QuoteOriginally posted by: gardener3Deposit insurance is meant to solve problems of liquidity not solvency. In other words deposit insurance's purpose is not to eliminate bank failures, but to eliminate failures due to system wide runs.It is a duration problem that has not changed in 1,000 years. Earlier I advocated for 95% deposit insurance, which is like a 5% deductible or co-pay in car or medical insurance. This would create an incentive for savers to shop based on something other than recklessness of bank management reflected in interest rates. And it would do it at a small cost.Another idea might be like a convertible bond or a put option. You would somehow need to establish a market where people could sell their passbooks to bond investors for X cents on the dollar cash. And these passbook bids, which would be like a backup form of deposit insurance, would have to somehow be visible or made public. And if the bid dropped out of the passbook market, the Fed could step in and buy passbooks for whatever price they deemed consistent with policy objectives. In a liquid market, the passbooks would generally trade above the Fed's bid, which would only get hit under unusual circumstances.So we have passbooks for demand deposits, private cash bids for passbooks at X cents on the dollar, and a Fed minimum cash bid, which they can raise and lower to meet policy objectives.

QuoteOriginally posted by: gardener3QuoteOriginally posted by: ppauperQuoteOriginally posted by: AlanWell, guys, I think we tried that one up to about 1933.mr farmer covered this pretty thoroughly, and I can't top his reply, but let me add a quote from Murray RothbardQuoteWhat, then, is the magic potion of the federal government? Why does everyone trust the FDIC and FSLIC even though their reserve ratios are lower than private agencies, and though they too have only a very small fraction of total insured deposits in cash to stem any bank run? The answer is really quite simple: because everyone realizes, and realizes correctly, that only the federal government ? and not the states or private firms ? can print legal tender dollars. Everyone knows that, in case of a bank run, the U.S. Treasury would simply order the Fed to print enough cash to bail out any depositors who want it. The Fed has the unlimited power to print dollars, and it is this unlimited power to inflate that stands behind the current fractional reserve banking system.Yes, the FDIC and FSLIC "work," but only because the unlimited monopoly power to print money can "work" to bail out any firm or person on earth. For it was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation.But now bank runs ? at least for the overwhelming majority of banks under federal deposit insurance ? are over, and we have been paying and will continue to pay the horrendous price of saving the banks: chronic and unlimited inflation.Putting an end to inflation requires not only the abolition of the Fed but also the abolition of the FDIC and FSLIC. At long last, banks would be treated like any firm in any other industry. In short, if they can't meet their contractual obligations they will be required to go under and liquidate. It would be instructive to see how many banks would survive if the massive governmental props were finally taken away.anatomy of a bank runThis makes no sense. If FDIC is backed up by threat of inflation, and if it has 'worked', then there would be no inflation. That's the ideal scenario, you avoid a bad equilibrium at zero cost.That's not what he saying.What Rothbard is saying is from the Austrian school and makes perfect sense.Rothbard wrote>>For it was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation.with moral hazard present, the banks can expand the money supply to their hearts' contentHe also wrote>> The Fed has the unlimited power to print dollars, and it is this unlimited power to inflate that stands behind the current fractional reserve banking system.Inflation is the way of life for the Fed. What you wrote makes no sense

QuoteOriginally posted by: ppauperFor it was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation.The cure worse than the disease.

QuoteOriginally posted by: katastrofaQuoteOriginally posted by: ppauperFor it was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation.The cure worse than the disease.just for the record, those are Murray Rothbard's words not pp'sQuoteOriginally posted by: Murray RothbardFor it was precisely bank runs, as severe as they were that, before 1933, kept the banking system under check, and prevented any substantial amount of inflation.

QuoteOriginally posted by: Traden4AlphaAnd we need to diffuse the linear chains of dominos by reducing the correlations between entities.I disagree with the idea that you can institutionalize the style, or the quality, of monetary policy. And there is no doubt that nations can have politicians with very different styles and economic policies. But if you go through 8 years with one politician or one central banker, it does not make sense to optimize the system to be insulated against the craziest things that can happen over the next 20 or 30 years. I think it makes sense to take advantage of the current environment, even if that means banking and risk systems that will go to pieces in a different environment.I think the regulatory structure is too slow and stupid to optimize for each politician and central banker. So I think you are just going to have banking panics. And you can put a lot of the blame on the voter who either chooses crazy politicians, or politicians who are just very different. But I don't think there is any point to pursuing some academically ideal US banking system, when the voters could decide to back a Hugo Chavez type any year the whim seizes them. Just accept crashes, and try to get business done in the meantime.

