Banks Should Be Boring and Reliable — That’s All

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an overwhelming proportion of the “quick cash” in the global financial system is uninsured and prone to manic-depressive behavior, swinging unpredictably from thoughtless yield-chasing to extreme risk aversion. Much of this flighty cash finds its way into banks through lightly regulated vehicles like certificates of deposits or repurchase agreements. Money market funds, like banks, are a repository for cash, but are uninsured and largely unexamined.

Bring Back Boring Banks

By AMAR BHIDÉ

Medford, Mass.

CENTRAL bankers barely averted a financial panic before Christmas by replacing hundreds of billions of dollars of deposits fleeing European banks. But confidence in the global banking system remains dangerously low. To prevent the next panic, it’s not enough to rely on emergency actions by the Federal Reserve and the European Central Bank. Instead, governments should fully guarantee all bank deposits — and impose much tighter restrictions on risk-taking by banks. Banks should be forced to shed activities like derivatives trading that regulators cannot easily examine.

The Dodd-Frank financial reform act of 2010 did nothing to secure large deposits and very little to curtail risk-taking by banks. It was a missed opportunity to fix a regulatory effort that goes back nearly 150 years.

Before the Civil War, the United States did not have a public currency. Each bank issued its own notes that it promised to redeem with gold and silver. When confidence in banks ebbed, people would rush to exchange notes for coins. If banks ran out of coins, their notes would become worthless.

In 1863, Congress created a uniform, government-issued currency to end panicky redemptions of the notes issued by banks. But it didn’t stop bank runs because people began to use bank accounts, instead of paper currency, to store funds and make payments. Now, during panics, depositors would scramble to turn their account balances into government-issued currency (instead of converting bank notes into gold).

The establishment of the Fed in 1913 as a lender of last resort that would temporarily replace the cash withdrawn by fleeing depositors was an important advance toward banking stability. But although the Fed could ameliorate the consequences of panics, it couldn’t prevent them. The system wasn’t stabilized until the 1930s, when the government separated commercial banking from investment banking, tightened bank regulation and created deposit insurance. This system of rules virtually eliminated bank runs and bank failures for decades, but much of it was junked in a deregulatory process that culminated in 1999 with the repeal of the 1933 Glass-Steagall Act.

The Federal Deposit Insurance Corporation now covers balances up to a $250,000 limit, but this does nothing to reassure large depositors, whose withdrawals could cause the system to collapse.

In fact, an overwhelming proportion of the “quick cash” in the global financial system is uninsured and prone to manic-depressive behavior, swinging unpredictably from thoughtless yield-chasing to extreme risk aversion. Much of this flighty cash finds its way into banks through lightly regulated vehicles like certificates of deposits or repurchase agreements. Money market funds, like banks, are a repository for cash, but are uninsured and largely unexamined.

Relying on the Fed and other central banks to counter panics is dangerous brinkmanship. A lender of last resort ought not to be a first line of defense. Rather, we need to take away the reason for any depositor to fear losing money through an explicit, comprehensive government guarantee. The government stands behind all paper currency regardless of whose wallet, till or safe it sits in. Why not also make all short-term deposits, which function much like currency, the explicit liability of the government?

Guaranteeing all bank accounts would pave the way for reinstating interest-rate caps, ending the competition for fickle yield-chasers that helps set off credit booms and busts. (Banks vie with one another to attract wholesale depositors by paying higher rates, and are then impelled to take greater risks to be able to pay the higher rates.) Stringent limits on the activities of banks would be even more crucial. If people thought that losses were likely to be unbearable, guarantees would be useless.

Banks must therefore be restricted to those activities, like making traditional loans and simple hedging operations, that a regulator of average education and intelligence can monitor. If the average examiner can’t understand it, it shouldn’t be allowed. Giant banks that are mega-receptacles for hot deposits would have to cease opaque activities that regulators cannot realistically examine and that top executives cannot control. Tighter regulation would drastically reduce the assets in money-market mutual funds and even put many out of business. Other, more mysterious denizens of the shadow banking world, from tender option bonds to asset-backed commercial paper, would also shrivel.

