Why Do We Even Need Private Banks?(jacobin.com)
jacobin.com
Why Do We Even Need Private Banks?
https://jacobin.com/2023/04/svb-bank-runs-private-federal-reserve-deposits
48 comments
I'm a sheltered young guy but I always thought a bank shouldn't be a business (in the sense as Walmart is a grocery store or Taco Bell is a fast food restaurant). And if they are, the government should be staring over the banks shoulder all the time. I also feel like credit is doing less good than bad and should be done away with. I can see myself changing my mind but this is how I feel right now.
I've always thought the US Post Office model was one worth exploring for more industries (retail banking, stuff like epipens and insulin, etc).
If your lean and nimble business can outcompete the sclerotic and wasteful government, go ahead. No one will be happier than the public and the tax man. If not, then people will get their services from the public option.
If your lean and nimble business can outcompete the sclerotic and wasteful government, go ahead. No one will be happier than the public and the tax man. If not, then people will get their services from the public option.
In the USPS (also true of the US Post Office, but that hasn’t existed for quite some time) model, the government enterprise has an enforced legal monopoly, it is not in free and open competition wih private actors.
Im not american, so might be missing some context, but what is the monopoly?
You can use Fedex, UPS etc to ship anything from anywhere to anywhere. Nothing is stopping you from using fedex to ship your christmas cards as well. I assume people stick with USPS for simple letters because its cheaper and easier, not because of any enforced monopoly.
You can use Fedex, UPS etc to ship anything from anywhere to anywhere. Nothing is stopping you from using fedex to ship your christmas cards as well. I assume people stick with USPS for simple letters because its cheaper and easier, not because of any enforced monopoly.
> Im not American, so might be missing some context, but what is the monopoly?
There’s a monopoly on residential letters, and a monopoly on mailbox access:
https://en.wikipedia.org/wiki/United_States_Postal_Service#U...
> You can use Fedex, UPS etc to ship anything from anywhere to anywhere.
You actually can’t, there are very specific rules for what you can use a non-postal carrier to send to which addresses and at which prices. Which is why you don’t see general, non-express, or cheap letter delivery from third-party services.
There’s a monopoly on residential letters, and a monopoly on mailbox access:
https://en.wikipedia.org/wiki/United_States_Postal_Service#U...
> You can use Fedex, UPS etc to ship anything from anywhere to anywhere.
You actually can’t, there are very specific rules for what you can use a non-postal carrier to send to which addresses and at which prices. Which is why you don’t see general, non-express, or cheap letter delivery from third-party services.
This is the sense that I meant it in, obviously they are peculiarities in the 18th century institution of the postal service that may or may not be worth copying over.
> obviously they are peculiarities in the 18th century institution of the postal service
The USPS was created in 1971, which is not the 18th Century.
(Heck, even the monopoly rules that originally applied to the Post Office that now apply to the Postal Service were first established in the 19th, not 18th, century.)
The USPS was created in 1971, which is not the 18th Century.
(Heck, even the monopoly rules that originally applied to the Post Office that now apply to the Postal Service were first established in the 19th, not 18th, century.)
A useful thought experiment is to consider why things might exist in the first place.
Credit serves lots of useful functions in the economy, and has done since ancient times[1]. Consider someone (say a farmer) who needs to make investments (seed, fertilizer, equipment etc) that will pay off in the future (when the crop is harvested and sold). It would be very much harder for them to run their business if they could not borrow, or forward sell their produce (which is an agreement that requires credit as a basis).
Or consider a merchant who needs to import or export goods. While the ship is at sea, either the buyer or seller almost certainly requires credit.
Think about very large assets (eg houses). Most people who buy property require a loan. To buy a house for cash where I live would require a literal lifetime of saving - where would you live in the meantime? You would need to rent. How would your landlord be able to buy a property if they could not borrow? If you did eliminate borrowing to purchase property literally only the ultra-rich would own property and they would own all the property. This would enforce an extreme unfairness that would be self-perpetuating as it would be practically impossible to transition from the renting to the owning class. This is similar to Europe in the early medieval period when hereditary landed gentry owned all the property and as a result the vast majority of people lived lives of abject poverty.
