[DRAFT] Insurance Against Bank Runs

[Araraukar]

IC: The intern-esque young woman sitting on the Araraukarian seat currently, scans quickly through the proposal, looking for the basic gist on it. Then she takes a red ink pen and writes at the top: "This is about banks not having enough money. N/A for Araraukar." She then leaves the room.

OOC: Araraukarian economy is basically almost completely digital, and the state controls all essential functions like banks. And yes I know it's a weird society, but it's a very large nation with lots of people (population is just over two billion, though they're trying to bring the number down humanely), and that helps to make it all work.

OOC EDIT: I say almost completely digital, because as long as everyone understands that you can't complain about such a system to the state, if it turned out to be a scam of some kind, people can feel free to use trading sticks as currency in private trades if they want, for all the government cares. The official national currency is digital and completely state-controlled.

[Wallenburg]

I'm aware that this tackles things in a different manner than "Preventing Financial Crises", but are the two really simultaneously necessary? Seems like a whole lot of overkill.

OOC: IA can correct me if I'm misunderstanding these proposals, but here's my take in plain language:

To the extent that the WA has any business regulating international finance, the two proposals are regulating very different things. This one prevents and cures savings bank (i.e. "I have to go to the bank" banks) insolvency (which affects people's savings and wealth), while the other prevents and cures central or investment bank (i.e. banks that lend to your bank) insolvency, which is a proximate cause of savings bank insolvency. The problems and solutions faced by the different types of institutions are not identical, necessitating two different resolutions.

OOC: I ask because banks can operate many different kinds of banking operations simultaneously (for instance, Bank of America both runs individual credit, debit, and savings accounts and runs one of the largest investment banking operations in the world). Both this and "Preventing Financial Crises" serve a primary function of preserving liquidity among banks. This does so by providing insurance services, whereas "Preventing Financial Crises" does so primarily by running an international securitization scheme. So, as I'm sure you can see, the two proposals tackle illiquidity through different methods, but their end goals remain nearly identical.

I'll ask again, just to be clear. Why are both of these necessary?

[Imperium Anglorum]

OOC: Araraukarian economy is basically almost completely digital, and the state controls all essential functions like banks. And yes I know it's a weird society, but it's a very large nation with lots of people (population is just over two billion, though they're trying to bring the number down humanely), and that helps to make it all work.

I've got two ideas: (1) you don't know what bank runs are and (2) MMT. In the former, you still have that problem. In the latter, money is long-run neutral and market actors adjust.

OOC: I ask because banks can operate many different kinds of banking operations simultaneously (for instance, Bank of America both runs individual credit, debit, and savings accounts and runs one of the largest investment banking operations in the world). Both this and "Preventing Financial Crises" serve a primary function of preserving liquidity among banks.

That one does have that primary function. This has a different function of preserving liquidity amongst depositors. Banks also will still fail under the the latter scheme if they are actually not solvent. In the case of a financial shock, the former also doesn't deal with deposit-taking institutions per se. It deals more broadly with the shadow and non-shadow banking system.

But most fundamentally, there are two different channels to the real economy, with two different time lags. In PFC, capital allocation is adversely affected and that's what we care about. If you are inefficiently allocating capital, then your economy cannot grow or recovers slowly (consider depreciation, production, and capital stock). Here, there are direct transmission channels from a wealth shock or liquidity shock to current consumption, and thus, the real economy.

It is definitely the case that there is an overlap between the two proposals. They both deal with preventing the possible breakdown of financial intermediation from having transmitting to the real economy. If you ask me, both are necessary. We had one during the Great Depression. Banks failed in the thousands every year, wiping out savings across the country (e.g. in 1932, ~4000 banks failed; in the period 1933–2016, ~4000 banks failed; the FDIC was formed by the Banking Act of 1933). In 2008, we had both systems, along with hundreds of billions of dollars in fiscal stimulus. Recovering from it was not a straightforward matter. Even after mitigation, it was pretty bad.

If anything, there has to also be two more counter-cyclical mechanisms acting through monetary policy and fiscal stimulus. Monetary policy is best done independently with different kinds of monies. Though, there is definitely room for balance of payments corrections. Fiscal stimulus could be made easier by favourable sovereign lending, but considering the possibilities of corruption, I would caution against that.

[Yohannes]

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Thank u for your time and the well informative post (it was really good to read!) IA! Hoping the best for the proposal!

[Araraukar]

I've got two ideas

OOC: That's ok, I've got one: I don't care. It works for my RP. I'm not even trying to RP hyper-realistically, just like you aren't. We just differ in what we want to be very nitpickery about. But if something's non-applicable for my RP, you can argue as much as you want, about how RL works, I'm still going to ignore it. I think accepting this will save both of us a lot energy that would be otherwise wasted on trying to get the other see one's point of view.

It's compromise meaning I won't get in the way of your financial lectures, I'm just not going to apply them to my RP. It's not non-compliance if it's just not applicable.