> It is quite a difference from depositing your money in a regular bank that gets involved in all sort of complex and risky financial operations to earn more.
It isn't different at all. That's what FDIC is for.
He should've tried saying something about checking account fees.
Banks are using actuarial science to make loans. You were (possibly) an outlier. That doesn't matter. All that matters is that their risk models work in aggregate. If they're right enough of the time, they profit. It doesn't have to be perfect.
> There is allot of financial illiteracy regarding the banking system.
And nor does the balance sheet become inexplicably unbalanced. It issues bills, a liability, which will cancel out as an asset unless it sells them, or takes a value from it's balance sheet capital, or gets interbank funding (which still balances, because that's another bank's asset).
You're not wrong a bank can fund it's lending, indeed there's that often cited BoE paper all about it, but that funding doesn't come from thin air.
> A lot of the problems stem from the fact that banks aren't earning enough from their payment processing business
I don't buy this reasoning. If banks are making investments that are too risky, it's because they're mismanaged, and possibly under regulated, not because their hands were tied by a lack of ways to profit.
It is allegedly the case that you are correct. It is actually the case that using the system is incredibly painful, and hard to understand, and lots of people end up in a terrible situation because of it.
> I think you're ascribing ill will where there isn't any. Banks charge high interest to business and/or personal loans not because they hate poor people or whatever, but because they're risky.
I don't mean to accuse bankers, if anything I meant to stress that this method has something which doesn't add up .
Think about it , even if your net worth is 1M you still have to go through a conversation with the bank before they loan you money. They want to know your intentions, what are you going to do with it and so forth. They size you up, and the 1M net worth doesn't even count as a tool to reduce the burden of questions.
This method instead : you post some securities and you get a loan with no questions asked. It seems too good to be true or intentional from the financial institution side as it completely sidesteps the due diligence process.
Actually that is exactly what banks do. You go to the bank and take out a loan, they credit your account with $1000 and then you owe them $1000 and they owe you $1000. The thing balancing the cash in your account isn't some other customer's cash, it's the debt you owe them. The amount of physical cash in their vault as a result of you taking out the loan hasn't changed at all.
They're required to have a certain amount of cash in reserve to cover cash withdrawals, but that amount is not 100%.
> Yes, it would solve one type of problem. But nobody wants your solution because it’s an unreasonable trade off for everyone to solve an extremely rare edge case.
Can you explain why this is bad? People lived with hard-ish money systems for extremely long periods of time.
> The concepts of assets and liabilities are well understood in the business world. Banks aren’t “lying” and fractional reserve banking does not mean that banks are creating fake dollars. Liabilities have always been part of the equation.
I mean, it's really about how you define words.
Most people believe that they have money in the bank. When in reality, they have unsecured debt to the bank. Although to be fair, for most people that debt is backstopped by FDIC/NCUA.
But, of course, that unsecured debt is often referred to as money, so I can't really blame them too much.
I'd beg to disagree. Bank makes bad bets. VCs put all their eggs in bad bank. VCs now hold a gun to our head.
"But the depositors?!" Who is a depositor of more than $250K cash in an account who can't take a 20-30% haircut, because they didn't understand FDIC insurance? And why shouldn't they? Because they're special?
This is an argument that only makes sense to people with mid 6 figure salaries, a gold plated benefits package, stock options/grants, Uber Eats for lunch. Everyone else says -- "Looks like those depositors made a mistake, huh?"
> everyone has to sit down and evaluate their banks balance sheet before trying to do business with them?
No, if you're not keeping more than $250k in the account, you don't have to do the homework. If you're keeping more than $250k in the account, you can afford to pay someone $1k to do a bit of due diligence.
> so I'm going to go with the banks I know the federal government will backstop.
Sure, there's nothing wrong with that. It's still a nonzero risk, of course.
But it's also not necessary. You don't have to assess the soundness of the bank yourself, really. You can bank with pretty much any random bank and get the same level of safety. You just have to actively manage your risk, is all.
> What they have trouble with is exponential growth at very high rates, which nearly always implies very high risk.
Correct, traditional banking "has trouble" with exponential growth at very high rates. Which means that actually, they do understand something fundamental about it.
> It's an illustration of why banks and bank debt are so important in our economy! This capital-intensive sort of business doesn't happen by an entrepreneur writing a $1 billion check from funds he has on hand.
Aren't you just pushing the "problem" back one step? The entrepreneur writing a $1 billion check from funds he has on hand is now the banker, not the airline guy. Of course, I guess these days you can keep pushing that back until you hit the federal reserve (or other central bank).
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