Regarding SVB terms of service with respect to a 'waiting' period when withdrawing >$10,000, I think that is referring to cash withdrawals. Most (if not all) of the material outflows were very likely conducted by wire transfer. Most bank branches carry relatively low levels of cash (and staff) and customers withdrawing large amounts of cash is pretty far outside the normal operation of a retail branch.

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You said: "But when was the last time you were in a grocery store or a restaurant and used M1 to pay?"

Sure, a lot of people use credit cards, but isn't a debit card M1?

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"Deposit insurance and “too big to fail” act as subsidies to the eligible financial actors. Capital requirements and other regulations act as taxes on their activities."

And perhaps some regs act as de facto barriers to entry, protecting established banks from would-be new competitors?

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I was with you until you got to the three mechanisms that enable liability transformation. I see a fourth, one that the insurance industry relies upon, which is having a large pool of investors to whom any expected loss can be spread so thinly nobody notices it. This is not quite the same thing as diversification. Homeowners in a large city or state who buy insurance are very similar, but so long as you insure so many of them (and avoid insuring, let's say, more than 20% of some small town where one forest fire might burn the entire town) you can count on the law of averages to keep your losses manageable.

Of course, for this to work for banks, banks need to be limited in size. I would like to see a rule limiting the total of all deposits at any one institution to, let's say, to one thousandth of one percent of M1, with any bank or investment bank that gets larger than this to be given a year to break up or lose its insurance. Thus no more "too big to fail" institutions. Would the market tolerate that? Would the government?

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Money and banks function as "providing access to the payment system; and liquidity transformation" but the other big function not mentioned is as a store of value and measurement of value.

How do you make a rational analysis of whether to buy a pump that will last 20 years or a cheaper pump that will only last 5 years? With a variable store of value the complexity of even the simplest economic decision becomes almost impossible as you don't know the cost of a pump in the future to use in your analysis. Unknown variable inflation and value creates irrational decision making.

You can view M1 and M2 as just another commodity and when the government make too much of it the value of money decreases and is reflected in overall price level increases (inflation). Inflation is the value of money decreasing which is functionally equivalent to shaving the coins by the rulers in ancient time (a form of theft by the rulers of value). Now we just call it QE by the Feds which ends up as demand deposits at the banks that eliminated "time deposits" like CD's at banks which made real interest rates (interest - inflation) less than zero.

Have the FED's ever stopped inflation while maintaining a negative real interest rate? Can they or are they just going the steal my retirement account to pay the government debt while giving COLA adjustments to government worker pensions?

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Sorry Arnold, it is mostly not true that "Capital requirements and other regulations act as taxes on their activities." Capital control regulations are not a tax and are likely worse. Taxes paid reduce gov't deficits - no amount of capital controls nor regulations do that. (That taxes "feed the beast" allowing more spending is a different issue.)

Because the tax payers lose the amount of tax paid, there is little uncertainty about the amount. Regulations have far less certain costs, and much lower social net benefits.

Most regulations should be converted to explicit tax rates allowing some companies to pay higher tax rates for lower compliance costs, with the goal of democracy to elect politicians who increase taxes on undesirable activities, like banks having too little capital. Or being too big, as JPM & Citi & Wells Fargo have all become.

Still you're so very correct about "the government’s role in fostering inflation to all of government debt," It's the total debt which most influences "inflation" - which itself includes volatile food & fuel consumables as well as housing & stock & cyber asset inflations. Since most folk don't have big current financial assets (many do have retirement accounts), financial asset inflation isn't counted as such, nor is house value inflation. The low interest rates led the gov't and banks to help the rich investors get much richer, must faster, than the median worker, who was only slowly getting a little richer.

I'm glad cash exists, and want that to continue. The Canadian gov't fascist controls used against their truckers should be a big warning to avoid too much gov't power in controlling individual bank accounts.

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I propose doing away with this fancy term "liquidity transformation". What banks do is implement a price control, where liabilities "equal" assets, even when liabilities > assets. Then bank runs make perfect sense: they are just the same thing as what happens with any other price control: queuing.

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For an economics rube like myself, whenever I observe contemporary involvement by the Federal government (and this, to me, means the Federal Reserve, Congress, the wise throng of regulators, etc.), I cannot help but hear in the background the opening theme music to the Three Stooges. My initial takeaway from this essay was that the primary issue consists of liability flimflam, a sort of shell game. Not any real conspiracy, though, as this would require coordinated brainpower. But after reflection, it seems hubris is the real problem with the Fed (and others); the confidence they’re able to “exercise exquisite control”.

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Banks do whatever the Jews want them to do. Just as they have done since Jesus threw the money changers out of the Temple, and since Moses found them worshiping a golden calf when he came down from the mountain with the Ten Commandments.

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"I expect that when my grandchildren are adults, the idea that you access the payment system using currency and demand deposits will seem as quaint as the notion that you access the telecommunications system using twisted-pair copper wire and a landline phone."

Even now, you can go to Amazon Fresh, verify your identity with a handprint on a screening device, load up your bags, and walk out the door. The monetary transfer occurs automatically from your bank account or credit card to Amazon's.

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I mainly agree conceptually, but even paying with plastic/electrons still runs through bank deposit accounts.

On bank risks I'd separate the risk of a change between the return on the loan and the return paid on the deposit from the the risk of the loan going bad. Only the latter is solved by diversification. The former has to be mainly borne by borrowers via VR lending.

Of course for banks as a whole, liquidity transformation is not hocus pocus. There is no way for depositors in the aggregate to withdraw their deposits.

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Issue 1

"First, there is expertise. The bank knows much more than I do about how to select loans and how to manage loans once they have been selected. With this expertise, the bank is able to lend at much lower risk than I can myself."

I am glad you recognize this and even happier you explicitly stated it. It allows me to ask why you go on to completely ignore it. This is how banks provide liquidity transformation without (mostly) going bankrupt when short term rates rise.

On a similar note, I don't know what you intend by liability transformation but your Sally/Joe example is textbook liquidity transformation. I'm skeptical our economy could function nearly as well without this service for moving money from savers to builders/creators/businesses/owners. That said, it is true that computers have made it increasingly easier to match lenders and borrowers so maybe it's not as important as it once was.

Issue 2

"My inclination is to attribute the government’s role in fostering inflation to all of government debt, rather than narrow money. "

MV=PT, M = Money Supply, V= Velocity of circulation, P= Price Level and T = Transactions.

Government debt isn't really the problem. It is a question of how the debt is financed. Debt that is entirely financed by bonds bought by US entities only increases V on the left side. When debt is financed by foreign funds and especially when by QE it also increases M. (Note: During and after the Great Recession, QE did little to increase V in part because banks mostly parked their money at the Fed. When govt spending jumped during the pandemic, V (and M?) increased.)

M1 used to be a good measure of M, or they at least moved in tandem. As you say, M1 no longer is as good and isn't used. That doesn't mean M is no longer important. It is just much harder to measure.

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