I don't see "depositors" as a special class of people at all. They're equivalent to shareholders to me. They all poured money in and expected dividends.
The true reality of the situation is that these people lent their money to the bank. To bail them out is equivalent to bailing out shareholders.
Depositors don’t put money in a bank expecting profits!! Yes they might get interest, but the main goal is safe storage of easily accessible money. Where exactly do you expect people to put money if not a bank?! And do you really expect, and want to live in a world where there is such an expectation (due to unreliable financial institutions), the average startup founder to spend time hedging bank risk?
Not to mention that depositors can get their money back without taxpayer money being used. That’s the whole point of the FDIC stepping in. SVB’s assets have value and can be used to give money back; if another bank buys SVB, odds are depositors will get the vast majority of their money back. It’s not a bailout if the government is not spending money and I don’t know why even a positive, non-bailout outcome seems to be viewed unfavorably.
> the main goal is safe storage of easily accessible money
Absolute bullshit. If that was the goal, banks would be 100% solvent at all times. Every single dollar people ever deposited in the bank would be sitting there in the bank's safe.
That's NOT what happens in practice. Banks simply cannot bear to watch a huge pile of money just sitting there safely doing nothing. So they do fractional reserve banking. People deposit 100 dollars at the bank, the bank stores like 10 dollars only and then loans out 90 dollars to anyone in need of cash. Then the bank literally lies to people's faces when they provide a statement saying they have $100 in their "account" when in fact they only have 10 dollars with $90 being tied up in outstanding liabilities and therefore exposing them to risk.
Anyone who "deposits" money at a bank without expecting profits in return has been fooled twice. Thrice if they tolerate "administrative fees" for the "service".
> And do you really expect, and want to live in a world where there is such an expectation (due to unreliable financial institutions), the average startup founder to spend time hedging bank risk?
I understand the mechanism that occurs in reality, but also in practice the average person puts money in the bank primarily for storage. If you ask someone why they have a bank account, odds are the answer is not “to make money”. They do it because it’s commonly held financial advice that this is better than putting cash in a box under their mattress (not just for returns, but for safety and ease of access). It is not fair to lump these people in with shareholders, in terms of profit expectation, and say they have just as little right to their money back.
But perhaps this is a learning opportunity for me. I’m sure you have a stash of money somewhere for paying bills; obviously you need relatively quick access to this stash. You probably also have a larger stash as an emergency fund, which doesn’t need to be as immediately accessible but still needs relatively quick access (so a CD won’t cut it). Where are you putting these stashes? (I guess your personal stashes might be small enough to be FDIC insured, so maybe pretend to be a small startup with a couple millions in cash.)
And regarding your point on banks hating to sit on money - they have to make money somehow as they have bills to pay. They can either charge a fee to hold your money or try to make money off deposits. The latter is obviously riskier, but the former is on average worse for consumers (they lose money by having money..?). If you would rather not pay money to have someone hold it for you, fractional reserves are a necessary construct.
Edit:
> Looks like we live in such a world already
Not if the FDIC successfully makes everyone whole without spending taxpayer money! Which, again, seems like a positive outcome no one should be rooting against.
> in practice the average person puts money in the bank primarily for storage.
> If you ask someone why they have a bank account, odds are the answer is not “to make money”
> They do it because it’s commonly held financial advice that this is better than putting cash in a box under their mattress (not just for returns, but for safety and ease of access).
Well, that's the problem. People actually believe this "your money is safe at the bank" common sense. Tell them otherwise and they treat you like you're one of those tinfoil hat crazies. Maybe they'll believe otherwise when the banks fail and their money is lost.
> It is not fair to lump these people in with shareholders, in terms of profit expectation, and say they have just as little right to their money back.
Sure it is. They loaned their money to the bank. They exposed themselves to the risk that the loan would not be paid back. That they were ignorant of what they were doing does not somehow excuse them of their culpability.
> I’m sure you have a stash of money somewhere for paying bills
I have exactly $0 in my personal checking account. All expenses are paid with credit. Then I pay the bank off in full the second money enters my account. Any and all remainders are immediately invested until $0 remains.
