.
Where I disagree with Cochrane is the idea that what I’d dub fed banking would make the financial system more stable. This is by no means obvious, it could just put all of the government induced moral hazard in one fed basket. Solve for the equilibrium, which is the fed managing a greater share of the money supply and investing it in treasuries. Will those assets be correctly priced?
I think this is a key point. When reading Arnold's piece I found myself thinking "That doesn't sound too bad; so long as that pseudo-bank thing that emerges isn't backstopped by government money, it all sounds like an improvement over the current system."
The bank/central bank/government billionaire monopoly is responsible for wealth inequality worldwide. They are the scum of the Earth, enriching themselves by constantly fleecing the poorest and middle class. They also steal billions from everyone via taxpayers by claiming they are too big to fail. The Fed should be designated as a terrorist group and sent to Guantanamo Bay for some waterboarding.
While this is an attempt at rageaholic ranting/ outrage pron (like the typo better), the key point is that banks & billionaires are, in the current system, rapidly increasing wealth inequality.
The money printing goes into making the financial assets appreciate faster - which are not counted in "inflation", but should be. What will stop Apple from becoming a 4 trillion / 6 trillion / 20 trillion US$ company? Why can't its share price keep rising, while milk and bread and those who make it, increase prices at only 1-2% / yr?
"Normal banking raises the level of investment in the economy." I am puzzled by this statement. Why? You are suggesting some major violation of Modigliani Miller here. What is that? Why do bank assets need to be backed by fixed value liabilities, and not equity or risky debt? In my opinion, most people want 1) a safe asset that they can make payments with, and 2) an investment portfolio that has (some degree of) risk. For 1, the natural candidate is (an indirect claim to) Fed reserves. Let's not mix 1 and 2!
Modigliani and Miller made the clarifying simplification of assuming no agency costs. Banks are agencies and exist to reduce agency costs in assembling portfolios. People apparently *want* the mixture of your 1 and 2 that "normal banking" provides.
1) Is this deviation from MM worth the cost of the instability of the banking system and the regulatory framework we have set up to try to deal with it (not very successfully)? You are free to argue that it does, but I am not convinced.
2) I am not so sure people actually want the mix, especially as we are not even allowed to find out, as the Fed will not allow narrow banks to exist.
"To operate as a narrow bank, matching deposits with assets means holding only short-term, risk-free assets."
My understanding of Cochrane's work is that narrow banks could hold risky assets.
Regardless, I could accept that in practice they might hold shorter maturity assets, but why only government securities? Could they not hold commercial paper or otherwise assets with more credit risk than Treasuries?
Sharp essay! The concept, "conscripted banking," is a breakthrough for analysis and discernment.
Reducing the subsidies to normal banks so as to increase narrow banking - and explicitly have the Fed want more narrow banking should be a policy. It would be better to have far more banks, with more trying to fill more niches and also have more (small or med. ) bank presidents. Regulators & fascists prefer fewer, bigger banks so as to more efficiently influence the banks thru gov't semi-market actions, like the auctions for gov't T-bills & T- bonds.
We also are better off with real, normal banks doing the risk transformation and looking for better investment opportunities. Including more investing in ideas that others think won't fly, and in people that others think won't be successful.
"the ultimate need is to reduce government spending and budget deficits, " -- YES; but only reduce the gov't spending I don't like! Real cuts are not very popular.
What seems more likely, politically plausible, is a freeze on most current spending and an effort to increase the effectiveness. More anti-fraud agents, with more gov't decision makers fired when there are "accounting errors" such that it's not clear where the money goes.
8 year term limits on gov't bureaucrats would help a lot - more ex-gov't folk would know how bad it is AND no longer have that gov't job, so be willing to talk about it. Less long-term gaming.
AI should be helpful in reducing the need for so many people in gov't - with so much info by so many benefit receivers going into various databases.
Normal banking you reference should be done by normal banks. But, you might think over what is a normal bank vs the financial institutions that exist today. So much of today's banking involves packaging and selling of loans in pools of securitized bonds. Asset back loans by banks and other non investment grade corporate loans are sold to CLO vehicles which match fund the term loan they buy. The revolving credit mostly if not entirely held by bank originator and partially funded like working capital loans of the past via bank deposits.
The changed nature of the banking industry requires safeguards of money depositors put in these banks and none are capable of understanding the creditworthiness of any of the banks.
So, narrow banking, maybe, but addressing the needs of depositors who might today face more risk than in past due to changes in banking industry would be wise.
I recently heard that the US is an outlier in availability of long-term fixed rate mortgages. If banks were restricted in what they could offer in fixed rate loans, would that address the bulk of the banking risk issue?
I don't know Tyler Cowen's views all that well, clearly not this one at all, but it surprises he would take a position that advantages more government borrowing. Making it harder for small business to borrow doesn't sound so good either. I agree with the reasons you gave for continuing fractional banking though I'm open to arguments for increasing the reserves somewhat. I love your example of what might replace it. That might not come to pass but it's important to consider whether something worse might fill a void.
I have often wondered why the big banks offer such terrible CD offerings.
I think you meant beckon, not beacon at one point.
"But the ultimate need is to reduce government spending and budget deficits,"
An why not some combination of reduced spending and increased taxation to reduce, nay to eliminate deficits?
I agree about normal banking, taking a prudent amount of credit an liquidity risk with depositors funds. What is NOT necessary, though "normal" is to take interest rate risk, that the yield curve will change. It's probably better to spread the interest rate risk among borrowers with VR instruments than to concentrate it with banks.
One of the main problems with fractional reserve banking is, as we saw with SVB, concentration of depositor risk. When a fractionally reserved bank focuses on a particular industry, as SVB did with startups, then it turns out that its depositors' cash needs are all the same. And startups tend to consume much more cash than they deposit! So, barring some mechanism to stop depositor concentration risk, I don't see why fractional reserve banking is preferable to alternative systems.
SVB was insolvent.