tag:blogger.com,1999:blog-8764541874043694159.post218835847916117471..comments2024-03-29T09:34:18.837+00:00Comments on Coppola Comment: A new approach to deposit insuranceFrances Coppolahttp://www.blogger.com/profile/09399390283774592713noreply@blogger.comBlogger24125tag:blogger.com,1999:blog-8764541874043694159.post-25165275464903191092013-10-17T07:52:34.540+01:002013-10-17T07:52:34.540+01:00thanks a lotthanks a lotnaserhttp://www.mahz.irnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-10177294625440293482013-08-23T04:18:27.709+01:002013-08-23T04:18:27.709+01:00that should have been "simply private debts&q...that should have been "simply private debts". philnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-59265655030345122472013-08-23T04:16:24.604+01:002013-08-23T04:16:24.604+01:00"Bank debts CAN be settled in physical curren..."Bank debts CAN be settled in physical currency, but they don't have to be"<br /><br />Right, but 'base money' doesn't only mean physical currency, it also means electronic currency, i.e. central bank reserve balances.<br /><br />As far as I'm concerned a bank deposit is a promise to pay not only physical currency but also electronic currency. <br /><br />I can't directly get my hands on central bank reserve balances, but if I have a bank deposit I can instruct my bank to pay central bank reserves to someone else on my behalf, like the Treasury for example. So in that sense I have a claim to ownership of them.<br /><br />I agree that bank debts are money. But those debts are currently guaranteed by the state and the taxpayer, and supported by the state's central bank. So it isn't really right to think of them as private debts.philnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-63316333044581439622013-08-18T13:36:32.914+01:002013-08-18T13:36:32.914+01:00But it is very important that a creditor of ABC Ba...But it is very important that a creditor of ABC Bank can require a claim against ABC Bank to be settled by delivery of currency or a claim against a different bank. If ABC Bank could always discharge its debts by delivery of more of its own debt, then you would have the problem Phil is concerned with. It is also important (at least within the way most modern monetary economies operate) that creditors of at least some private sector banks can require settlement by delivery of currency or central bank reserves, even if in practice they do not do so.Nick Edmondshttps://www.blogger.com/profile/15342983814699700396noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-72618440587623479802013-08-18T13:08:46.442+01:002013-08-18T13:08:46.442+01:00Strictly speaking, all bank deposits are redeemabl...Strictly speaking, all bank deposits are redeemable in physical cash - if you want to regard this as "banks owe base money" you can. But it isn't a meaningful concept in the Western world. We actually run on bank credit, not on physical currency. That's how our financial system works. When you pay a bill from your deposit account, your bank's debt to you decreases just as much as if you had withdrawn cash from your account, but no physical currency is involved. And the recipient's bank now owes the recipient more, but the recipient hasn't deposited any physical cash. Bank debts CAN be settled in physical currency, but they don't have to be. We use the debt ITSELF as money. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-16699545313319522802013-08-18T12:29:17.947+01:002013-08-18T12:29:17.947+01:00Right, but a bank deposit is a debt owed by a bank...Right, but a bank deposit is a debt owed by a bank. A bank can create a deposit out of thin air because all it's doing is going into debt to a depositor. <br /><br />When a bank makes a loan, it creates a new deposit. The loan is a debt owed by the borrower to the bank, and the deposit is a debt owed by the bank to the borrower/depositor. <br /><br />If the borrower spends the deposit and it ends up with another depositor at the same bank, the deposit then represents a debt owed by the bank to that other depositor.<br /><br />So what does the bank actually owe to the depositor? You said it owes M1 money, i.e. a bank deposit. But a bank deposit is a bank debt. How can the bank only owe more of its own debt?<br /><br />For example, if you lend me some money, I can't repay my debt by simply giving you another one of my IOUs, can I? I can't repay my debt by promising to repay my debt. I wouldn't have repaid my debt, because I would still be in debt to you!<br /><br />I'm trying to get my head around this idea, so I appreciate the explanation..<br />philnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-39253916715964196762013-08-18T09:12:07.367+01:002013-08-18T09:12:07.367+01:00A bank creates a new deposit out of "thin air...A bank creates a new deposit out of "thin air" when it lends. That deposit is then spent by the borrower, ending as the recipient's demand deposit in either the same bank or a different one. It is then spent on by the recipient and ends up as a different demand deposit in a bank somewhere, and is spent on by the next recipient - and so on. A bank deposit is therefore - ultimately - created through borrowing. That applies whether it is created as part of lending, physically deposited as cash or received by electronic transfer. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-20101531692515944602013-08-18T01:57:53.261+01:002013-08-18T01:57:53.261+01:00M1 is basically demand deposits and cash, right? A...M1 is basically demand deposits and cash, right? A demand deposit is a bank debt. <br /><br />How can the thing owed by a bank simply be more of its own debt? philnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-36065199571685631542013-08-18T01:48:25.765+01:002013-08-18T01:48:25.765+01:00In another comment,Ms.Coppola says,"Once you ...In another comment,Ms.Coppola says,"Once you have lent the money to the bank it is not "your property" that you have entrusted to them for safe keeping." Interesting that does not apply the other way around when the banks lend "their property" to me. When they lend to me, I, the borrower, pays for the risk the bank takes in lending to me via the interest rate. But is the bank borrows my deposit, the proposal is that I, now the lender must pay for the risk. Banks and their cheerleaders seem to be in favor of "heads I win, tails you lose" policies.