QuoteOriginally posted by: AlanWell, guys, I think we tried that one up to about 1933. For the foreseeable future, we are stuck in a world where the govt is the insurer of last resort for the banking system.Lies inevitably lead to trouble, like when portfolio insurers imagined they could sell unlimited S&P futures near the last-trade price. Instead of lying to the depositor about duration, and then trying to handle the animal behavior when he realizes he has been lied to, I wonder if there isn't some possible approach based on reason and empowerment?For example, any bank branch could could have a maximum daily withdrawal "without a reservation." Restaurants take reservations, why not banks? So a given branch might allow up to $20,000 a day for all accounts based there, and up to $20,000 a day of reservations. If you really want the opportunity to withdraw $20,000, you could make a reservation for every day. If you saw they were all filled up until 2015, you might move your money to a bank with more empty slots. This would be a bank managed specifically to cater to people who have a high demand for liquidity.The point being, you could do away with deposit insurance and still avoid runs - and still have banks that could allow 100% of depositors to withdraw 100% of their money in one day - through honesty. I don't know what the scheme would be, but I suspect there is one. If banks were forced to be honest, then demand deposits might carry a $100/month fee per checking account, or a 1%/month fee. This would force people who wanted to escape the fee into CD's or something. But at least it would begin with honesty and rational behavior and rational expectations and planning.Of course politicians don't win elections by empowering people. They win elections by playing Santa Claus or a cartoon superhero. But you can at least call the banking system what it is, another tool for politicians to win elections through insane, irrational, and shortsighted behavior that exploits human stupidity. Beginning with this assumption sets the tone of any discussion on how to arrange the banking system.So is deposit insurance in its current form a good solution? If we measure good by whether it facilitates rational behavior and positive economic outcomes, it is not good. But if we measure good by whether it is mindless and vote-winning, then it is good.

JPMorgan Board Says Dimon Should Remain as C.E.O. and Chairman JPMorgan Chase's board said on Friday that it was standing behind Jamie Dimon, the bank's chairman and chief executive, amid calls from some investors that the two jobs be split. In the bank's proxy filing, the 11-member board said that Mr. Dimon should continue to hold both positions, as he has since 2006. "The board has determined that the most effective leadership model for the firm currently is that Mr. Dimon serves as both," the filing said. In the wake of a multibillion trading loss that roiled the bank's executive ranks, some investors have been agitating for JPMorgan Chase to separate the roles. In February, a vocal group of shareholders, including the American Federation of State, County and Municipal Employees and pension funds in New York and Connecticut filed a resolution to divide the chairman and chief executive posts.

QuoteFor example, any bank branch could could have a maximum daily withdrawal "without a reservation." Restaurants take reservations, why not banks? So a given branch might allow up to $20,000 a day for all accounts based there, and up to $20,000 a day of reservations. If you really want the opportunity to withdraw $20,000, you could make a reservation for every day. If you saw they were all filled up until 2015, you might move your money to a bank with more empty slots. This would be a bank managed specifically to cater to people who have a high demand for liquidity.If this was as simple a problem as you describe it would have been solved before the establishment of the fed or the fdic. The 19th century bankers were not idiots. During runs they would jointly suspend convertibility of deposits. The clearinghouses for consortium of banks would issue loan certificates on the joint capital of member banks (similar to deposit insurance). This did not eliminate panics or runs on the system. Also, the point is to not only avoid failures but to remove uncertainty around money so that money supply does not shrink and transactions and economic activity do not come to a halt. I am not suggesting that deposit insurance is the optimal solution, but that there are no easy answers.QuoteThe point being, you could do away with deposit insurance and still avoid runs - and still have banks that could allow 100% of depositors to withdraw 100% of their money in one day - through honesty. I don't know what the scheme would be, but I suspect there is one.There is only ONE scheme that could allow 100% of depositor to withdraw 100% of their money in one dayQuoteIf banks were forced to be honest, then demand deposits might carry a $100/month fee per checking account, or a 1%/month fee. This would force people who wanted to escape the fee into CD's or something. But at least it would begin with honesty and rational behavior and rational expectations and planning.Of course politicians don't win elections by empowering people. They win elections by playing Santa Claus or a cartoon superhero. But you can at least call the banking system what it is, another tool for politicians to win elections through insane, irrational, and shortsighted behavior that exploits human stupidity. Beginning with this assumption sets the tone of any discussion on how to arrange the banking system.So is deposit insurance in its current form a good solution? If we measure good by whether it facilitates rational behavior and positive economic outcomes, it is not good. But if we measure good by whether it is mindless and vote-winning, then it is good.Rational behavior and positive economic outcomes are not the same thing. A run on the bank is rational at the individual level but collectively disastrous. Same with hoarding liquidity in uncertain times, or under-provisioning liquidity in good times.

