General > General Technical Chat

Silicon Valley Bank Collapses

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bdunham7:

--- Quote from: Marco on March 20, 2023, 12:12:08 pm ---Unless government intervenes, people are suckers for interest on "demand" deposits ...

--- End quote ---

The problem is that the Fed itself is setting the de facto rate for interest on "demand" (overnight) deposits by not allowing any space between the Fed funds rate and the overnight reverse repo rate.  There is no free market at the short end.

Marco:
Reverse repo and interest on excess reserves are crisis tools. Banks build up liabilities during the good time, when those are completely irrelevant.

The world has had free banking. After the fractional reserve meme arose, free banking overwhelmingly used fractional reserves. There is absolutely no reason to expect any differently now. Full reserve is a statist solution and there is nothing wrong with that, except for libertarians who can't compromise and like it :p

Central Bank Digital Currencies are probably the easiest road to full reserve banking.

TimFox:
Full-reserve banking is basically paying for a safe-deposit box.

bdunham7:

--- Quote from: Marco on March 20, 2023, 03:09:07 pm ---Reverse repo and interest on excess reserves are crisis tools.

--- End quote ---

They should be, I agree.  However, that isn't the current policy unless you think we've been in a crisis for the past two decades.  Mandated negative interest rates on reserves as an economic stimulus was the most insane example. 

bdunham7:

--- Quote from: TimFox on March 20, 2023, 03:40:30 pm ---Full-reserve banking is basically paying for a safe-deposit box.

--- End quote ---

But if you limit the full-reserve requirement to actual demand deposits and thus explicitly differentiate between demand and time deposits, the whole thing becomes workable.  Right now I'm getting higher interest on my demand savings account (not even mentioning money markets) than I'd get on a 10-year treasury.  That's broken.  There's also a big spread between treasuries and retail FDIC-insured bank CDs when the CD actually has less overall risk. 

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