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-58858070503126671792013-08-18T00:38:41.075+01:002013-08-18T00:38:41.075+01:00No. They are lending credit money to the bank: the...No. They are lending credit money to the bank: the deposit was ultimately created from someone else's borrowing. What is owed is what we call M1, not base money (M0). However, the M1 debt can be settled in physical currency, which is part of base money. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-65490940356973727712013-08-18T00:35:31.216+01:002013-08-18T00:35:31.216+01:00I agree with this. Have to say that my colleague E...I agree with this. Have to say that my colleague Euronomist doesn't, though - he is concerned that higher premium could encourage depositors to remove their money, resulting in bank runs. I think the chances of destabilising bank runs due to premium divergence are vanishingly small, but I agree that there might be "slow runs" that would eventually drive higher-risk banks out of business. Personally I think this is a good thing. I am hoping to persuade Euronomist round to my point of view! Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-30198162128897665042013-08-17T22:54:31.088+01:002013-08-17T22:54:31.088+01:00thanks.
So what is the depositor actually lending...thanks.<br /><br />So what is the depositor actually lending to the bank?<br /><br />It seems to me they are essentially lending base money to the bank (even if the depositor doesn't actually deposit any physical cash in the first place). At the end of the day the bank owes base money to the depositor in some form. Would you agree with that, or not?philnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-42232341291334167242013-08-17T16:27:52.019+01:002013-08-17T16:27:52.019+01:00To address the issue of banks taking undue risks, ...To address the issue of banks taking undue risks, the premium on the deposit insurance should be tied to some measure of the riskiness of the bank. Just as smokers pay higher rates for life insurance, depositors in banks with low capital ratios or high concentration in one type of lending (real estate) should pay a higher premium than with a stronger bank.Advant Guardhttps://www.blogger.com/profile/13724697741711826082noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-31146147232427261362013-08-17T12:53:36.771+01:002013-08-17T12:53:36.771+01:00"depositors should explicitly pay a premium f..."depositors should explicitly pay a premium for the benefit of having the money insured. We limit this to interest-bearing accounts" Seems like there is less and less reason for people to put their money in the bank, especially given that you agree that a bank deposit is a loan from the depositor to the bank,for which the depositor is receiving less and less benefit while the banks continue to make money from depositors' funds and foist more and more the cost of doing so upon those same depositors.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-27869053752898665072013-08-17T09:40:42.365+01:002013-08-17T09:40:42.365+01:00Yes. Yes. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-23707179733469805612013-08-17T05:49:58.991+01:002013-08-17T05:49:58.991+01:00Really the only way to solve all these problems is...Really the only way to solve all these problems is to nationalise the banks.cringing2https://www.blogger.com/profile/07174637668885864648noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-81952940006524985762013-08-16T17:21:07.430+01:002013-08-16T17:21:07.430+01:00Frances,
is a bank deposit a loan from the deposi...Frances,<br /><br />is a bank deposit a loan from the depositor to the bank?<br /><br />Thanksphilnoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-55484404320247749992013-08-16T14:03:37.969+01:002013-08-16T14:03:37.969+01:00I'm sorry, I fundamentally disagree with you. ...I'm sorry, I fundamentally disagree with you. Depositors absolutely DO benefit from deposit insurance. If there were no deposit insurance, they would lose their money when banks fail. Deposits are loans to banks and depositors have no automatic right of return. <br /><br />I do not support your implied call for a change to full reserve banking. I am in agreement with Minsky, who rejected full reserve banking on the grounds that the primary purpose of banks is to provide capital to the economy. Full reserve banking would seriously reduce the capital available to the economy and is therefore in my view a very bad idea. <br /><br />I don't think that people "waking up" to how our financial system actually works is a bad thing. People should understand that deposits in banks are "at risk", and decide whether they wish to pay to mitigate that risk. At present they are kept in the dark and they pay whether they wish to or not. Your notion that the bank levy can be paid purely from profits without affecting deposit rates is simply unrealistic. <br /><br />You've obviously failed to notice that we are not proposing a charge for deposit insurance on non-interest bearing accounts. It is up to depositors to exert sufficient pressure on banks to ensure that the rates offered on insured interest-bearing accounts give yields above zero. Frances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-14435183357008338972013-08-16T13:44:01.847+01:002013-08-16T13:44:01.847+01:00Correct. The tax is "paid through the corpora...Correct. The tax is "paid through the corporations" but "economically paid by the depositors, borrowers, employees and shareholders." I firmly believe the idea to have it borne by the depositors is the wrong way to go. They do not enjoy the benefit, as much as it is called "deposit insurance." The benefit of the root cause of the problem, fractional reserve banking, goes to the bank and its shareholders. They should pay for it out of excess profits, generated from a cheap funding base of forcibly appropriated funds.