Araraukar wrote: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.
Wallenburg wrote: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.
On top of that, PFC doesn't deal with savers. It deals primarily with corporations and certain asset classes. One could imagine (and I could pull up for you, from the Failed bank database and Call reports, examples of) certain banks not dealing with those asset classes or not being solvent at all, which then pass losses to those holding bank liabilities, like depositors. Simply put, at a broad level, we should not have some kind of expectation that small residential depositors are going to keep hyperfine vigilance on their bank. This is especially the case when many of those depositors don't understand finance (or, in many cases, even how credit cards work). Implicitly punishing them for someone elses' mistakes seems overly punitive.
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.