In general if credit did not exist, economic activity as a whole would be severely curtailed.
Do people use or extend credit unwisely? of course they do. Should it be done away with? Probably not, or not without understanding the profound implications this would have across the economy.
[1] https://erenow.net/ancient/money-in-classical-antiquity/6.ph...
Credit serves lots of useful functions in the economy, and has done since ancient times[1]. Consider someone (say a farmer) who needs to make investments (seed, fertilizer, equipment etc) that will pay off in the future (when the crop is harvested and sold). It would be very much harder for them to run their business if they could not borrow, or forward sell their produce (which is an agreement that requires credit as a basis).
Or consider a merchant who needs to import or export goods. While the ship is at sea, either the buyer or seller almost certainly requires credit.
Think about very large assets (eg houses). Most people who buy property require a loan. To buy a house for cash where I live would require a literal lifetime of saving - where would you live in the meantime? You would need to rent. How would your landlord be able to buy a property if they could not borrow? If you did eliminate borrowing to purchase property literally only the ultra-rich would own property and they would own all the property. This would enforce an extreme unfairness that would be self-perpetuating as it would be practically impossible to transition from the renting to the owning class. This is similar to Europe in the early medieval period when hereditary landed gentry owned all the property and as a result the vast majority of people lived lives of abject poverty.
In general if credit did not exist, economic activity as a whole would be severely curtailed.
Do people use or extend credit unwisely? of course they do. Should it be done away with? Probably not, or not without understanding the profound implications this would have across the economy.
[1] https://erenow.net/ancient/money-in-classical-antiquity/6.ph...
Governments are staring over the banks shoulders all the time! See banking regulators, FDIC, OCC, etc.
In some countries, all or most banks are state owned. It can work.
Most people would never be able to buy a house without credit. Along with many other reasons why credit is necessary.
The concept of 'buy a house' is predicated on many other systems that make credit 'necessary'. Why do you think a person needs to 'buy a house' at all?
> Why do you think a person needs to 'buy a house' at all?
Because people need a place to live, it would be helpful if you stated which alternatives you have in mind?
Renting for the rest of your life? Building a house, paycheck to paycheck? Something more radical, like abolishing private housing and give every citizen a place to live, for free?
Because people need a place to live, it would be helpful if you stated which alternatives you have in mind?
Renting for the rest of your life? Building a house, paycheck to paycheck? Something more radical, like abolishing private housing and give every citizen a place to live, for free?
I'm not saying there is anything wrong with credit but the ol latin american method of buying a house one brick at a time does work. You may have to buy the land all at once, but even where I live (top 10 city) that's doable for roughly what a down payment costs.
Except it's not impossible or even unusual: look into post office savings and checking accounts. We used to have this in the UK until relatively recently. It's entirely possible and not inherently doomed to corruption.
I find this a lot in comments from Americans on topics like this, this ignorance of other ways things have been done. You get comments like the parent talking about alternative ways of doing banking, or medical care, or a host of other areas as if they're impossible abstract thought experiments instead of things that have been actually done in other places in the real world.
That's not to say these other ways of doing things are without flaw or above criticism, just that they do in fact exist.
That's not to say these other ways of doing things are without flaw or above criticism, just that they do in fact exist.
don't private businesses have bureaucracy?
Because anything run by politicians and involving large amounts of money is doomed to corruption.
Bankers might be pricks, politicians are crooks and thieves.
Bankers might be pricks, politicians are crooks and thieves.
I would say rather,
humans who feel unconstrained because they are insulated from view, cupability, and consequence by virtue of their institutional agency-laundering,
will matter of factly engage in almost any kind of awful behavior, especially bloodless ones,
exactly so long as they are able to allay cognitive dissonance, which is very completely done when it's not them, it's <institution> or <role> or <rule>.
