Thoughts on the Bank Bailouts
Financing risk-taking with deposits is an inherently fragile business model that depends on persistent government support. There are alternatives.
Banks are speculative investment funds grafted on top of critical infrastructure. This structure is designed to extract subsidies from the rest of society by threatening civilians with crises if the banks’ bets are ever allowed to fail. The U.S. government’s response to the collapses of Silicon Valley Bank and Signature Bank—effectively removing the $250,000 cap on deposit insurance while letting lenders borrow relatively cheaply against fictitious asset values—is a reminder that those threats usually work.1
But there is a better way. Instead of expanding subsidies to private businesses, the public sector should embrace its role as a financial intermediary. Money and the payments system are public goods. Banks could focus on (what should be) their core competency: identifying creditworthy borrowers and making profitable loans.
The good news is that banks do not need access to trillions of dollars of uninsured deposit financing to do this, nor do they need to hold trillions of dollars of government-guaranteed bonds plus trillions of dollars of cash and equivalents. The default-free assets could migrate to the Federal Reserve, while the money-like claims would be better managed by money market funds. Other fixed income assets could be absorbed by bond funds and ETFs (at new prices, but that’s life), while investor appetite for “private credit” suggests that even parts of the banks’ core lending franchises could be segregated from insured deposits without too much disruption.