These radical, 1930s-style measures may seem a pipe dream. But we now have the worst of all worlds: panics, followed by emergency interventions by central banks, and vague but implicit guarantees to lure back deposits. Since the 2008 financial crisis, governments and central bankers have been seriously overstretched. The next time a panic starts, markets may just not believe that the Treasury and Fed have the resources to stop it.

Deposit insurance was also a long shot in 1933 — President Franklin D. Roosevelt, the Treasury secretary, the comptroller of the currency and the American Bankers Association opposed it. Somehow advocates rallied public opinion. The public mood is no less in favor of radical reform today. What’s missing is bold, thoughtful leadership.

Amar Bhidé, a professor at Tufts’s Fletcher School of Law and Diplomacy, is the author of “A Call for Judgment: Sensible Finance for a Dynamic Economy.”

 

19 Responses

  1. Way cool! Some extremely valid points! I appreciate you writing this post and the rest of the site is also really good.

  2. It’s nearly impossible to find educated people for this topic, however, you seem like you know what you’re talking about! Thanks

  3. Anyone see “Too BiG TO FAIL”? End of movie is Hank Paulson looking out the window, “well, I think they (banks) will lend…. that is what we are hoping.” But, they did not. Despite that “lending” was implied by the bailout deal. They did nothing. Continue to do nothing. Continue to conceal.

    Bailouts all over, for everyone but the real victims.

  4. The Federal Reserve pumped hundreds of billions of printed $$$ into ECB right before XMAS—- Geithner/Bernanke playing Santa Claus. So that anybody in Europe that needed to pay off a debt or otherwise trade or speculate in $$$ could. Liquiity.

    Then ECB made loans of hundreds of billions of some currency at 1% for three years to EU banks. They have not loaned anybody anything–nor do they trust each other enough to even loan it overnight. They deposit any loose change with ECB at the end of each day. Until recently–now they are bying ten yr US treasuries at just about 2%. The spread is 100% profit. This will build eurozone bank capital pretty fast if they borrow enough–trouble is the US taxpayer must pay for it.

    The Germans wouldnt bail out the EU banks–via ECB printing–but US was more forthcoming. The London bankers love suckers –you all. Sometimes its just embaressing to be an American and the butt of jokes worldwide. Its not just the “ugly” American today –but the ugly and stupid american.

  5. Alessandro

    “credit event” and “trigger event”. I will take note of those two new phrases that replace “credit default”

    I have asked this question here a few times but never got an answer. Got access to an investor report for the trust that suposedly owns my mortgage. In the section “Trigger Events” it says “Senior Credit Support Depletion Date Has Occurred”. What does it mean… Many lower tranches are not reporting and are empty but the higher tranches still have data.

  6. “credit event” and “trigger event”. I will take note of those two new phrases that replace “credit default”.

    If only consumers were allowed a credit event or trigger event that did not actually ruin their credit.

    Joann, you will probably never see the show you envision because most advertising on television is done by the very corporations that are not helping homeowners when it is reasonable to help a homeowner.

  7. And get rid of the FinCen reporting, too, that makes bank employees secret spies for the IRS and makes us all into terrorists.

    For instance if you deposit or withdraw more than 10k you are subject to scrutiny. Just absurd.
    The other day I had to explain why I was depositing 1,500. in cash. The teller commented: “That is a lot of money.” I told him I sold my old car. Well, that wasn’t enough for him. Then the he wanted to know what make of car it was…like I was lying or something. I suppose if I said “It’s none of your business,” that would have made me look suspicious.

    Meanwhile, government types and banks are hiding billions, if not trillions in assets.

    This behavior just makes people angry. Like you just want to buy metals and bury them somewhere. And if you try to protect yourself and your family with a gun, that makes you a criminal, too.

  8. @Enraged, read the one line, simple hedging. That is what the alleged banks call derivatives and swaps and why we short the pools after telling clients to purchase certificates.

