As a former trading desk guy I struggle to see how the system allows things to be marked-to-cost. Or rather, why is it that we allow a bank to not mark-to-market a security for which there is a liquid market?
Allowing the bank to pretend it has more assets than it actually has seems to be an invitation to hide risk. If they had to MTM their underwater bonds, they would would have been pushed to raise capital earlier, or they would have cut their losses earlier.
It should be straight up "I have these deposit liabilities, I have this book of assets, oops, my assets are down a bit, lets do something about it". Instead of "I'm gonna run the gauntlet and hope the business survives until these bonds come in".
There are liquidity, jurisdiction and tax considerations that go into bond accounting. Under both US GAAP and IFRS you can't flip between held to maturity, available for sale and m2m asset classification advantageously. I think this is ok -- it's impractical and misleading for a bank to value every liability and asset by rebaselining value constantly. How would you determine fair value for a bespoke security anyway? No matter what you did it would be largely guesswork anyway. This change would make banks more difficult to value and increase volatility since performance would be even more heavily driven by market conditions. In my opinion, accounting statements aren't really the right place for the kind of disclosure you're looking for.
The Basel accords are supposed to establish a risk-oriented way of measuring and controlling capital risk limits across asset classes. SVB and other regional banks fought heavily against being subject to this kind of oversight. I think it makes more sense to rework Basel 4 based on this failure rather than change the accounting standards.
Many types of institutions have to mark to market on a ~constant basis, so it's not impossible. Yes there are certain asset classes (private companies, for example) that don't have easy or reliable marks (but people still do it anyway!). But at least for SVB the issue was not determining the market value, but that the market value was bad.
> why is it that we allow a bank to not mark-to-market a security for which there is a liquid market?
Because at maturity, the bank gets back its money. So it is perfectly valid to say "in ten years, this $100m bond is worth $100m...and I intend to hold it for ten years, so it's worth $100m [equivalent] today". The "I intend to hold it" is the relevant part of the valuation, though.
> The "I intend to hold it" is the relevant part of the valuation, though.
Yup, and definitely anticipate there will be major new regulations in this area. A huge part of SVB's book of bonds were categorized as "Hold to Maturity". And, legally, if you mark bonds as HTM, you are not allowed to hedge against their interest rate risk. Basically, the regulations say that if you're hedging against interest rate risk, you don't really intend to hold to maturity, so you need to put them in the "Available for Sale" category.
The fact that SVB had such a huge book of bonds at paltry rates with no/minimal hedging is just awful risk management.
>So it is perfectly valid to say "in ten years, this $100m bond is worth $100m...and I intend to hold it for ten years, so it's worth $100m [equivalent] today".
But that valuation model is not perfectly valid. It's only partially valid under limited scenarios.
As many comments have already pointed out, the issue is the bank has customers with demand deposits. The customers can demand withdrawal of their money anytime -- without advanced notice. In other words, SVB is not a hedge fund that has the customers' deposits contractually locked up for 10 years.
Therefore, the "10 year bond held to maturity" assumption becomes invalid if the bank has to sell them prematurely at distressed discount prices -- to meet liquidity requirements of demand deposits.
You can't use value securities as "mark-to-intended-optimal-future" as an alternative to "mark-to-market" for purposes of insolvency risk calculations.
Welcome to a non-zero interest rate environment. "$100m equivalent today" is not $100m -- the term to search for is "net present value". These considerations are precisely what marking to market captures
But the entire point of computing current assets is to understand the effects of rapid withdrawals from the bank. If you are trying to predict the future value of the bank or how much money they will make then looking at the value at maturity makes sense. But the regulatory system doesn't (or shouldn't) care about that. The regulatory system should be concerned with estimating and mitigating the risk of sudden bank failure.
The problem, though, is that it's not necessarily 100% up to them whether they'll hold it to maturity, since withdrawals can force them to liquidate it. It seems like they should have a ruling forcing the use of some formula that factors in this possibility.
In the extreme - obviously you can't buy a call option and say 'I intend to hold this until it's $10 in the money, so it's actually worth (time-adjusted) $10'. What's the difference, besides probabilities of outcomes?
I'm surprised no one has already mentioned this series of events:
- Enron used "creative" accounting and mark to something style procedures to create fake valuations
- They go out of business.
- Regulators say, "Hey! Now you need to mark to market always!"
- 2008 happens. Markets for things like CDOs and CDSs dry up almost overnight. At the very least most of the liquidity is gone and spreads get VERY big
- B/c of the above coupled with rules of "you need to mark to market" and "if value falls X% you have to sell", lots of selling happens in low liquidity environments and therefore prices fall more, the downward cycle begins
- Post 2008, people realize that "mark to market, always!" maybe isn't the best idea.
- I would imagine, that's why the Govt is saying "Ok, we will pretend that your assets are worth par value". They don't want to trigger the downward spiral.
It's also interesting to note that the Govt made money on many of the assets they bought in 2008 at well below par value. The implication is that those assets were undervalued when they bought them. Again, I would imagine this is a selling point of the idea "the par value is probably not that bad price to pay for these things now".
> B/c of the above coupled with rules of "you need to mark to market" and "if value falls X% you have to sell", lots of selling happens in low liquidity environments and therefore prices fall more, the downward cycle begins
This is a _good_ thing. We don't want a house of cards that's so fragile as soon as it looks like it it's going to fall down, we pour glue all over it and prop it up with cardboard.
Assets need to fall in value so that the next guy can have a chance to thrive. Some bank collapsing is an opportunity for some of the younger folks to buy up a piece, or leave with a team and a book of customers.
We should have this happen regularly so that it isn't an earthquake each time.
> At the very least most of the liquidity is gone and spreads get VERY big
Isn’t this just a way of saying “nobody wants to pay what I want to pay me?”. Unless it’s actually worthless, there’s a buyer, you just may not like the price.
The liquidity on my used socks is gone and spreads are very BIG. Why yes, I won’t sell for less than what I paid for them new, but it’s the market that’s failed, not my insane pricing demands.
The basic job of a retail bank is to fund long-term loans with short-term deposits. A bank which is doing this optimally is still curiously vulnerable to bank runs. If all short-term deposits decide to redeem at once, that collective decision might render the bank insolvent and incapable of returning deposits at par, because not all long-term loans can be immediately redeemed/sold at par. In the normal course of business, nobody thinks too hard about this. Asking such an institution to MTM (which is intrinsically about immediate redemption/sale value) is asking everyone to document and consider a bank's inability to immediately redeem all depositors. We're doing more of that, which has pros and cons. (Recent MTM disclosures set off the SVB run in advance of a planned SVB equity fundraise.)
