Modern finance is just a con job. It's like a hustler on a street corner, except that he wears a suit and works out of a skyscraper instead wearing a trenchcoat and working from a stool and a folding table. Listening to those guys, they're just con artists with a doctorate in BS (and I don't mean Bachelor of Science...)
I wonder if Sal is of the opinion that fractional reserve banking contributes to the business cycle à la Austrian School. Of course he may not agree with the Austrian explanation of the business cycle in the first place. Perhaps he mentions this in a related video?
U r right -- having insurance doesn't always make one negligent. But it does remove one of the top penalties for being not negligent.
It is hard enough to evaluate a single business. A bank lends $ to many businesses, so the difficulty is multiplied by the number of businesses. I hope this helps.
Shouldn't the FDIC charge an insurance fee percentage to a bank based on its profitability? e.g. using a bracket system.
Wouldn't that help mitigate the problem of hidden risks?
It may be seen as "punishing" the best performers, and anti-capitalistic, but then again, if you're a bank that takes more risks, potentially unbalancing the whole financial system, you should probably pay a higher insurance.
think about this. it puts the wallstreet crisis in perspective. the banks all "hit the wall" and owed money. but without letting a few go bankrupt there would have been no way to absorb profit and continue the cycle. but another intersting point is that this cycle speeds up every time. it wont take long till we see wallstreet in the same sinkhole.. and then what do we do?
The FDIC's program may encourage banks to take more risk, the FDIC will back their liability at the end if they are unlucky, while having a certain chance to earn a lot (or actually not so much than the other banks) of interests. But when this happens, the bank and bankers and executives will have to leave the industry permanently, this is a heavy lost they are about to take and most of them will rather run their businesses steadily.
The implication of this series of videos is that government should only be regulating the reinsurance industry to ensure that it can always honor all of its obligations. The banking industry would be better regulated by the private sector which can better evaluate the risk and react more rapidly and with greater freedoms. I see the fed's strategy of shooting for a stable inflation rate as the best one available. But the real risk must ultimately fall to those with present day assets.
Btw. IndyMac was giving highest interest because it was in a trouble. For me personally, every time I see a bank giving higher interest it's a potential warning sign something bad is happening in the banks books.
PS That's why confidence in the system is so important and that's the reason why every day when I turn on CNBC circus I always hear the clowns saying how every thing is ok, why financial system is stable as well sound as a rock esp. C and BAC !
And the best of them all in the 'game' is the biggest clown of them all the Booyah Cammer, who weeks before implosion of BSC said it was FINE! Maybe that was the main reason why he was promoted to anchoring yesterdays squawk box?! - just kidding.
Bank runs is the only market mechanism left to remove bad banks. The FDIC, late at night over the weekend, seizes these banks and sells them secretly to some larger bank. No other industry has the state so involved in just going out of business. No other industry can collapse on a mere rumor.
And since the Fed is OWNED by the banks, that is really the same thing. I have taken the time to read the Federal Reserve Act of 1913. Hard but very interesting read.
So, they create a housing bubble, lend everyone money they made from nothing. Then foreclose on them (and own them) without paying a dime. Brilliant uh?
US dollars are money, a bad form of money, but money nonetheless. Also, banks are in the business of making loans, and not maintaining a house or shopping center. Take one look at the conditions of foreclosed property, and you'll see why they want to avoid holding the property.
Again I disagree. Take a look at the positions Goldman Sachs has taken over the past few months. In the end, money means nothing if it is not in hard assets or influence. Money is just a means.
Hey Sal, is there really zero cost to you if your bank goes phut? Will the FIDC pay your deposit back immediately? Will there be some delay, some red tape? You have some incentive to chose a good bank, I think. By the same argument, car insurance makes everybody a worse driver? If insurance companies can evaluate risks, can't they evulate the risks of banks as well, and charge the right premium?
It is much harder to evaluate risk on a bank, as each bank have many loans, each with different risk. The risk evaluation tends to require local knowledge (eg how valuable is a coffee shop in a town which tends to drink a lot of tea?), which is also difficult for an FDIC to have.