    Please read the article again to see what this mutt is back-dooring. This is how it starts. The media conditions the mass to change that is coming down the road. i.e. the federal reserve was a good start toward financial stability. Why not issue an independent currency through the Congress that does not pay interest to the federal reserve corp.

    This mutt is giving you a reason why global banks should be regulated under the same conditions without stating who sets the precedent. If an entity other than congress controls banking regulation they could effectively cause chaos through inflationary and deflationary moves. Just look at what has happened in the 100 years since the control of the currency left the Congress. These liquidity and financial events are not sudden. They are calculated, planned and introduced over a decade so to not blatantly cast the effect of the lost purchasing power of the dollar while inflating the assets the banks hold. This is just another period of deleverage as a result of the currency pinnacle. What this guy is introducing is not a sovereign solution, it is a global device that relinquishes the last moments of freedom upon commencement.

    Permit me to issue and control the money of the nation and I care not who makes its laws. — Mayer Amsched Rothchild

    If the American people ever allow the banks to control issuance of their currency, first by inflation and then by deflation, the banks and corporations that grow up around them will deprive the people of all property until their children will wake up homeless on the continent their fathers occupied. — Thomas Jefferson

    No one’s safe when freedom fails,
    and good men rot in filthy jails,
    and those who cried appease, appease,
    are hung by those they tried to please.

    Get my point, why waste a coordinated financial collapse when you can advance the cause under the guise of future protection from the same events recasting. Isn’t the panic 0f 1908 what brought us the Federal Reserve Corp. It was never supposed to happen again, but is has, practically every 20 years since the charter of the central bank. The banks are not changing a damn thing except escaping borders.

  9. Put the real life battles of homeowners on TV including hard won triumphs and tragic losses and prempt dancing with the stars, the bachelor bachlorettes and fantasy reality shows – nothing like real lives of everyday people suffering in silence – time to go blockbuster. Showcase the fraud. Where are the celebrities who can make it happen?

  10. @neidermeyer

    “There’s a business idea here ,, with electronic access to ATM networks you or I could easily start “the boring bank”

    Way past time to do this. Can’t wait for the gov anymore. Not going to happen. (just feeling hopeless today sorry). Every last home will foreclose of sell short for decades.

    80 million would sign up overnight. Get a celebrity in the tradition of Jimmy Stewart to launch a telethon and put the articulate consumer advocates on TV. Wish I had any money to save. Still have a home that has declined 50% putting my 70% paid for 7 years underwater. Could still rent it out for the price of the mortgage (can’t do equity if you don’t have equity….these homes nationwide still have value even to the “loser” owners and it still belongs to the name on title until snatched away for pure profit by theives who were never harmed by non payment).

    Where do I sign up?

  11. Lenders put politicians in, then they take from borrowers.

  12. Sorry guys, I was typing so fast that I mexed and matched. Anyway, what I means was: C.U. put lenders and borrowers together. Lenders have the dough and borrowers have the ideas or business to develop.

    That’s how countries prosper. But you all knew that already, didn’t you?

  13. Iwantmypvn,

    I may not read the same thing you do but… I fully agree with the article!

    A bank is supposed to be there to hold investor’s money and lend it to borrowers under certain pre-established and pre-regulated conditions and guidelines, period. Everything else, every exotic way banks have found to “make” money through the commodities market, the mortgages, the selling and reselling of stock, portfollio and action is NOT, in reality, banking activities but rather Booklegging activities at an extremely high level. There is very little difference between Al Capone rigging the ponies and making a killing on the race track and Jamie Dimon rigging the appraisals of houses and making a killing in the stock market. (Except that Capone, who has no “proper” Harvard connection goes to jail while Dimon runs the Federal Reserve…)

    If we agree that banks role is limited and should remain so, the credit union system is the way to go. That system puts investors with lenders, lenders have the money and want to invest it into some local business. Investors have a business or an idea and want to develop it. Banks put both in contact with each other and gets paid a percentage of the interests paid by the borrowers.