QuoteOriginally posted by: farmerQuoteOriginally posted by: AlanWell, guys, I think we tried that one up to about 1933. For the foreseeable future, we are stuck in a world where the govt is the insurer of last resort for the banking system.Lies inevitably lead to trouble, like when portfolio insurers imagined they could sell unlimited S&P futures near the last-trade price. Instead of lying to the depositor about duration, and then trying to handle the animal behavior when he realizes he has been lied to, I wonder if there isn't some possible approach based on reason and empowerment?For example, any bank branch could could have a maximum daily withdrawal "without a reservation." Restaurants take reservations, why not banks? So a given branch might allow up to $20,000 a day for all accounts based there, and up to $20,000 a day of reservations. If you really want the opportunity to withdraw $20,000, you could make a reservation for every day. If you saw they were all filled up until 2015, you might move your money to a bank with more empty slots. This would be a bank managed specifically to cater to people who have a high demand for liquidity.The point being, you could do away with deposit insurance and still avoid runs - and still have banks that could allow 100% of depositors to withdraw 100% of their money in one day - through honesty. I don't know what the scheme would be, but I suspect there is one. If banks were forced to be honest, then demand deposits might carry a $100/month fee per checking account, or a 1%/month fee. This would force people who wanted to escape the fee into CD's or something. But at least it would begin with honesty and rational behavior and rational expectations and planning.Of course politicians don't win elections by empowering people. They win elections by playing Santa Claus or a cartoon superhero. But you can at least call the banking system what it is, another tool for politicians to win elections through insane, irrational, and shortsighted behavior that exploits human stupidity. Beginning with this assumption sets the tone of any discussion on how to arrange the banking system.So is deposit insurance in its current form a good solution? If we measure good by whether it facilitates rational behavior and positive economic outcomes, it is not good. But if we measure good by whether it is mindless and vote-winning, then it is good.Probably you know the movie War Games where the WOPR at the end is running through every possible scenario ofnuclear war and they all turn out badly. Maybe every design of a system without deposit insurance always turn out badly. Or maybe you could design such a system that 'works', but it comes with a bunch of inconveniences.Personally, I don't see deposit insurance as a big issue that needs fixing. How much does it cost taxpayers on average per year?

QuotePersonally, I don't see deposit insurance as a big issue that needs fixing. How much does it cost taxpayers on average per year?The real cost comes in terms of moral hazard. There is misallocation of capital and there is an increase in incidence of crisis that can cause serious disruptions to economic activity. If you compare potential GDP to actual GDP after banking crises, the costs can be very large.

QuoteOriginally posted by: AlanProbably you know the movie War Games where the WOPR at the end is running through every possible scenario ofnuclear war and they all turn out badly. I think that movie represented the best of Ally Sheedy.

QuoteOriginally posted by: bearishQuoteOriginally posted by: AlanProbably you know the movie War Games where the WOPR at the end is running through every possible scenario ofnuclear war and they all turn out badly. I think that movie represented the best of Ally Sheedy.Absolutely -- I've had the same thought. Similar to Ellen Page and Juno

QuoteOriginally posted by: gardener3QuotePersonally, I don't see deposit insurance as a big issue that needs fixing. How much does it cost taxpayers on average per year?The real cost comes in terms of moral hazard. There is misallocation of capital and there is an increase in incidence of crisis that can cause serious disruptions to economic activity. If you compare potential GDP to actual GDP after banking crises, the costs can be very large.OK, well I have to say I wasn't thinking of the deposit insurance as increasing the likelihood of banking crises.But lets say it does and, without it, bank crises occur at a lower frequency. Now, we still have some crisesand there is the issue of what the fed. govt should do, if anything, to help offset the effects. Is the answer -- nothing? If so, then how can we tell which loss is worse? (loss of GDP due to increased freq. of crises vs loss of GDP due to no counter-cyclical support from the govt after crises)

QuoteOriginally posted by: gardener3The 19th century bankers were not idiots. During runs they would jointly suspend convertibility of deposits. The clearinghouses for consortium of banks would issue loan certificates on the joint capital of member banks (similar to deposit insurance).Awesome. I was wondering about that.QuoteOriginally posted by: gardener3the point is to not only avoid failures but to remove uncertainty around money so that money supply does not shrink and transactions and economic activity do not come to a halt. I am not suggesting that deposit insurance is the optimal solution, but that there are no easy answers.With the Fed, can not every depositor run and lose all his money and money supply is not a problem? So doesn't the Federal Reserve eliminate money-supply problems even without deposit insurance?

QuoteOriginally posted by: purbaniJPMorgan Board Says Dimon Should Remain as C.E.O. and Chairman JPMorgan Chase's board said on Friday that it was standing behind Jamie Dimon, the bank's chairman and chief executive...I have had feeling that all that overly detailed public report must lead somewhere, but apparently it did not. I wonder what would have happened if the new VaR model was rejected rather than conditionally approved with an action plan, as the trading losses would have shown up anyway given the position size. A rejection of the new model would reinforce the old reported VaR figures and lead to unwind of some of the trading position before any external traders found out about it and took bets against it. This at least would have limited the actual losses that could be covered by liquidity reserves etc, and no public hearings in the end as the original risk management culture prevailed.