Finance is an imaginary staircase that only works until we look down and freak out. We don't document the robustness of the stairs because the stairs aren't real.
> basic job of a retail bank is to fund long-term loans with short-term deposits.
CDs are a thing. Unpopular because their rates sucked but that hasn’t always been the case.
Long-term loans become like short term loans closer to maturity. A mature bank should have a fair amount maturing every year, mortgages 24 or 23 or whatever years ago. Along with some early repayments or reissuances from people moving. Or 4 years ago for a vehicle, etc.
It seems to me (being uneducated in the matter) that if a bank is holding US government debt (treasuries) as "hold to maturity" that the US Government should have some ability to offer a line of credit against those assets for cases like this one was.
Or that the bank should be able to say "depositor X transferred $100 million to Chase, so we sent Chase a wire for $10 million and treasuries marked HTM worth $90 million" or something.
> It seems to me (being uneducated in the matter) that if a bank is holding US government debt (treasuries) as "hold to maturity" that the US Government should have some ability to offer a line of credit against those assets for cases like this one was.
Yes, the Fed basically did this.
See the recently (Sunday) announced "Bank Term Funding Program", which basically says if banks hold securities from the Federal government, the Federal Reserve will accept it as collateral for a loan, the collateral valued at par.
You don't even need the government to do it; the thing you're talking about is called repo. A bank agrees to sell high-quality collateral to another bank and then buy it back the next day for a little more (the level of interest paid gives us SOFR: the Secured Overnight Funding Rate).
The repo market is vast and generally massively liquid; trillions of dollars of funding per day.
>Or that the bank should be able to say "depositor X transferred $100 million to Chase, so we sent Chase a wire for $10 million and treasuries marked HTM worth $90 million" or something.
Why? HTM bonds are not cash so they are not interchangeable. This is like if you were forced to accept a 10 year IOU in place of cash from your employer.
> US Government should have some ability to offer a line of credit against those assets
What is the difference between what you are saying and just buying back the bonds before maturity?
Anyway, governments do usually have all kinds of lines of credit against bonds. And when there is a difference, it's for the benefit of the government.
That would fall over as soon as people decided to "Cash out" the United States. Which would be an interesting exercise tbqh. Probably catastrophic, but interesting. If the People went one way, and the Government another. We're most certainly entering Failed State territory at that point.
>Or rather, why is it that we allow a bank to not mark-to-market a security for which there is a liquid market?
I agree with your main point.
You'd have to be careful with regulation around this, because what you might end up with is banks preferentially seeking assets for which there is not a liquid market so they can pretend they are worth more. That's... not an obvious improvement.
As I understand it, banks have some assets that are marked-to-market, and others that are assumed to be held to maturity. Their classification is determined when they are purchased, but there are rules governing the mix.
To some degree this makes sense, because if the maturity timelines and classification are correct the bank is only losing opportunity cost and inflation-adjusted dollars. Not actual dollars.
Meanwhile, if they need money from the fed it is offered against collateral based on mark-to-market value.
> It should be straight up "I have these deposit liabilities, I have this book of assets, oops, my assets are down a bit, lets do something about it". Instead of "I'm gonna run the gauntlet and hope the business survives until these bonds come in".
The “let’s do something about it” could actually be business as usual. Look at the “deposit beta” in that article: when interest rates increase, mean rates banks pay on deposits increase less. So you can have a bank with a low mark-to-market value (assume all deposits liquidate at par and securities are sold at mid-market), but that ignores the value of the enterprise itself. Or you can project forward (to a specific time or times, not necessarily to the arbitrary maturity of each security), and you may well find that you end up with enough money at every point in the future to be quite comfortable, assuming your deposits stick around and continue to earn less than market interest.
Imagine you worked at a magic trading desk where you could issue a very special bond: you borrow money right now, and you pay a floating interest rate that is set at 1/2 the federal funds rate. This is a great deal, but it comes with a catch: the bond holder can call the debt at any time, which they will do on occasion at random but will do en masse if they don’t like you. Also, people can lend you money on these terms and you have to accept the deal. How would you make money on these? How would you account for them?
I agree that HTM accounting, done carelessly, can lead to wrong conclusions.
Isn't the short answer that if you made banks be flat interest rate delta, it would be impossible to make money as a bank - and therefore there would be no banks?
If a bank that makes a mortgage loan has to buy an interest rate swap that zeros out the interest rate risk on that loan, then the replicating portfolio is basically ... nothing ... right?
> As a former trading desk guy I struggle to see how the system allows things to be marked-to-cost. Or rather, why is it that we allow a bank to not mark-to-market a security for which there is a liquid market?
Many of their assets aren't really fungible either. Mortgages are the canonical example: yes they can now be turned into MBS, but your local credit union just issues and holds them). The same is true of the commercial loan to the local stationary business. As far as I know those aren't bundleable into commercial paper securities. The debtors do the same: they don't treat their loan as having any market value at all beyond what it had when issued. House prices generally don't mark to market except in places with property tax assessment.
> your local credit union just issues and holds them [mortgages]
I was on BoD of a CU. About the only thing we didn't resell were loans which did not conform. The business was to originate, quickly resell, and do some more.
There is a massive conflation of insolvency and illiquidity going on here, because the distinction requires more mathematical finesse than most people have.
A bank is illiquid if its holdings require time to sell at "market price". Selling things like mortgages requires time because the buyer has to perform due diligence. If i have to sell mortgages right now, I'm going to be getting an awful price for them.
OTOH, i can sell treasuries in a fraction of a second at the ask price minus epsilon. It's not a liquidity problem, its an assets < liabilities problem, (as you clearly state, I'm just frustrated by the discussion here).
So in a downturn all of the banks would just seem insolvent.
What is the alternative ? To have the banks trading on a millisecond basis so that the mark to market value of assets is positive ? What about the transaction fees ?
You just know that all the losing trades went from the hold-to-sell-for-a-profit book to the hold-to-maturity book.
In the olde days that was the bottom drawer where you would stuff the losing tickets at the end of the day and hope that they were in the money tomorrow.