A person is very easy to evaluate, based on his age and driving record -- which are easily obtainable.
@mwong000 I don't think this is relevant to my point that having insurance doesn't always make one negligent. But if you are right that financial risk cannot be evaluated I guess Standards and Poor should go out of business. maybe you are right.
No so. Remember the 10X the initial $100 came from $ circulating back in the system to other people ($90+81+ 72 ..... = $1000) , who then deposit their $ in the bank at the bank interest.
So if the bank pays 5% on deposits, it will have to pay 5% on $1000, not $100
@mwong000 so the answer to the question is yes, they can collect interest on up to ten times the amount but they will pay deposit interest, because as you explained ... the money came from circulating back
Banks do not collect interest on up to 10X the amount it pays u money on.
If u deposited $100 into Bank1, it can loan out $90 of that to Borrower1. Borrower1 deposits that $90 to Bank2, which has to pay Borrower1 interest. Bank2 now lends $81 to Borrower2 who has to pay Bank2 interest. At each level, the Bank(s) has to pays and collects interest.
For simplification purposes, all $ loaned out eventually gets deposited in some other bank.
I think some people get confused by the acronym "FRB" in the video title. They would think you are talking about "Federal Reserve Bank" instead of a less known concept of the "Fractional Reserve Banking".
I don't think that the FDIC doesn't do anything to promote risk taking behavior of the bank. The perception of a bank, money market, or shadow bank (with no FDIC insurance) being too big to fail, will present what economists call a moral hazard.
the FDIC had three methods of action, they could close the bank, sell it to another party, or run it themselves. None of these options exactly give the bank a reason to take on more risk. Sal makes a valid point that the depositors will be comfortable with more risk if they are insured against losses but not the bank.
Modern finance is just a con job. It's like a hustler on a street corner, except that he wears a suit and works out of a skyscraper instead wearing a trenchcoat and working from a stool and a folding table. Listening to those guys, they're just con artists with a doctorate in BS (and I don't mean Bachelor of Science...)
SSedmak 2 months ago
@SSedmak
Would you consider speculators nonproductive jobs with that reasoning?
SomeUsefulIdiot 4 weeks ago
I wonder if Sal is of the opinion that fractional reserve banking contributes to the business cycle à la Austrian School. Of course he may not agree with the Austrian explanation of the business cycle in the first place. Perhaps he mentions this in a related video?
SirTenenbaum 2 months ago
Sal, do you know EVERYTHING??!
StAndAl0neCompl3x 4 months ago
macroman52
U r right -- having insurance doesn't always make one negligent. But it does remove one of the top penalties for being not negligent.
It is hard enough to evaluate a single business. A bank lends $ to many businesses, so the difficulty is multiplied by the number of businesses. I hope this helps.
mwong000 11 months ago
Shouldn't the FDIC charge an insurance fee percentage to a bank based on its profitability? e.g. using a bracket system.
Wouldn't that help mitigate the problem of hidden risks?
It may be seen as "punishing" the best performers, and anti-capitalistic, but then again, if you're a bank that takes more risks, potentially unbalancing the whole financial system, you should probably pay a higher insurance.
celinocaliente2002 1 year ago
hah... " what I'm going to do is take you into receivership "
Thats really funny. Thats now how it works in the u.s. anymore.... even if they're out of business they'll be allowed to lie and deceive the public.
AlcoholLevel 1 year ago
think about this. it puts the wallstreet crisis in perspective. the banks all "hit the wall" and owed money. but without letting a few go bankrupt there would have been no way to absorb profit and continue the cycle. but another intersting point is that this cycle speeds up every time. it wont take long till we see wallstreet in the same sinkhole.. and then what do we do?
twosideddeth 1 year ago
No matter how you slice the cake its still corrupt. The fed is just a tax on the population in the ong run.
jayjasonbird 1 year ago
The FDIC's program may encourage banks to take more risk, the FDIC will back their liability at the end if they are unlucky, while having a certain chance to earn a lot (or actually not so much than the other banks) of interests. But when this happens, the bank and bankers and executives will have to leave the industry permanently, this is a heavy lost they are about to take and most of them will rather run their businesses steadily.