The difference in taxonomy of standard evils executed by bankers, C-suite types, the very rich, religious authorities, and politicians, vary primarily as a function of the opportunities afforded by each role and the risk-reward surface it affords.
Those who thrive in (and most effectively exploit without cognitive dissonance) a given institution in turn underpins the attractor and filter functions for those roles.
Cops priests politicians entrepreneurs—they all have their well-known shadow-side stereotypes, for the damn good reason that those stereotypes are rooted in the recurring abuse each invites.
Humans, anonymized and/or elevated, deeply suck to at least one standard deviation. Or perhaps you can say, there is no shortage of humans who suck, exactly enough as needed to fully exploit the available amoral crime space; and recruit for it, teasing out and amplifying what might otherwise have been latent.
That our society (or I would say, species) has not figured out how to corral this behavior bodes ill.
humans who feel unconstrained because they are insulated from view, cupability, and consequence by virtue of their institutional agency-laundering,
will matter of factly engage in almost any kind of awful behavior, especially bloodless ones,
exactly so long as they are able to allay cognitive dissonance, which is very completely done when it's not them, it's <institution> or <role> or <rule>.
The difference in taxonomy of standard evils executed by bankers, C-suite types, the very rich, religious authorities, and politicians, vary primarily as a function of the opportunities afforded by each role and the risk-reward surface it affords.
Those who thrive in (and most effectively exploit without cognitive dissonance) a given institution in turn underpins the attractor and filter functions for those roles.
Cops priests politicians entrepreneurs—they all have their well-known shadow-side stereotypes, for the damn good reason that those stereotypes are rooted in the recurring abuse each invites.
Humans, anonymized and/or elevated, deeply suck to at least one standard deviation. Or perhaps you can say, there is no shortage of humans who suck, exactly enough as needed to fully exploit the available amoral crime space; and recruit for it, teasing out and amplifying what might otherwise have been latent.
That our society (or I would say, species) has not figured out how to corral this behavior bodes ill.
Well-regulated bankers are usually not crooks and thieves.
But politicians write the regulations. If they're regulating themselves... the darker sides of human nature inevitably show up.
But politicians write the regulations. If they're regulating themselves... the darker sides of human nature inevitably show up.
"Regulating themselves" is a misnomer and rarely happens in government.
Judges are regulated because they can't bring forth cases. Only a prosecutor can. The prosecutor is regulated because they can't make a decision, only the Jury can (and the Judge handles meta-decisions). The Police cannot execute you, they can only had evidence over to the prosecutor.
"Government" is about designing a system of different people, doing different jobs, doing different checks and balances against each other. Anyone who thinks "Oh, X just will self-regulate" is looking at the worst of strawmen.
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That being said, in many cases we don't know what kind of system should exist to move forward. In these cases, having the free market self-regulate while we figure out issues is probably better. Later on, we can write laws that benefit everyone once we understand what the heck is going on.
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I don't think our banking system is doing much wrong. Yeah, I'd prefer if SVB didn't take a bunch of people's money, but the shareholders (and maybe even the bondholders) are going to be wiped out by this debacle. FDIC taking over in the case when things get bad did work, I just personally disagree with what the FDIC did.
Judges are regulated because they can't bring forth cases. Only a prosecutor can. The prosecutor is regulated because they can't make a decision, only the Jury can (and the Judge handles meta-decisions). The Police cannot execute you, they can only had evidence over to the prosecutor.
"Government" is about designing a system of different people, doing different jobs, doing different checks and balances against each other. Anyone who thinks "Oh, X just will self-regulate" is looking at the worst of strawmen.
---------
That being said, in many cases we don't know what kind of system should exist to move forward. In these cases, having the free market self-regulate while we figure out issues is probably better. Later on, we can write laws that benefit everyone once we understand what the heck is going on.
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I don't think our banking system is doing much wrong. Yeah, I'd prefer if SVB didn't take a bunch of people's money, but the shareholders (and maybe even the bondholders) are going to be wiped out by this debacle. FDIC taking over in the case when things get bad did work, I just personally disagree with what the FDIC did.