The answer is simple of course, which is why no one does anything; the political and finance systems are in cahoots to enrich themselves and so such common sense policing to insure the stability of the system everyone relies on is not allowed.
Finance crimes are low tech and have not evolved much as they don’t need to; there’s no policing.
Have a go at it, elites scream communism and the like, and rile up the 2nd Amendment fan boys, only to throw the ones that go over the line in jail to keep up appearances.
I’ve been noting and watching this same social ebb and flow since the 80s. The kids/teens then who soaked that reality up live it still today. IMO memory is why we had a mini-Reagan in Trump grow so popular.
The reason such things you point out are allowed is they’ve always been allowed from the perspective of those benefiting from them. If the system was stable and accountable to the masses, the phony winners rich off mathematical inference but too inept to keep themselves alive would of course be subject to a terrible regime should elites be required to pull on their boot straps; a figurative identity of being coddled is all they know!
You know as well as I that the reason is that cash was able to sit in banks without losing money as a depositor. That gentleman's agreement is gone, due a set of actors' individualistic and uncooperative actions.
Talking about the detail is wasting the effort when the problem is located at higher level, which is, the whole system is built in a socialism territory, started when Gold is by planning (major element of socialism), taken away from banking industry.
"This was complicated by some banks finding it surprisingly difficult to add numbers quickly… We have a report of Friday outflows, but it gets crunched by an ETL job which only finishes halfway through Saturday, and Cindy who understands all of this is on vacation, and… and eventually very serious people said Figure Addition The #*(%#( Out And Call Me Back Soonest"
As someone who has written ETL jobs for banks, this hits home.
I thought financial companies had regulations against bottlenecks like that? Something like, every employee has to have their access turned off for one uninterrupted week, to ensure they didn't leave something in that depends on them or they're controlling a (fraudulent) process no one else knows about?
Yes, the week (two weeks, IME) is a thing. As are contractor term limits. They reduce key man risk and keep knowledge internal. Still, it's possible to write a script to do something and then just not touch it for years. It keeps chugging away, and the mental model of how it works is lost to time or employee churn, and nothing goes wrong enough that anyone has to dig in and really understand it again.
* Chart 8. Number and Assets of Banks on the "Problem Bank List"
* (Chart 13.) Unrealized Gains (Losses) on Investment Securities
Sadly, "Results are published approximately 55 days after the end of each quarter (i.e., 55 days after March 31, June 30, September 30, and December 31)." So there's nothing super new. Bit it strikes me that Chart 13 is going bonkers on unrealized losses, but Chart 8 isn't quite matching the same (assets in problem banks, and # of problem banks is going down since rate hikes??).
Really wanna see that number for 2023Q1. But the quote
> about a quarter of all equity in the banking sector has been vaporized by one line item.
Read this all the way to the disclaimers at the bottom. It's just a fantastic piece of writing, digging deep into some of the unseen structures that underlie our society.
I'm not close enough to the banking system to judge the truth of it, but it was beautiful.
PS If you are on email lists, make sure to respond occasionally to the author. It's hard out there and they are shouting into the void. If a piece makes you smile/think/learn, tell them!
It seems to avoid discussing a rather basic issue, which is that as Fed interest rates rose, the interest rates on deposits (i.e. individual savings accounts) did not increase at all due to bank executives wanting to harvest more of that pie for themselves. Hence people seem to have an incentive to move money out of banks and into money market accounts that were giving much higher returns on those deposits.
The history here is illuminating: (Jan 1 2023)
> "During the 1980s, savings rates climbed as high as 8%. Deregulation caused deposit interest rates to stay higher than financial institutions could sustainably support, which contributed to banking failures during that decade. In the 1990s, savings account rates decreased significantly, typically sitting between 4% and 5%. The 2000s kicked off with a recession, and savings rates fell to between 1% and 2%. Following the financial crisis of 2008, savings account interest rates fell to historic lows—below 0.25%."
It's not discussed here, but banks probably couldn't increase their interest rates to be competitive with money market accounts etc because the whole root cause of the problem is that their deposits were backed up with long-term fixed interest rate bonds that paid substantially below the rate that someone could get by buying a bond now, and therefore below the return on money market accounts etc. How bad of a problem this is depends on how sensitive to interest rates the banks' customers actually are.
“ as Fed interest rates rose, the interest rates on deposits (i.e. individual savings accounts) did not increase at all”
Very true
“due to bank executives wanting to harvest more of that pie for themselves.”
Eh, needlessly inflammatory and does not get at the real issue, although it is undoubtedly true that banks profited by not raising deposit interest rates. Banks could not safely raise deposit interest rates because large parts of those deposits were locked into investments in fixed-rate financial instruments.
First, the article is a great explanation of what's going on. "Maturity Transformation" explains the cause. "Trying to forestall a banking crisis" is a great discussion of the important next stage of the non-headline-grabbing solution.
Just wondering about this "desert" word, in context:
> I am very frustrated by political arguments about desert, which start with an enemies list and celebrate when the enemies suffer misfortune for their sins like using the banking system.
A deserving; that which makes one deserving of reward or punishment; merit or demerit; good conferred, or evil inflicted, which merits an equivalent return: as, to reward or punish men according to their deserts.
"Just deserts" is a common phrase that uses it in the same way.
Oh wow. I (non-native) never realized it only had one s, I always assumed it was "just desserts", as in, you are getting the dessert you deserve, after the food (the evil you did) :D
> > > > I am very frustrated by political arguments about desert
> > > What does "desert" mean here
> A deserving [...] merit
Thanks. As a native speaker aware of "desert"'s multiple meanings and "just deserts", I think "merit", "deservedness", "appropriateness" would have been much clearer choices here. Perhaps the jarring note alone (of "desert" in this context) should have clued me in that an unusual usage was in play. Thanks again for the clarification.
desert i don't think means deserving. It comes from the latin desertus which means to "make barren or empty/forsake". I think in this context it means to have something fail or be abandoned at a critical moment.
Per Merriam-Webster, which for the benefit of international HNers I will mention is a well-known English dictionary: “the quality or fact of meriting reward or punishment”
This seems like a good opportunity to plug the American Heritage Dictionary, which in my experience is at least a couple notches better than Merriam-Webster despite their website being stuck in 1999 (maybe that's a good thing?)
