Gyroscopic Investing

Libertarian666 wrote: The main problem with banking is fractional reserve banking.
Also known as "fraud" in any other industry.
If banks could only lend out deposits for the term of the deposit (or their own capital), and if the depositors couldn't withdraw their money before the end of the term, and the owners of the money (depositors or the bank itself) took the risk of lending, then banks wouldn't have to worry about runs.
That is the only safe model for banking.

That is the only safe model for banking.

D1984 wrote: Devil's advocate mode on/ If that is the case, how did we in the US have a banking system from the mid 1930s to roughly 1980 with comparatively few bank failures and almost none of the major financial crises/bubbles bursting like we see now every six to ten years...and this despite the fact that fractional reserve banking was quite legal then (albeit more regulated in many ways than it is today).

D1984 wrote:

That is the only safe model for banking.

Devil's advocate mode on/ If that is the case, how did we in the US have a banking system from the mid 1930s to roughly 1980 with comparatively few bank failures and almost none of the major financial crises/bubbles bursting like we see now every six to ten years...and this despite the fact that fractional reserve banking was quite legal then (albeit more regulated in many ways than it is today).

D1984 wrote:
Devil's advocate mode on/ If that is the case, how did we in the US have a banking system from the mid 1930s to roughly 1980 with comparatively few bank failures and almost none of the major financial crises/bubbles bursting like we see now every six to ten years...and this despite the fact that fractional reserve banking was quite legal then (albeit more regulated in many ways than it is today).

Slotine wrote: Actually, what you described previously was a bond.  The term deposit makes it unable to have a bank-run by definition.  It doesn't make it any safer.

If instead, you had meant a 100% backed deposit with anytime withdraw (what most people think of as non fractional banking), then you only need to look as far as money market mutual funds as a working example of one in practice.  When certain ones were subject to breaking the buck, redemption rates rocketed.  That in all essence, was a bank run.

stone wrote: It seems to me that there are two completely separable functions. One is the payments system. That could potentially be a "full reserve system" just like paypal. The other is the lending system. Where we run into trouble is that we mix them up. We have a system where the payments system uses the debt from lending as the medium of exchange. That entails all of the hazards of maturity transformation and liquidity risks. It means that the payment system (a vital utility for the entire economy) is held hostage by the lending system. That creates a slippery slope towards bailing out an irresponsible lending system so as to keep the payment system intact.

If the payment system was just by something such as paypal and the lending system were separate; THEN it wouldn't matter if systemic credit defaults led to defaults on the bonds sold to fund loans. That would not impact on the vital role of the payment system. It would simply be irresponsible lenders getting what they had coming to them.

Slotine wrote:

AgAuMoney wrote: Matching deposit term to loan term makes it impossible to have a bank run, which by definition is safer.

Matching deposit term to loan term is a bond.  It could also be a CD or a savings account.  Most savings accounts TODAY have a several day and up to 30 day hold at the discretion of the bank.  CDs also, and they are usually at the longer end of that range.  Read the fine print.  How many times does that get pointed out and exercised by the bank?  Terms 7 days and longer could be matched to any kind of callable loan.  Non-callable loans need longer locked terms but perhaps could be worked with shorter mandatory holds and limits on withdrawal.  (e.g. you commit to 5 years, but can have 10% with 30 day

You're right in that CDs and certain restricted savings accounts also fall into that term deposit group.  I chose bonds as an example because everyone is used to it having haircuts.  CDs/savings not so much so I didn't highlight them. 

From my point of view, when the loan goes bust your bond devalues hence it's no safer because there's no bank-run.  The trigger point is the same and the only difference is that you didn't have to leave the house for one of them.  The only valid argument for it being safer is if you're a slow runner - the loss is amortized across everyone regardless of running speed.

AgAuMoney wrote: A money market fund is NOT an example implementation of such an account because 1) they are not fully backed (leverage), 2) they invest in non-liquid assets so are not term matched, and 3) are not bank accounts by definition.  I don't know if MMF's have withdrawal and/or transaction limits, but MMA's sure do.