> "Government" is about designing a system of different people, doing different jobs, doing different checks and balances against each other.
This definition of government from an 8th grade civics textbook is an extraordinary claim that requires extraordinary evidence, since all the evidence we have from the historical records shows that states are captured by economic elites to the point of stagnation until that economic elite is violently displaced or is forced to reform due to external threats.
> That being said, in many cases we don't know what kind of system should exist to move forward. In these cases, having the free market self-regulate while we figure out issues is probably better.
This also runs against the historical record and requires extraordinary evidence or at least some walkthrough of how you reached the conclusion that self-regulation was probably better, or even possible.
Ie, without postulating a utopian society made up of some kind of post-human who is more moral and more intelligent than all hitherto existing humans, it's unclear why anyone would expect the wealthiest and most influential to refrain from engaging in both the expansion and the capture of state power for their own self-interest. Such a species would have to be engineered and universal because there's no way you could get such traits through natural selection nor can you find them in the cognitive architecture or evolutionary history of primates.
This definition of government from an 8th grade civics textbook is an extraordinary claim that requires extraordinary evidence, since all the evidence we have from the historical records shows that states are captured by economic elites to the point of stagnation until that economic elite is violently displaced or is forced to reform due to external threats.
> That being said, in many cases we don't know what kind of system should exist to move forward. In these cases, having the free market self-regulate while we figure out issues is probably better.
This also runs against the historical record and requires extraordinary evidence or at least some walkthrough of how you reached the conclusion that self-regulation was probably better, or even possible.
Ie, without postulating a utopian society made up of some kind of post-human who is more moral and more intelligent than all hitherto existing humans, it's unclear why anyone would expect the wealthiest and most influential to refrain from engaging in both the expansion and the capture of state power for their own self-interest. Such a species would have to be engineered and universal because there's no way you could get such traits through natural selection nor can you find them in the cognitive architecture or evolutionary history of primates.
Because under a fully deregulated scheme, corporations will raise a private Navy + private Army and then conquer India... effectively becoming a government on their own.
Governments, in general, are constantly "less bad" schemes compared to their predecessors. The Roman Republic is pretty bad by today's standards, but it was far superior to other forms of government in the timeframe it existed in.
The discussion of "Government" is innately about "Good Government", not bad ones. A good government will split responsibilities in a way that proves to everybody that its trustworthy. That's the lesson on modern civics (ie: anything from the Magna Carta or more recent).
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In any case, I'm not convinced that the fully privatized scheme discussed in this blogpost is to anyone's benefit. The current scheme of free-market banks that collapse on their own (and then the US Government stepping in afterwards) has numerous benefits in practice.
Governments, in general, are constantly "less bad" schemes compared to their predecessors. The Roman Republic is pretty bad by today's standards, but it was far superior to other forms of government in the timeframe it existed in.
The discussion of "Government" is innately about "Good Government", not bad ones. A good government will split responsibilities in a way that proves to everybody that its trustworthy. That's the lesson on modern civics (ie: anything from the Magna Carta or more recent).
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In any case, I'm not convinced that the fully privatized scheme discussed in this blogpost is to anyone's benefit. The current scheme of free-market banks that collapse on their own (and then the US Government stepping in afterwards) has numerous benefits in practice.
I appreciate you clarifying your points where they were proscriptive rather than descriptive, it is certainly a common civc intention of government and a persistent ideal of governance.
In a previous era from 1890-1910, the purpose of "trust busting" and regulating industry was specifically to limit the threat of any single private entity from creating enough systemic risk to be considered "too big to fail."
There's nothing particularly pro-market about saying that habitual drunk drivers who no entity will sell accident insurance to must be retroactively insured for free by the government to contain the systemic risk they inflict on sober people.
The legitimate benefits of the technological innovations that've come from no-downside financial speculation appear to be increasingly portable, available to other societies either through reverse-engineering or commodities-for-technology-transfer or outright espionage.