1. (often "deserts") Something that is deserved or merited, especially a punishment: They got their just deserts when the scheme was finally uncovered.
2. The state or fact of deserving reward or punishment.
It should refer to "desert" as in "to deserve". Desert arguments typically ascribe a certain sort of moral responsibility on certain persons and them being liable to negative consequences in light of that ascription.
Ha! I just learnt something new. Always thought it was desserts with two S's, but seems that my version is a pun that is slipping into general usage: https://blog.oup.com/2007/07/eggcorn/
So, I'm a layman here, but I feel like he makes narrow banking (i.e. full-reserve or maturity-matched banking) sound more dangerous than it probably is, for instance:
> Take an exploding mortgage, the only way to finance homes in a dystopian alternate universe. It’s like the mortgages you are familiar with, except it is callable on demand by the bank. If you get the call and can’t repay the mortgage by the close of the day, you lose your house. What did you do wrong to make the mortgage explode? Literally nothing; exploding mortgages just explode sometimes. Keeps you on your toes.
It sounds to me like this could simply be solved with mortgage insurance. Granted, that insurance might be more expensive than it is now, but when a mortgage explodes you end up owning your house outright. Seems like not a bad deal. To reduce their risk (and consequently the cost of the insurance) the insurer would probably take on responsibility for finding alternate lending in the case of the loan being called, and the home owner would never hear about it until after the new lending was secured.
I'm sure there would be other problems, but it is not at all clear to me that those problems are worse than the ones we have now.
An exploding mortgage wrapped in mortgage insurance has exactly the same shape as a conventional mortgage from a fractional reserve bank. The insurer would be doing something like “fractional reserve insurance”, i.e. only holding some fraction of the total insurance payout it’s liable for, and you’d have the same problems. If you legislate that insurers can’t do fractional reserve insuring, the cost of insurance would go up so high that the only people who could afford insurance are people who could plausibly afford to buy the house outright.
The reason “fractional reserves” keep creeping back in whenever you try to offer mortgages to more than just rich people is because fractional reserves are a way to invent money out of thin air, and you have to invent money out of thin air because the not-rich people buying the houses do not have the money to afford the house (but they can make that money if they focus on it for 10 or 20 or 30 years).
You often see people demand to know why banks are allowed to do fractional reserve banking. And this is the reason: it lets banks offer mortgages and credit cards to most of the public. Most people don’t have much money, but do have a lot of future earnings. Giving people access today to large chunks of their future earnings is a big social good but it fundamentally requires money to be invented from thin air, and that invented money is then gradually filled in with real money over time as the earnings come in.
So somebody somewhere has to be inventing trillions of dollars. This is risky. The capitalist way is to have private entities who profit when they manage their risk well, since that provides the strongest incentives for competency. And the democratic-capitalist way is to heavily regulate those private entities, eating some portion of their profit to provide some extra value to the public.
You raise some interesting points. Let me see if I can address them.
> An exploding mortgage wrapped in mortgage insurance has exactly the same shape as a conventional mortgage from a fractional reserve bank. The insurer would be doing something like “fractional reserve insurance”, i.e. only holding some fraction of the total insurance payout it’s liable for, and you’d have the same problems.
They are similar in that in both cases we have an institution that may not be able to pay its obligations. Those kinds of risks will always be present in society. However, I do think that the shape of these risks are different in important ways.
First, in the full-reserve scenario, no money is being invented out of thin air. Insurance is a risk pooling scheme, that is it.
Second In a fractional-reserve system, bank runs are self-fulfilling prophesies, because the game-theoretic optimal move in the event of a bank run (or a reported bank run) is to run on the bank! Because no other conditions are necessary for a bank run (other than a widespread belief that one is happening) a bank run can literally be memed into existence. I believe that, to a certain extent, the functioning of a fractional reserve system relies on the general public being ignorant of how it actually works.
I don't think insurance acts like that. You can't make an insurance claim just because other people are doing it: you have to actually have a qualifying event. It also doesn't seem reasonable to assume that calling of the mortgage loans would start spreading just because of a rumor - there would have to be some other cause.
> You often see people demand to know why banks are allowed to do fractional reserve banking. And this is the reason: it lets banks offer mortgages and credit cards to most of the public. Most people don’t have much money, but do have a lot of future earnings. Giving people access today to large chunks of their future earnings is a big social good but it fundamentally requires money to be invented from thin air, and that invented money is then gradually filled in with real money over time as the earnings come in.
I think lending is an essential economic service, but I don't think the easy credit enabled by inventing money is a good thing. At a macro level, there are arguably all sorts of market distortions caused by too much money chasing too little "stuff" to invest in. At a micro-level, easy credit plus inflation incentivizes bad habits of spending money for instant gratification and discourages prudent saving and financial preparedness for most people.a instant gratification of spending more money noa instant gratification of spending more money no
> The losses banks have taken on their assets are real. They already happened. They are survivable if banks remain liquid.
But… they aren’t real yet? They haven’t been realized. If held to maturity they will be paid back in full.
Which I know the author is fully aware of. So I don’t understand this point.
> I would suggest one has at least one backup financial institution. If one hypothetically does not, I would observe that opening bank accounts rounds to free. Thousands of perfectly good financial institutions exist.
Some people have investment accounts with brokerages like Fidelity or Schwab. Many brokerages (including the two mentioned) offer cash management accounts. They offer deposit insurance similar to FDIC and will give you tools similar to checking accounts. Debit cards, checks, bill pay, etc.
They can be excellent backup accounts that don’t add the additional overhead (however small) of yet another company to deal with.
> > The losses banks have taken on their assets are real. They already happened. They are survivable if banks remain liquid.
> But… they aren’t real yet? [...] So I don’t understand this point.
If people withdraw their deposits, the bank will have to deliver the money somehow...by selling the assets that have lost money. So the point is that although, if nobody withdraws, the losses are survivable, if enough people withdraw, the losses are not survivable. As soon as depositors realise this situation, they will withdraw their money. So that's the problem.
This is true, but there can be a lot of slight of hand when talking about dollars and future dollars.
Banks run on nominal dollars, and SVB would have remained capitalized if withdrawals hadn't overwhelmed their ability to get ready cash, which caused them to sell at a loss, which spooked everyone, causing a run.