    What caused the greatest financial scandal ever visited upon humanity is not the banking activities of banks but every else they undertook: mostly unbriddled and uncontroled speculation and every additional fraudulent activity.

  14. Just a thought most of us are hard working individual whom by no fault of our own have been thrown into the workings of foreclosure by design. maybe a job loss or an illness. no one should have been approved for loans that if !/2 of the income was gone could not afford to live. this was wrong. fraudclosure by design was ment to do what it is doing. 20 years ago i bought a small home in hollywood florida. but back in 1991 they did not approve you if you can not afford the home. there was 6 week wait for income verification. from contrsct signing until closing was 10 weeks in 2006 1 month. My small home Gave birth to 3 kids and broke my ankle (my husband was unemployed when i broke my ankle) yet we never lost our home. I call great western bank and said i needed help and the said 2 x a year i can place 2 payments in the back of my mortgage. we survived fine no foreclosure. why did i sell and move in 2004? I am an RN and value education and wanted my 3 kids to have a chance at a college education. this was at a time that florida went to the FCAT. where we lived the FCAT scores were the lowest in the state/county. so i had a plan to move and give my children a chance at a valuable education.

    So we sold and moved and am now caught up in this horror. this mess of a mortgage. My children well, they are doing well in all this, besides being afraid that we may have to lose our home and move. Myoldest turns 19 tomorrow. he moved out with friends and is working and going to college. He is perusing a zoology degree. He did very well in high school. His act and sat scores did suffer because alot of early learning was prior to us moving. but it is ok. he is still going to college and plans on transferring to a university as a junior. MY others are smart as whips. I am proud i moved and my kids are going to have the education i want for them.

    As a consequence i have to go through a fraudclosure and watch my home stolen from me. My note included the foreclosure complaint was endorsed with a rubber stamp of joan m mills. my signature is robosigned. all is good i have a great lawyer and he is driving my car now.
    my children they will be ok. i gave them the best present that 2 parents can give thee gift of knowledge of an education (we took out the prepaid college fund when my older on was in 4th grade)

    so is this another sad foreclosure story how wells fargo lost my paper work, moved my modification file, gave me a stated income loan with 19 years of verifiable income, noted appraisal fraud. yt but i will you bet it is. but everyone reading this we need to fight these monsters.

    the bigger monster would have been my kids getting into drugs, a teenage pregancy ect. but i will never know any of those horrors inlife. i did kind of a trade off without knowing it.

  15. I did not mean to say paper money was created for use during the civil war. Paper money can be traced back to papyrus. My intent was to show that it was used for commerce purpose more so than storage or conversion.

  16. “Before the Civil War, the United States did not have a public currency. Each bank issued its own notes that it promised to redeem with gold and silver. When confidence in banks ebbed, people would rush to exchange notes for coins. If banks ran out of coins, their notes would become worthless.”

    In response to the author: You idiot! Not only did these united states have a public currency, you mentioned it in the same paragraph. It was called gold and silver coins. Somebody minted these coins and the value was guaranteed by the stamp itself that the coin could be accepted for the purchase of goods or other commerce. Paper Money was originally created because transporting loads of silver and gold was not economically feasible. So it went… give me your gold here in San Francisco bank and I will change it to paper currency (money changers) and you can redeem the same amount of Gold at New York Bank (Payable to Bearer in Gold) upon your arrival. You paid a transaction charge and went on your way.

    Why don’t you dig back into your hole of academia up there in Massachusetts, or stick your PHD in international economics up your global pandering ass and introduce resolve that fixes America first.

    The confidence issue with paper currency prior to the civil war is the same confidence issue we have today. It is not the depositor concerned of being paid, it is the counter party bank that is unsure of they will be paid. If I changed a $1,000 dollars of gold into paper currency, which the money changer in San Francisco guaranteed could be redeemed in Gold in NY, and when i arrived i was told that since you last San Francisco two weeks ago; it turns out that money changer has been investing your gold at a rate of 50-1 leverage, and we do not know if we can send these paper notes for $1,000 in gold to have the gold shipped to us from the San Francisco money changer.