So regardless of how much the top 5-20% of Americans and their cultural institutions have a moral or predictive-utilitarian argument for the societal and technological benefits of concentrated capital and financial policy that sees the wealthiest capture a larger percentage of GDP decade-over-decade, it appears to be internally destabilizing and internationally weakening by nearly any metric one could name.
To steelman the other side of this, one could argue the decline is overstated and temporary or attribute it to other factors. But it's no longer the case that a majority domestically or internationally is confident that this is the least bad system to emulate out of all the really existing systems.
Powers in decline and relative elites within them tend to spend a lot of time creating theories for why the majority is wrong to feel the way they do, but historically that strategy has failed, regardless of if what replaces the existing system eventually turns out to be even worse.
In a previous era from 1890-1910, the purpose of "trust busting" and regulating industry was specifically to limit the threat of any single private entity from creating enough systemic risk to be considered "too big to fail."
There's nothing particularly pro-market about saying that habitual drunk drivers who no entity will sell accident insurance to must be retroactively insured for free by the government to contain the systemic risk they inflict on sober people.
The legitimate benefits of the technological innovations that've come from no-downside financial speculation appear to be increasingly portable, available to other societies either through reverse-engineering or commodities-for-technology-transfer or outright espionage.
So regardless of how much the top 5-20% of Americans and their cultural institutions have a moral or predictive-utilitarian argument for the societal and technological benefits of concentrated capital and financial policy that sees the wealthiest capture a larger percentage of GDP decade-over-decade, it appears to be internally destabilizing and internationally weakening by nearly any metric one could name.
To steelman the other side of this, one could argue the decline is overstated and temporary or attribute it to other factors. But it's no longer the case that a majority domestically or internationally is confident that this is the least bad system to emulate out of all the really existing systems.
Powers in decline and relative elites within them tend to spend a lot of time creating theories for why the majority is wrong to feel the way they do, but historically that strategy has failed, regardless of if what replaces the existing system eventually turns out to be even worse.
At least in the US politicians surely “regulate” themselves. They pass laws setting their benefits, pay schedules, etc. They can even exempt themselves from laws (insider trading cough).
> Police cannot execute you...
In theory
In theory
ctrl-F "Postal Banking". Sigh.
I'd love to read a good comparison of the different ways to bring the money flows savers, investors, borrowers, and businesses into harmony, and the question of how to allocate risk and losses. But this comes across like Ackerman has never heard of postal banking, or any of the other institutions that might fill this role like trusts, credit unions, churches, fraternal orders, etc. Oh, Jacobin.
I'd love to read a good comparison of the different ways to bring the money flows savers, investors, borrowers, and businesses into harmony, and the question of how to allocate risk and losses. But this comes across like Ackerman has never heard of postal banking, or any of the other institutions that might fill this role like trusts, credit unions, churches, fraternal orders, etc. Oh, Jacobin.
Because having only one entity that lends money is a bad idea...
The only idea that could be worse is having a multitude of private lending entities that collect almost all the profits backed by only one public entity that's stuck with almost all of the risk. A marxist might call it "dictatorship of the capitalist class" but any honest libertarian would call it an obvious moral hazard.
But then again, people who understood things that actually work better than Marxists and libertarians would realise that the public entity isn't stuck with nearly all the risk, because enough bad loans still wipe out bank shareholders (and the liquidity risk of maturity transformation is eliminated altogether). The moral hazard in banking operates at the level of individual bank employees' incentives, and that isn't exactly reduced by making them all state employees with political masters...
You seem to be describing a theoretical model which doesn't fit with an empirical description of the events of the last 15 years of the banking sector in the US. It's an interesting premise for a work of fiction or as a description of the 19th century but seems orthogonal to any discussion of banking in the US as it really exists today. This line of reasoning is no longer persuasive within or outside of the US so it's sort of like reprinting old war propaganda rather than engaging with modern historiography.