There is allot of financial illiteracy regarding the banking system. For example, heard an NPR reporter this morning talking about a bank not having money to loan because of depositors fleeing. These are vestiges of the Gold standard. There is no loanable funds market. That is, the funding for loans does not come from deposits. It comes from thin air. Banks create loans which then become deposits. So called "Bank Money" . In order to create loans and stay in the lending business, banks are required to have certain levels of capital.
* The Fed has control of quantity of money . No. The Fed controls the direction of interest rates via interest rate policy or simply put the Fed determines the price of money.
This is a very popular but false 'take the gist of it as true' misunderstanding.
Yes, banks do "create" money.
No, it is not out of thin air. It absolutely does come from deposits.
An example of how banks "create" money, is person A has $100. A deposits it. The bank lends that $100 to B. Now B has $100, but A also still thinks they have $100, even though they just have a number on a piece of paper.
They system goes from acting as if $100 exists, to acting as if $200 exists, but really there is only $100, and an IOU for $100.
That is what bank money "creation" is. It is not from thin air.
People get confused because "money", as in fiat currency, is also a Government IOU. But the above principle is true for gold, bitcoin, or any asset, and they wouldn't get mixed up the same way thinking banks create gold out of thin air.
It is a starkly different thing than how the Government creates money.
There is not a dependency on deposits in order create loans. This is false. Banks can make loans to the extend of demand for loans at the banks terms. Deposits have nothing to do with it in terms of funding. The bank must be in compliance with capital requirements and reserve requirement in order to be in the federal reserve system . As Mosler says (founder of MMT) The loan guy does not call the deposit guy at the bank before making a loan.
> 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.
The accounting is like this. Bank A is in compliance for the current period of time under examination (capital requirments and reserve requirements). Bank A makes a loan L1 to person B. This is a contract. Bank A has an asset in L1 on its balance sheet(this improves its capital ratio) and person B has L1 on her balance sheet as a liability. Person B makes a deposit of L1 amount into Bank B. Bank B has a liability of L1. Person B has an asset of L1 which is her deposit which she owns. Finally, Bank A makes a reserve payment to Bank B of L1. These reserves come out of the reserve account that each bank has at the Fed. The reserves maybe borrowed in the Federal Funds market on demand so long as the bank is in compliance.
If you keep creating money out of thin air — which as per my admittedly naive understanding is equivalent to just printing money without giving back anything in return — wouldn't it ultimately lead to a collapse or a hyper inflation? Like it did in Venezuela a few years ago (???).
Why is the US seemingly immune to this kind of thing?
2) new money can be absorbed by economic growth. Imagine you have $100 in an economy and 100 apples. $100 is added, so there’s $200/100 apples. Inflation might occur. But if you make 100 more apples, so there’s $200/200 apples, the ratio of money to goods didn’t change, and you wouldn’t get inflation. That’s an extremely contrived example, but it gets the point across.
Considering both of those factors, I hope it’s understandable that printing money doesn’t necessarily cause inflation.
The money is mostly created as debt, with the obligation to repay more money. So it's not "not giving anything back in return".
A company wants some money to fund business expansion. So it borrows $1m with a promise to pay $1.06m back, which it can fund because it has customers. The bank in turn can fund this by borrowing $1m and promising to pay back $1.03m (when lending activity increases this money comes from the Fed, albeit normally indirectly via its bond market activity). It's not free money for the business: if they don't sell enough stuff they go bankrupt. It's not free money for the bank: if enough of it's customers don't pay they also get bankrupt. So the money created is based on market participants believing that the additional money will result in additional economic activity
Additionally, you've got the Fed actively intervening on a day-to-day basis to fix that base interest rate for borrowing and on a month-to-month basis to increase it if it thinks people are borrowing too much and prices are going up too fast
Not trying to be a low-effort reply but any Economy 101 textbook will theorize that it's impossible. Practically, the world is too dependent on the USD in one way or another. If they try to break loose, they might get confronted with those military expenditures which is a good enough incentive to keep using USD as a global reserve currency.
There’s over-confidence espoused by economists, the idea that we can measure inflation with any kind of precision is challenging, never mind building on top of this shaky foundation that there are behaviours which regardless of circumstance will lead to a given outcome such as hyper inflation.
This is not to say that hyper inflation isnt a severe risk, it is. it’s to say that the mechanisms through which it’s created or avoided are not well understood nor proven.
In US the fed determines how much money is printed. The EU, UK, Japan, Switzerland, and China have similar central banks. Most countries do, but those are some major players (I left some out). Basically, if you print the right amount of money, it works. So they get smart Econ experts to guess how much money to print. And as long as they get close enough it doesn't cause hyperinflation.
Banks do create money out of thin air, but depositors fleeing does in fact limit their ability to loan money. Here's how that works: every time a bank loans money, they create an asset (the repayment they're owed) and a matching liability (the actual money sitting in someone's account). So long as this stays within the bank or outflows match with inflows, everything works. However, if money starts flowing out of the bank overall for whatever reason then the trick no longer works - and that includes if the money is being transferred out by customers other than the ones being lent to, such as their employees or suppliers. The main consequences of this are usually that one bank can't be substantially more aggressive in lending or offer substantially different interest rates than everone else, which of course affects demand to borrow money from the bank.
Stating obvious, this is only true until debts exceed a leverage US government has to inject currency it magically creates or utilize other financial tools it has available. At the point they are unable to do so, that’s no longer the case, system reaches a critical point for which recovery will take real assets at fair market value on the global market.
Ironically, US’s down fall may be its own failure to believe itself.
If Banks make bad loans and those loans( or investments) are marked to market bringing the bank out of compliance with Capital requirements, then it gets shutdown.
Readit News
Allowing the bank to pretend it has more assets than it actually has seems to be an invitation to hide risk. If they had to MTM their underwater bonds, they would would have been pushed to raise capital earlier, or they would have cut their losses earlier.
It should be straight up "I have these deposit liabilities, I have this book of assets, oops, my assets are down a bit, lets do something about it". Instead of "I'm gonna run the gauntlet and hope the business survives until these bonds come in".
The Basel accords are supposed to establish a risk-oriented way of measuring and controlling capital risk limits across asset classes. SVB and other regional banks fought heavily against being subject to this kind of oversight. I think it makes more sense to rework Basel 4 based on this failure rather than change the accounting standards.