    I go straight back to the money changer, demand my gold back with a pistol and tell everyone else not to use that money changer.

    Is not that truly the same event that just transpired. It wasn’t a liquidity problem that started the bank run of 2007, it was the fear factor of not knowing how over-leveraged Lehman was. When global banks demanded the FED back the Lehman checks they were receiving as payment to change global monies, debt service etc..; and the answer was no, global banks created the panic by not honoring or accepting Lehman credit / checks. The rest of the story is bunch of horseshit to disseminate the same propaganda this idiot spews.

    Sir, you are part of the problem and would like to see your global agenda advanced. Offer some real solutions since every damn penny that is issued via a balance sheet entry is implicitly guaranteed by the America people because it carries the term “NOTE”. The problem is; the American people are awakening to this incredible heist and we do not care how many movies you have Oliver Stone make, to cast you in a better, we are also victims light; we are coming for you.

    We will put you in jail eventually, and hopefully we can recapture all the stolen assets through RICO and put your wives and children on the street – like you have been doing to ours. You have both candidates this election cycle, but wait til next time. We will get you!

  17. Is this guy kidding. Why do we need and FDIC and to pay interest on the alleged creation of the currency if we are going to fully guarantee it. Second, the first mention we are going to regulate them and restrict fractional activities to 5-1 will immediately draw the liquidity response.

    Mr. Bhide in one sweeping stroke wants to regulate sovereign banks as well. His plan must regulate the banks from a global perspective since foreign banks deeply entrenched in US history will have a tremendous advantage over local thrifts and regional’s because they will not be subject to the same restrictions.

    You can’t fix banking until you fix capitalism. The FRC wasn’t trying to avert a meltdown of the Euro as much as they know our reserve system banks are the counter-party to those who will default. They have replaced the word default with “credit event” and “trigger event”.

    The author almost sounds like he is for a global banking system with no borders. Who manages the flow of currency and does the dollar remain the peg, or is it devalued as part of his new financial Utopia?

    Instead of the Eurozone (see how well that worked) we can call it the global zone and if any country gets in trouble repaying its debt we can have the IMF sweep in and steal the natural resources of the sovereign people of that sovereign nation.

    Why doesn’t the government issue an interest free currency or stop debt spending in the entirety, Banks are private institutions and should be made to tell depositors how there money will be lent and at what factor they extend credit on deposits. For example: XYZ bank lends at a fraction of three- we keep our reserves at 70% and we do not lend other than automobile loans, credit cards and mortgages which require a 700 credit score and we service all our debt in-house versus selling it to a highly leveraged trust while truly keeping the fake asset on our balance sheet so we look healthier to regulators and we will use swaps to insure the transactions so we can skirt reserve requirements.

    The globalist are openly pushing their agenda through folks who claim they want to help. I have a much simpler approach. Stop the cronyism that has invaded our banking and political system. Start indicting the folks that committed massive regulatory and consumer fraud at every level, including Tim Geithner and Paulson. Give the central bank and the rest of the global banks the dollar, along with the 60 trillion in debt and unfunded liabilities. These united states create a new sovereign currency and we repeg to the dollar @149.90.

    Or we issue currency based on the land value and resources of these untied states and we issue new dollars to pay off all debt and the american people pay down its right full obligations without interest and interference from a private central bank and its insurance company. We reinvigorate the American people with buy as you go approach. No more credit means lower prices for all goods because demand will decrease along with supply decrease.

    Just saying..

  18. There’s a business idea here ,, with electronic access to ATM networks you or I could easily start “the boring bank” and license the SBA , car dealer networks , trusted local appraisers and such to give opinions on loan approvals and colatteral valuations. Investing client deposit funds only in predictable short term vehicles and at minimal leverage…

  19. What about the allegations that world wars are funded by the federal reserve?

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