1) not fully backed - legally, they may borrow up to 1/3rd of assets, but in practice they rely on little if any borrowing.  You're nitpicking.

2) illiquid assets - aside from a credit freeze that impacts everything, what is non-liquid about short term treasuries and commercial paper?  If anything, it's far more liquid than the long term investment loan banks normally make. 

2b) terms not matched - a corollary of withdraw anytime.  The comparatively low-risk nature of CPs and the overnight marked-to-market settlement of mutual funds give them an edge-up over any investment bank trying to do the same under onerous 100% backed rules.

3) not banks - the discussion centered around whether a fully-backed bank would prevent runs.  Since no such thing exists, the MMFs - which pretty closely meet all the criteria laid out - are the next best thing that show the limitations of such a scheme.  Please don't resort to tautology.

3b) withdraw limits - a MMF can freeze redemptions much like a bank undergoing liquidity issues can declare bankruptcy.  It's slightly different legally, but similar signal-response conditions.  It's also the one reason such a thing as a redemption run exists for MMFs.

The MMF redemptions came about because people were no longer confident in the remaining assets that the fund held and were scared to be the last ones locked-in.  That's not a fractional reserve thing.  That's a confidence thing.  And it applies just as well to any asset-backed liability.

I'd run on your bank regardless of whether it's fully backed or fractionally backed.

stone wrote: If the payment system was just by something such as paypal and the lending system were separate; THEN it wouldn't matter if systemic credit defaults led to defaults on the bonds sold to fund loans. That would not impact on the vital role of the payment system. It would simply be irresponsible lenders getting what they had coming to them.

our country's base-money to credit-money ratio would have to do a huge shift

moda0306 wrote: stone,
I guess I haven't done a full-blown analysis, but people currently expect their deposits to be liquid, not turned into 10 year bonds.  To match up our deposits to terms on the loans overnight would piss a lot of people off.  That's why I think we'd need some more base money to enter the system or something.

I actually think a robot future potentially solves one of the biggest "issues". When lots of brute labour was needed, any industrialist needed to have a potential workforce who were desperate to work for him. When America was being colonized every new comer wanted a farm of their own rather than working as an employee and so there was a labour shortage. First indentured labour was used to provide staff then that morphed into bringing slaves from Africa. It used to be necessary to have a downtrodden class of people.
In the robot future we would just need people who knew what to set the robots doing (eg set the robots inventing better robots with certain characteristics). Potentially everyone could be in the owning class. Obviously that would require the wisdom (as I see it) to recognize the need for a certain level of wealth equality.

As Jeremy Grantham put it:
“the final position is that automation, and thereby capital, produces everything while all of
the mere mortals sit on the beach. And starve? The worthless unemployed who are
obviously not carrying their weight? Ah, there’s the rub! Up the beach, in a protected,
cordoned-off section is the capital owners’ club. There, a handful of equally
“unemployed”?owners sit, enjoying tea and the ocean.”?

All we need to do is to move everyone into the "capital owners' club" with (you guessed it) an asset tax and citizens' dividend  .

Slotine wrote: The PayPal expenses breakdown shows that even in electronic transactions, the cost is still there in terms of managing security, reconciling things like chargebacks, collecting on fraudulent activities, etc.  I'd say most of this is because they don't hold the money in physical form but rely on ledger accounting.  People expect it to be recoverable unlike real cash transactions.
You'd have to throw a lot of the baby out with the bath water like what bitcoin does in order to actually be cheap.  And PayPal isn't cheap.  The recipient pays on behalf of both parties.  A percentage that's actually higher than gold storage

Slotine wrote: If we're willing to put up with bandits on the highway again, then we can drop 'em.

Slotine wrote: PayPal without the bill me later mess   their risk section in the annual report scares me.

It's a nice idea stone.  It's too bad everyone keeps crossing that line.  A fully detached payment system would also have the problem of money storage, necessitating storage fees and other fine details.  Don't we have this problem with gold funds?

Slotine wrote:And PayPal isn't cheap.  The recipient pays on behalf of both parties.  A percentage that's actually higher than gold storage