Because at maturity, the bank gets back its money. So it is perfectly valid to say "in ten years, this $100m bond is worth $100m...and I intend to hold it for ten years, so it's worth $100m [equivalent] today". The "I intend to hold it" is the relevant part of the valuation, though.
Yup, and definitely anticipate there will be major new regulations in this area. A huge part of SVB's book of bonds were categorized as "Hold to Maturity". And, legally, if you mark bonds as HTM, you are not allowed to hedge against their interest rate risk. Basically, the regulations say that if you're hedging against interest rate risk, you don't really intend to hold to maturity, so you need to put them in the "Available for Sale" category.
The fact that SVB had such a huge book of bonds at paltry rates with no/minimal hedging is just awful risk management.
But that valuation model is not perfectly valid. It's only partially valid under limited scenarios.
As many comments have already pointed out, the issue is the bank has customers with demand deposits. The customers can demand withdrawal of their money anytime -- without advanced notice. In other words, SVB is not a hedge fund that has the customers' deposits contractually locked up for 10 years.
Therefore, the "10 year bond held to maturity" assumption becomes invalid if the bank has to sell them prematurely at distressed discount prices -- to meet liquidity requirements of demand deposits.
You can't use value securities as "mark-to-intended-optimal-future" as an alternative to "mark-to-market" for purposes of insolvency risk calculations.
Seems like that would allow an investor to see the state of the bank more clearly.
In the extreme - obviously you can't buy a call option and say 'I intend to hold this until it's $10 in the money, so it's actually worth (time-adjusted) $10'. What's the difference, besides probabilities of outcomes?
It’s really not, at least not mathematically. That intentions play a role is purely an artifact of regulations.
So, can the bank claim it has $1,000 now?
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- Enron used "creative" accounting and mark to something style procedures to create fake valuations
- They go out of business.
- Regulators say, "Hey! Now you need to mark to market always!"
- 2008 happens. Markets for things like CDOs and CDSs dry up almost overnight. At the very least most of the liquidity is gone and spreads get VERY big
- B/c of the above coupled with rules of "you need to mark to market" and "if value falls X% you have to sell", lots of selling happens in low liquidity environments and therefore prices fall more, the downward cycle begins
- Post 2008, people realize that "mark to market, always!" maybe isn't the best idea.
- I would imagine, that's why the Govt is saying "Ok, we will pretend that your assets are worth par value". They don't want to trigger the downward spiral.
It's also interesting to note that the Govt made money on many of the assets they bought in 2008 at well below par value. The implication is that those assets were undervalued when they bought them. Again, I would imagine this is a selling point of the idea "the par value is probably not that bad price to pay for these things now".
This is a _good_ thing. We don't want a house of cards that's so fragile as soon as it looks like it it's going to fall down, we pour glue all over it and prop it up with cardboard.
Assets need to fall in value so that the next guy can have a chance to thrive. Some bank collapsing is an opportunity for some of the younger folks to buy up a piece, or leave with a team and a book of customers.
We should have this happen regularly so that it isn't an earthquake each time.
Isn’t this just a way of saying “nobody wants to pay what I want to pay me?”. Unless it’s actually worthless, there’s a buyer, you just may not like the price.
The liquidity on my used socks is gone and spreads are very BIG. Why yes, I won’t sell for less than what I paid for them new, but it’s the market that’s failed, not my insane pricing demands.
Finance is an imaginary staircase that only works until we look down and freak out. We don't document the robustness of the stairs because the stairs aren't real.
CDs are a thing. Unpopular because their rates sucked but that hasn’t always been the case.
Long-term loans become like short term loans closer to maturity. A mature bank should have a fair amount maturing every year, mortgages 24 or 23 or whatever years ago. Along with some early repayments or reissuances from people moving. Or 4 years ago for a vehicle, etc.
Or that the bank should be able to say "depositor X transferred $100 million to Chase, so we sent Chase a wire for $10 million and treasuries marked HTM worth $90 million" or something.
Yes, the Fed basically did this.
See the recently (Sunday) announced "Bank Term Funding Program", which basically says if banks hold securities from the Federal government, the Federal Reserve will accept it as collateral for a loan, the collateral valued at par.
https://www.federalreserve.gov/newsevents/pressreleases/mone...
The repo market is vast and generally massively liquid; trillions of dollars of funding per day.
Why? HTM bonds are not cash so they are not interchangeable. This is like if you were forced to accept a 10 year IOU in place of cash from your employer.
What is the difference between what you are saying and just buying back the bonds before maturity?
Anyway, governments do usually have all kinds of lines of credit against bonds. And when there is a difference, it's for the benefit of the government.
I agree with your main point.
You'd have to be careful with regulation around this, because what you might end up with is banks preferentially seeking assets for which there is not a liquid market so they can pretend they are worth more. That's... not an obvious improvement.
To some degree this makes sense, because if the maturity timelines and classification are correct the bank is only losing opportunity cost and inflation-adjusted dollars. Not actual dollars.
Meanwhile, if they need money from the fed it is offered against collateral based on mark-to-market value.
Have a read of Matt Levine:
https://archive.is/l4nLU
The “let’s do something about it” could actually be business as usual. Look at the “deposit beta” in that article: when interest rates increase, mean rates banks pay on deposits increase less. So you can have a bank with a low mark-to-market value (assume all deposits liquidate at par and securities are sold at mid-market), but that ignores the value of the enterprise itself. Or you can project forward (to a specific time or times, not necessarily to the arbitrary maturity of each security), and you may well find that you end up with enough money at every point in the future to be quite comfortable, assuming your deposits stick around and continue to earn less than market interest.
Imagine you worked at a magic trading desk where you could issue a very special bond: you borrow money right now, and you pay a floating interest rate that is set at 1/2 the federal funds rate. This is a great deal, but it comes with a catch: the bond holder can call the debt at any time, which they will do on occasion at random but will do en masse if they don’t like you. Also, people can lend you money on these terms and you have to accept the deal. How would you make money on these? How would you account for them?
I agree that HTM accounting, done carelessly, can lead to wrong conclusions.
If a bank that makes a mortgage loan has to buy an interest rate swap that zeros out the interest rate risk on that loan, then the replicating portfolio is basically ... nothing ... right?
Banks have to be long duration risk to be useful.