Nope. I'm describing a reality in which Silicon Valley Bank et al shareholders have all been wiped out. Same with Lehman Brothers et al last time round. Their bad loans and securitised loan purchases were very much not in the interests of their shareholders, who very much did bear the downside risk of them. Other bailout recipients repaid their emergency loans (just like profit making companies in every other sector borrowing from a hypothetical State Bank would be expected to in an alternative arrangement where the state decides to handle the consumer side and lend to everyone except money lenders)
Certainly the line of reasoning that the bailouts could be skipped altogether in an idealised system is very persuasive as a propaganda line for people proposing terrible policies like "what if it was impossible for people or businesses to borrow money without the approval of the state board for borrowing money" (or "what if ordinary depositors were subject to the same risks as capitalist investors") and arguments like the OP's which conflate the concept of maturity mismatch and insolvency are very persuasive to people that don't know the difference. But personally, I prefer to analyse how things work rather than compare their respective propaganda values
Certainly the line of reasoning that the bailouts could be skipped altogether in an idealised system is very persuasive as a propaganda line for people proposing terrible policies like "what if it was impossible for people or businesses to borrow money without the approval of the state board for borrowing money" (or "what if ordinary depositors were subject to the same risks as capitalist investors") and arguments like the OP's which conflate the concept of maturity mismatch and insolvency are very persuasive to people that don't know the difference. But personally, I prefer to analyse how things work rather than compare their respective propaganda values
I’ve always wondered, if one buys, lends and sells their own commodities, aren’t they performing “banking”? Seems like if I were a government, I would want to centralize that behavior and limit it. But if I was an individual, I would want to maximize it.
Why do we even need banks? What does the financial industry provide? If we were to restructure everything, what would make sense? What are the invariant properties of a viable financial system?
Who else is going to lend you money to buy a house or start a business? Who else will keep your money safe from fire and theft and pay you for the privilege?
Wait. We are exploring boundaries and understanding and not necessarily maintaining the present system. Money? Lend? Ownership? Business? Protecting money? Payments? Privilege? Banking? These are all up for rethinking.
Feel free to come up with a new system that works better. Good luck (so far, all alternatives have proved worse, and not just slightly worse but terribly worse)
The Fed. I guess you didn't read the article.
Edit: retracted!
The original comment asked what the financial system provides society. I gave examples.
> Jacobin
> Why Do We Even Need Private _____
> Why Do We Even Need Private _____
the original intent, at least in the usa, was to take away power from the government so that the people have more control or something. im not entirely sure, so take mine as grain of salt
I don't disagree or agree with the piece, but for those unfamiliar with the publication, the Jacobin is profoundly socialist. So, the question posed is not really necessarily inquisitive in nature, or at least, the author had a strong opinion before sitting down to write this piece.
Because the Federal Reserve has done such a bang up job.
Any large bureaucracy has standards for loan/lending evaluation. Inevitably those standards become more and more restrictive and conservative, because of risk management.
Private businesses are willing to take on more risk to reach different segments of a market.
As an example, take SVB. One of SVB's markets are startups: companies with no track record, spotty revenues, large and non-repeating transactions, and fluid ownership. A normal bank would consider a startup a money-laundering operation: no visible sources of income, with really large incoming and outgoing transactions that happen intermittently. Many startups also do business internationally, which is another huge red flag for normal banks.
This makes a regular bank much, much slower. Normal banks will put holds on financial transfers because of...risk management. SVB didn't, because that's their "normal."
It's the same for underserved/unbanked (ie: poor) communities. Lending standards have to be different because the community is different. In fact, the new wave of FinTech places are experimenting with other ways of judging creditworthiness, which would be very difficult or impossible to do in a large institution because of...you guessed it, risk management().
It's the same with private businesses vs public businesses. Why not just have a Wal-Mart run by the state? Oh, because every new vendor somehow will need to scale out massively to sell a product...which is probably impossible, both financially and logistically.
Is it possible to design a bureaucratic structure that is both all-encompassing and flexible? Probably...but in the (albeit short) history of bureaucracy it hasn't been done successfully.
() these small fintechs eventually get bought by the big players if the tech proves out