<br />Funds, which incidentally currently do not have a choice to migrate to a fully reserved state unless you close your account and move to cash. Deposit insurance is an insurance paid by the fractionally reserved institution for an exorbitant economic privilege of using other economic agents liquidity as a backstop for their own. These, incidentally being essentially the whole economy unless they are self banked.<br /><br />If we move to a regime where the depositors pay for this explicitly, we risk the unintentional consequence of the vast majority to wake up to the way money is generated (from thin air on a bank balance sheet) and them having to pay for their own disownment.<br /><br />There are many ways to make banks safer and regulate their capital, but anything that touches on deposits short of full reserve conversion is explosive. Loss aversion is very deeply ingrained and even a mild tax on a zero yielding account can end in the unforseen.Finsternoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-91336435838640177372013-08-16T12:34:51.715+01:002013-08-16T12:34:51.715+01:00You may find the paper below an interesting additi...You may find the paper below an interesting addition to the debate.<br /><br />Section 10 discusses a proposed deposit insurance scheme that is deliberately designed to signal and punish risky lenders.<br /><br />Going back to your post two days ago, section 6 discusses options for stabilising the housing market.<br /><br />The paper generally looks at how financial markets can be controlled when they are considered from a dynamic rather than static point of view. You may also find other sections interesting.<br /><br />"Pricing, liquidity and the control of dynamic systems in finance and economics"<br /><br />http://mpra.ub.uni-muenchen.de/31137/Geoff Willishttp://www.econodynamics.org/noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-5396086733018405162013-08-16T11:46:38.213+01:002013-08-16T11:46:38.213+01:00I refer you to the considerable evidence for the i...I refer you to the considerable evidence for the incidence of taxation falling not on corporations but on their customers, workers and shareholders. Deposit insurance is a form of taxation. Banks don't pay it. Depositors, borrowers, employees and shareholders do. <br /><br />http://en.wikipedia.org/wiki/Tax_incidenceFrances Coppolahttps://www.blogger.com/profile/09399390283774592713noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-4834824337808885312013-08-16T11:37:56.902+01:002013-08-16T11:37:56.902+01:00The "deposit insurance" justly is paid b...The "deposit insurance" justly is paid by the bank, because the bank as a deposit taking institution enjoys exorbitant privilege of use of the funds for its own account. The risk of loss is not created by the depositor, who has no choice but a commercial bank account if he wants to part take in modern society. The arrangement is a public private partnership between the government/central bank and the commercial banking system operating under its laws, providing us mere mortals, who cannot get an account with the central bank with legal tender.<br /><br />No deposit taker of non monetary nature can appropriate the depositors goods/wealth in the same way without being sued for embezzlement. It's a legal loophole which is caused by fractional reserve banking. I'm only using this technical term carefully, because bringing it even up can cause reflexive defensive stance by financial professionals.<br /><br />Deposit guarantee and central banks as lender of last resort are the necessary corollary of fractional reserve banking. Doing away with either while staying fractional is asking for financial mayhem and social unravelling.Finsternoreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-66378181272398955462013-08-16T09:48:53.585+01:002013-08-16T09:48:53.585+01:00I like it. The problem is, though, that the upper ...I like it. The problem is, though, that the upper bound on premiums would be bounded by the short-term interest rate. Anything greater would lead depositors to take transaction accounts, or simply leave deposits uninsured. <br /><br />There are around GBP 1.3tn in deposits in Britain. Assuming that all of these deposits found their way into insured savings accounts, if the Bank were to levy around a third of the interest paid, the insurance fund would receive only around 6.5bn - not too dissimilar to the FSCS's 2012 levy of c. 4bn. With interest rates so low, taxpayer intervention can't be ruled out. <br /><br />That said, premiums earned would benefit from the economic cycle - earning more in good times to protect against lower premiums earned in downturns.OTC-Asymmetryhttps://www.blogger.com/profile/07633282431507280124noreply@blogger.comtag:blogger.com,1999:blog-8764541874043694159.post-25938862100167853392013-08-16T07:44:34.917+01:002013-08-16T07:44:34.917+01:00'Therefore it would probably be sensible for t...'Therefore it would probably be sensible for the fund to be restricted to investments in safe assets such as high-quality government debt.' <br /><br />Allowing depositors access to these safe assets would remove retail banks from the system altogether. Bring it on!devonseaglasshttps://www.blogger.com/profile/02637463423116171963noreply@blogger.com