Many of their assets aren't really fungible either. Mortgages are the canonical example: yes they can now be turned into MBS, but your local credit union just issues and holds them). The same is true of the commercial loan to the local stationary business. As far as I know those aren't bundleable into commercial paper securities. The debtors do the same: they don't treat their loan as having any market value at all beyond what it had when issued. House prices generally don't mark to market except in places with property tax assessment.
I was on BoD of a CU. About the only thing we didn't resell were loans which did not conform. The business was to originate, quickly resell, and do some more.
A bank is illiquid if its holdings require time to sell at "market price". Selling things like mortgages requires time because the buyer has to perform due diligence. If i have to sell mortgages right now, I'm going to be getting an awful price for them.
OTOH, i can sell treasuries in a fraction of a second at the ask price minus epsilon. It's not a liquidity problem, its an assets < liabilities problem, (as you clearly state, I'm just frustrated by the discussion here).
What is the alternative ? To have the banks trading on a millisecond basis so that the mark to market value of assets is positive ? What about the transaction fees ?
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In the olde days that was the bottom drawer where you would stuff the losing tickets at the end of the day and hope that they were in the money tomorrow.
Finance crimes are low tech and have not evolved much as they don’t need to; there’s no policing.
Have a go at it, elites scream communism and the like, and rile up the 2nd Amendment fan boys, only to throw the ones that go over the line in jail to keep up appearances.
I’ve been noting and watching this same social ebb and flow since the 80s. The kids/teens then who soaked that reality up live it still today. IMO memory is why we had a mini-Reagan in Trump grow so popular.
The reason such things you point out are allowed is they’ve always been allowed from the perspective of those benefiting from them. If the system was stable and accountable to the masses, the phony winners rich off mathematical inference but too inept to keep themselves alive would of course be subject to a terrible regime should elites be required to pull on their boot straps; a figurative identity of being coddled is all they know!
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As someone who has written ETL jobs for banks, this hits home.
This is probably the companion report to have on hand while reading:
https://www.fdic.gov/analysis/quarterly-banking-profile/inde...
In particular
* Chart 8. Number and Assets of Banks on the "Problem Bank List"
* (Chart 13.) Unrealized Gains (Losses) on Investment Securities
Sadly, "Results are published approximately 55 days after the end of each quarter (i.e., 55 days after March 31, June 30, September 30, and December 31)." So there's nothing super new. Bit it strikes me that Chart 13 is going bonkers on unrealized losses, but Chart 8 isn't quite matching the same (assets in problem banks, and # of problem banks is going down since rate hikes??).
Really wanna see that number for 2023Q1. But the quote
> about a quarter of all equity in the banking sector has been vaporized by one line item.
Struck me as pretty wild.
I'm not close enough to the banking system to judge the truth of it, but it was beautiful.
PS If you are on email lists, make sure to respond occasionally to the author. It's hard out there and they are shouting into the void. If a piece makes you smile/think/learn, tell them!
The history here is illuminating: (Jan 1 2023)
> "During the 1980s, savings rates climbed as high as 8%. Deregulation caused deposit interest rates to stay higher than financial institutions could sustainably support, which contributed to banking failures during that decade. In the 1990s, savings account rates decreased significantly, typically sitting between 4% and 5%. The 2000s kicked off with a recession, and savings rates fell to between 1% and 2%. Following the financial crisis of 2008, savings account interest rates fell to historic lows—below 0.25%."
https://www.forbes.com/advisor/banking/savings/history-of-sa...
See also: https://twitter.com/biancoresearch
Very true
“due to bank executives wanting to harvest more of that pie for themselves.”
Eh, needlessly inflammatory and does not get at the real issue, although it is undoubtedly true that banks profited by not raising deposit interest rates. Banks could not safely raise deposit interest rates because large parts of those deposits were locked into investments in fixed-rate financial instruments.
Just wondering about this "desert" word, in context:
> I am very frustrated by political arguments about desert, which start with an enemies list and celebrate when the enemies suffer misfortune for their sins like using the banking system.
Anyone know what "desert" refers to?
"Just deserts" is a common phrase that uses it in the same way.
> > > What does "desert" mean here
> A deserving [...] merit
Thanks. As a native speaker aware of "desert"'s multiple meanings and "just deserts", I think "merit", "deservedness", "appropriateness" would have been much clearer choices here. Perhaps the jarring note alone (of "desert" in this context) should have clued me in that an unusual usage was in play. Thanks again for the clarification.
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https://ahdictionary.com/word/search.html?q=desert
de·sert (dĭ-zûrt)
n.
1. (often "deserts") Something that is deserved or merited, especially a punishment: They got their just deserts when the scheme was finally uncovered.
2. The state or fact of deserving reward or punishment.
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> Take an exploding mortgage, the only way to finance homes in a dystopian alternate universe. It’s like the mortgages you are familiar with, except it is callable on demand by the bank. If you get the call and can’t repay the mortgage by the close of the day, you lose your house. What did you do wrong to make the mortgage explode? Literally nothing; exploding mortgages just explode sometimes. Keeps you on your toes.
It sounds to me like this could simply be solved with mortgage insurance. Granted, that insurance might be more expensive than it is now, but when a mortgage explodes you end up owning your house outright. Seems like not a bad deal. To reduce their risk (and consequently the cost of the insurance) the insurer would probably take on responsibility for finding alternate lending in the case of the loan being called, and the home owner would never hear about it until after the new lending was secured.
I'm sure there would be other problems, but it is not at all clear to me that those problems are worse than the ones we have now.
The reason “fractional reserves” keep creeping back in whenever you try to offer mortgages to more than just rich people is because fractional reserves are a way to invent money out of thin air, and you have to invent money out of thin air because the not-rich people buying the houses do not have the money to afford the house (but they can make that money if they focus on it for 10 or 20 or 30 years).
You often see people demand to know why banks are allowed to do fractional reserve banking. And this is the reason: it lets banks offer mortgages and credit cards to most of the public. Most people don’t have much money, but do have a lot of future earnings. Giving people access today to large chunks of their future earnings is a big social good but it fundamentally requires money to be invented from thin air, and that invented money is then gradually filled in with real money over time as the earnings come in.
So somebody somewhere has to be inventing trillions of dollars. This is risky. The capitalist way is to have private entities who profit when they manage their risk well, since that provides the strongest incentives for competency. And the democratic-capitalist way is to heavily regulate those private entities, eating some portion of their profit to provide some extra value to the public.