> You probably also have a larger stash as an emergency fund, which doesn’t need to be as immediately accessible but still needs relatively quick access (so a CD won’t cut it).
My emergency fund is about the only thing I keep in a bank account long term. In several liquid investment accounts in different banks. With full knowledge these banks could flop at any moment.
> I guess your personal stashes might be small enough to be FDIC insured, so maybe pretend to be a small startup with a couple millions in cash.
In my country, bank accounts are insured up to some amount per bank per our social security number equivalent. Therefore, when that amount is exceeded, I spread them over multiple banks. If money accumulates to the point I can buy real property, I immediately do so instead of leaving it at the bank.
It's a pretty simple algorithm.
> And regarding your point on banks hating to sit on money - they have to make money somehow as they have bills to pay.
Or they could charge you for the storage service instead. Maybe if banks were in the storage business it'd actually make sense to pay them a single cent in fees. They're not, so it doesn't.
> Not if the FDIC successfully makes everyone whole without spending taxpayer money! Which, again, seems like a positive outcome no one should be rooting against.
Yeah, and everyone just keeps on believing in banks. Positive outcome for them, not for society as a whole.
I guess your system works, but I hope you’d agree it’s quite the hassle! It also seems you’d be ok with paying fees for pure money storage, though hopefully you can see why the average person would hate such a setup.
I think from your POV that banks are horrible, thinking that even depositors should lose their money is in fact a defensible argument. So I concede that your view is one I can respect despite disagreeing.
But in my view, banks are a useful fiction because of the utility they provide (specifically easy storage of and convenient access to money). Even if a person can buy property to reduce bank risk (again, a super inconvenient workaround!), I’m not sure I want _businesses_ to be doing so, especially in light of the likely resulting impact on property values. I acknowledge a system relying on banks indeed has risks, but to me that’s a stronger argument for better regulations and protections to mitigate the risks than it is an argument to dissolve the system and lose its benefits.
I also concede that this fiction is convenient. I oppose it mainly because I completely distrust the current bank based implementation of it. Technology that obsoletes banking has yet to be invented. I thought cryptocurrencies would change something but they turned into stocks instead. Even worse: they literally reinvented banks on top with all of the downsides and none of the benefits. There's also the fact they don't solve secure storage: nothing stops some criminal from holding you at gunpoint and forcing you to irreversibly transfer cryptocurrencies to their wallets. Nothing stops them from kidnapping people and emptying their credit cards and bank accounts either but at least society manages to make the bank absorb some if not all of those losses. My country launched a central bank electronic transfers service and every day I see news of people irreversibly scammed out of tens of thousands.
Real property solves that problem best. The criminal can't take you to the government office with a gun to your head and force you to sign over the property to him. Property is also what capitalism is all about: actually owning stuff. Engaging in it keeps the fabled "you'll own nothing" dystopia at bay.
I do expect interest payments from any money of mine that's not in my physical posession. Checking accounts don't pay interest so I don't use them. They're just a temporary register for my "pay bills" and "invest" operations.
I don’t know where you’ve been banking for the last ten years or so, but I wish I did — interest payments on liquid deposits weren’t a thing for a long time. And startups don’t “invest”, they only “pay bills”.
I'm brazilian so I use brazilian banks. Some of my banks pay me interest on liquid accounts. I don't allow money to accumulate in the accounts of those that don't. I also spread my investments over as many banks as possible: my accounts are independently insured for up to some amount. I also move money off of the banks as soon as humanly possible by buying real property instead. I don't trust them.
You bet. My father did too. It's one of many reasons why he was highly successful in responsibly managing the money of every institution he was ever put in charge of.
They're not shareholders, they are creditors, by definition. That's why bank statements have a little "CR" next to the balances. In a bankruptcy, shareholders get wiped out first, then creditors start taking haircuts... it's worked this way since forever.
The true reality of the situation is that these people lent their money to the bank. To bail them out is equivalent to bailing out shareholders.