XzRccc 1 year ago
The implication of this series of videos is that government should only be regulating the reinsurance industry to ensure that it can always honor all of its obligations. The banking industry would be better regulated by the private sector which can better evaluate the risk and react more rapidly and with greater freedoms. I see the fed's strategy of shooting for a stable inflation rate as the best one available. But the real risk must ultimately fall to those with present day assets.
ananiasacts 1 year ago
Btw. IndyMac was giving highest interest because it was in a trouble. For me personally, every time I see a bank giving higher interest it's a potential warning sign something bad is happening in the banks books.
RemiG2006 2 years ago
Here is a little story about FDIC deposits:
When I became Chairman of the FDIC in 1981, the FDIC's financial statement showed a
balance at the U.S. Treasury of some $11 billion. I decided it would be a real treat to see all of
that money, so I placed a call to Treasury Secretary Don Regan:
Isaac: Don, I'd like to come over to look at the money.
Regan: What money?
Isaac: You know . . . the $11 billion the FDIC has in the vault at Treasury.
RemiG2006 2 years ago
Regan: Uh, well you see Bill, ah, that's a bit of a problem.
Isaac: I know you're busy. I don't need to do it right away.
Regan: Well . . . it's not a question of timing . . . I don't know quite how to put this,
but we don't have the money.
Isaac: Right . . . ha ha.
Regan: No, really. The banks have been paying money to the FDIC, the FDIC has
been turning the money over to the Treasury, and the Treasury has been
spending it on missiles, school lunches, water projects, and the like.
RemiG2006 2 years ago
The money's gone.
Isaac: But it says right here on this financial statement that we have over $11 billion
at the Treasury.
Regan: In a sense, you do. You see, we owe that money to the FDIC, and we pay
interest on it.
Isaac: I know this might sound pretty far-fetched, but what would happen if we
should need a few billion to handle a bank failure?
Regan: That's easy we'd go right out and borrow it. You'd have the money in no
time . . . same day service most days.
RemiG2006 2 years ago
Isaac: Let me see if I've got this straight. The money the banks thought they were
storing up for the past half century sort of saving it for a rainy day is gone.
If a storm begins brewing and we need the money, Treasury will have to
borrow it. Is that about it?
Regan: Yep.
Isaac: Just one more thing, while I've got you. Why do we bother pretending there's
a fund?
Regan: I'm sorry, Bill,
RemiG2006 2 years ago
PS That's why confidence in the system is so important and that's the reason why every day when I turn on CNBC circus I always hear the clowns saying how every thing is ok, why financial system is stable as well sound as a rock esp. C and BAC !
And the best of them all in the 'game' is the biggest clown of them all the Booyah Cammer, who weeks before implosion of BSC said it was FINE! Maybe that was the main reason why he was promoted to anchoring yesterdays squawk box?! - just kidding.
RemiG2006 2 years ago
Bank runs is the only market mechanism left to remove bad banks. The FDIC, late at night over the weekend, seizes these banks and sells them secretly to some larger bank. No other industry has the state so involved in just going out of business. No other industry can collapse on a mere rumor.
siggyboss 2 years ago
How many industries can loan out money they don't have?
imnos482 2 years ago
Only banks and the Federal Reserve can legally create money and lend it.
siggyboss 2 years ago
And since the Fed is OWNED by the banks, that is really the same thing. I have taken the time to read the Federal Reserve Act of 1913. Hard but very interesting read.