> An exploding mortgage wrapped in mortgage insurance has exactly the same shape as a conventional mortgage from a fractional reserve bank. The insurer would be doing something like “fractional reserve insurance”, i.e. only holding some fraction of the total insurance payout it’s liable for, and you’d have the same problems.
They are similar in that in both cases we have an institution that may not be able to pay its obligations. Those kinds of risks will always be present in society. However, I do think that the shape of these risks are different in important ways.
First, in the full-reserve scenario, no money is being invented out of thin air. Insurance is a risk pooling scheme, that is it.
Second In a fractional-reserve system, bank runs are self-fulfilling prophesies, because the game-theoretic optimal move in the event of a bank run (or a reported bank run) is to run on the bank! Because no other conditions are necessary for a bank run (other than a widespread belief that one is happening) a bank run can literally be memed into existence. I believe that, to a certain extent, the functioning of a fractional reserve system relies on the general public being ignorant of how it actually works.
I don't think insurance acts like that. You can't make an insurance claim just because other people are doing it: you have to actually have a qualifying event. It also doesn't seem reasonable to assume that calling of the mortgage loans would start spreading just because of a rumor - there would have to be some other cause.
> You often see people demand to know why banks are allowed to do fractional reserve banking. And this is the reason: it lets banks offer mortgages and credit cards to most of the public. Most people don’t have much money, but do have a lot of future earnings. Giving people access today to large chunks of their future earnings is a big social good but it fundamentally requires money to be invented from thin air, and that invented money is then gradually filled in with real money over time as the earnings come in.
I think lending is an essential economic service, but I don't think the easy credit enabled by inventing money is a good thing. At a macro level, there are arguably all sorts of market distortions caused by too much money chasing too little "stuff" to invest in. At a micro-level, easy credit plus inflation incentivizes bad habits of spending money for instant gratification and discourages prudent saving and financial preparedness for most people.a instant gratification of spending more money noa instant gratification of spending more money no
But… they aren’t real yet? They haven’t been realized. If held to maturity they will be paid back in full.
Which I know the author is fully aware of. So I don’t understand this point.
> I would suggest one has at least one backup financial institution. If one hypothetically does not, I would observe that opening bank accounts rounds to free. Thousands of perfectly good financial institutions exist.
Some people have investment accounts with brokerages like Fidelity or Schwab. Many brokerages (including the two mentioned) offer cash management accounts. They offer deposit insurance similar to FDIC and will give you tools similar to checking accounts. Debit cards, checks, bill pay, etc.
They can be excellent backup accounts that don’t add the additional overhead (however small) of yet another company to deal with.
> But… they aren’t real yet? [...] So I don’t understand this point.
If people withdraw their deposits, the bank will have to deliver the money somehow...by selling the assets that have lost money. So the point is that although, if nobody withdraws, the losses are survivable, if enough people withdraw, the losses are not survivable. As soon as depositors realise this situation, they will withdraw their money. So that's the problem.
Barring something extremely abnormal happening, aren't low-yield bonds seeing real losses already due to inflation?
Like it doesn't have to be the spot price we're talking about, aren't many of them toxic already and others expected to track there?
But bank deposits aren't in inflation adjusted dollars.
Banks run on nominal dollars, and SVB would have remained capitalized if withdrawals hadn't overwhelmed their ability to get ready cash, which caused them to sell at a loss, which spooked everyone, causing a run.
* The Fed has control of quantity of money . No. The Fed controls the direction of interest rates via interest rate policy or simply put the Fed determines the price of money.
Yes, banks do "create" money. No, it is not out of thin air. It absolutely does come from deposits.
An example of how banks "create" money, is person A has $100. A deposits it. The bank lends that $100 to B. Now B has $100, but A also still thinks they have $100, even though they just have a number on a piece of paper.
They system goes from acting as if $100 exists, to acting as if $200 exists, but really there is only $100, and an IOU for $100.
That is what bank money "creation" is. It is not from thin air.
People get confused because "money", as in fiat currency, is also a Government IOU. But the above principle is true for gold, bitcoin, or any asset, and they wouldn't get mixed up the same way thinking banks create gold out of thin air.
It is a starkly different thing than how the Government creates money.
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.
If you keep creating money out of thin air — which as per my admittedly naive understanding is equivalent to just printing money without giving back anything in return — wouldn't it ultimately lead to a collapse or a hyper inflation? Like it did in Venezuela a few years ago (???).
Why is the US seemingly immune to this kind of thing?
1) taxation destroys money.
2) new money can be absorbed by economic growth. Imagine you have $100 in an economy and 100 apples. $100 is added, so there’s $200/100 apples. Inflation might occur. But if you make 100 more apples, so there’s $200/200 apples, the ratio of money to goods didn’t change, and you wouldn’t get inflation. That’s an extremely contrived example, but it gets the point across.
Considering both of those factors, I hope it’s understandable that printing money doesn’t necessarily cause inflation.
A company wants some money to fund business expansion. So it borrows $1m with a promise to pay $1.06m back, which it can fund because it has customers. The bank in turn can fund this by borrowing $1m and promising to pay back $1.03m (when lending activity increases this money comes from the Fed, albeit normally indirectly via its bond market activity). It's not free money for the business: if they don't sell enough stuff they go bankrupt. It's not free money for the bank: if enough of it's customers don't pay they also get bankrupt. So the money created is based on market participants believing that the additional money will result in additional economic activity
Additionally, you've got the Fed actively intervening on a day-to-day basis to fix that base interest rate for borrowing and on a month-to-month basis to increase it if it thinks people are borrowing too much and prices are going up too fast
See https://en.wikipedia.org/wiki/List_of_countries_by_military_...
Not trying to be a low-effort reply but any Economy 101 textbook will theorize that it's impossible. Practically, the world is too dependent on the USD in one way or another. If they try to break loose, they might get confronted with those military expenditures which is a good enough incentive to keep using USD as a global reserve currency.
This is not to say that hyper inflation isnt a severe risk, it is. it’s to say that the mechanisms through which it’s created or avoided are not well understood nor proven.
https://www.federalreserve.gov/monetarypolicy/reservereq.htm
https://positivemoney.org/how-money-%20works/how-banks-%20cr...
Ironically, US’s down fall may be its own failure to believe itself.
To add, the vast amount of money that's circulating is created by banks. As I keep harping, refer to this article by BoE for details.
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/m...