Once again I agree, but the only reason people arent racing eachother to the banks is because their money is guaranteed by the federal reserve. If we are to remove that guarantee, which I think we should, then we need a better way to handle the resulting fallout. Again, I’m not looking to bail the banks out, only restructure the banking system so that it reflects that the assets are long term ones.
The Certificate of Deposits are pretty much exactly what I had in mind, though if the bank could not back CDs with assets of longer maturity than the CD, there would need to be CDs of longer maturities than mentioned on Wikipedia.
That helped, thank you.
If we now assume a bank whose issued CD’s are all of equal or longer maturities than the assets backing them, and are tradable on an open market, we pretty much have what I have imagined. In the event that a bank should begin to look shaky (not having quite failed yet), the value of it’s CD’s would drop slightly, and risk averse depositors could sell ther CD’s to less risk averse depositors. This would help the economy by allocating possible losses to people or companies who can bear them (along with the associated higher expected yield).
Perhaps we can advocate for a class of CD only banks, subject to less regulation, whose CDs are of equlal or longer maturity than the assets backing them. These banks would not be insured by the fed, and would be excempt from any insurance related tax. Divide the CD’s into tranches and you have a fully free market alternative to the current banking debacle, while still supplying equally secure investments in the lower tranches.
All that remains to be figured out is how make your CD holdings accessible by debit card. Ie one should be able to sell arbitrary amounts, on demand, when charging to a card, with some backup solution, like short term credit, kicking in if the price was depressed for any reason.
I’m liking this idea more by the minute.
The problem isn’t matching the duration of the loans to the deposits.
The problem is that the value of the loans is in reality about a third (probably less, maybe much less) of the deposits.
Let me give you a very simple example: The bank receives a long term deposit of 300k, then they lend that out on a mortgage for 300k, then the realestate market tumbles because the population isn’t growing and the housing market is grossly over built. The borrower then walks away from the house because it is grossly underwater, leaving the bank with an abandoned house in a deserted neighborhood.
Now the bank owes 300k plus interest on an asset worth 100k if it is lucky. If this is representative of the banks holdings the Bank is now bankrupt (interesting word) it doesn’t matter that the bank doesn’t have to pay off the debt for 30 years, the bank should be closed down at this point. The longer the bank continues to operate and lose money the worse the situation becomes.
What has happened is that we have a ponzi scheme with the government now depositing money into the banks in the vain hope that the people that walked away from their upside down mortgage will come back and start making payments.
The bottom line is that without inflation, the whole system comes crashing down, eventually. The only question is how this crash is going to work itself out. I haven’t got a clue.