So, they create a housing bubble, lend everyone money they made from nothing. Then foreclose on them (and own them) without paying a dime. Brilliant uh?
imnos482 2 years ago
Banks really don't want the property, but the interest on the money they created and lent.
siggyboss 2 years ago 3
Huh? They don't want real assets? They would rather have dollars? Sorry, I think you are dead wrong on that one.
imnos482 2 years ago
imnos482, please watch Khan's playlist on Banking and then you'll understand a bit more.
leejae 2 years ago
Hmmm, show me what I am missing. That is where I came up with these thoughts.
imnos482 2 years ago
US dollars are money, a bad form of money, but money nonetheless. Also, banks are in the business of making loans, and not maintaining a house or shopping center. Take one look at the conditions of foreclosed property, and you'll see why they want to avoid holding the property.
siggyboss 2 years ago
Again I disagree. Take a look at the positions Goldman Sachs has taken over the past few months. In the end, money means nothing if it is not in hard assets or influence. Money is just a means.
imnos482 2 years ago
What positions have they been taking??
leejae 2 years ago
Sal, So the bank pay interest on my deposit? but it can collect interest on up to ten times the amount it pays me interest on?
johnnyfenger 2 years ago 7
@johnnyfenger Wrong. The bank collects interest on 90% of what you deposit. Its loans are 90% of its deposits.
macroman52 11 months ago
Hey Sal, is there really zero cost to you if your bank goes phut? Will the FIDC pay your deposit back immediately? Will there be some delay, some red tape? You have some incentive to chose a good bank, I think. By the same argument, car insurance makes everybody a worse driver? If insurance companies can evaluate risks, can't they evulate the risks of banks as well, and charge the right premium?
macroman52 11 months ago
@macroman52
It is much harder to evaluate risk on a bank, as each bank have many loans, each with different risk. The risk evaluation tends to require local knowledge (eg how valuable is a coffee shop in a town which tends to drink a lot of tea?), which is also difficult for an FDIC to have.
A person is very easy to evaluate, based on his age and driving record -- which are easily obtainable.
mwong000 11 months ago
@mwong000 I don't think this is relevant to my point that having insurance doesn't always make one negligent. But if you are right that financial risk cannot be evaluated I guess Standards and Poor should go out of business. maybe you are right.
macroman52 11 months ago
@johnnyfenger
No so. Remember the 10X the initial $100 came from $ circulating back in the system to other people ($90+81+ 72 ..... = $1000) , who then deposit their $ in the bank at the bank interest.
So if the bank pays 5% on deposits, it will have to pay 5% on $1000, not $100
mwong000 11 months ago
This has been flagged as spam show
@mwong000 so the answer to the question is yes, they can collect interest on up to ten times the amount but they will pay deposit interest, because as you explained ... the money came from circulating back
joniinsidee 8 months ago
@johnnyfenger
Banks do not collect interest on up to 10X the amount it pays u money on.
If u deposited $100 into Bank1, it can loan out $90 of that to Borrower1. Borrower1 deposits that $90 to Bank2, which has to pay Borrower1 interest. Bank2 now lends $81 to Borrower2 who has to pay Bank2 interest. At each level, the Bank(s) has to pays and collects interest.
For simplification purposes, all $ loaned out eventually gets deposited in some other bank.
mwong000 11 months ago
I think some people get confused by the acronym "FRB" in the video title. They would think you are talking about "Federal Reserve Bank" instead of a less known concept of the "Fractional Reserve Banking".
zetasan 2 years ago
I don't think that the FDIC doesn't do anything to promote risk taking behavior of the bank. The perception of a bank, money market, or shadow bank (with no FDIC insurance) being too big to fail, will present what economists call a moral hazard.
sparc5 2 years ago
FDIC in this scenario acts like a bailout so banks would be willing to take on more risk. That's called moral hazard.
leejae 2 years ago
the FDIC had three methods of action, they could close the bank, sell it to another party, or run it themselves. None of these options exactly give the bank a reason to take on more risk. Sal makes a valid point that the depositors will be comfortable with more risk if they are insured against losses but not the bank.
sparc5 2 years ago
what are u doing in your life to know all this things? you are very good, i would love to be bankir, so i love your clips.
will have some questions soon.
p1isericsson 2 years ago 2
This has been flagged as spam show
is there something that you like dont know xD
timar03 2 years ago