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Is the Money in Your Checking Account Yours or the Bank’s?
When Silicon Valley Bank and other banks failed earlier this year, the debate over the sustainability of fractional reserve banking resurfaced. Under fractional…
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When Silicon Valley Bank and other banks failed earlier this year, the debate over the sustainability of fractional reserve banking resurfaced. Under fractional reserve banking, banks keep only a fraction of customers’ deposits in reserve. The difference is bank credit, such as government debt, mortgages, business loans, and many other kinds of loans. This practice leaves the bank open to a run, in which panicky depositors attempt to withdraw their funds from the bank en masse but the bank doesn’t have the cash on hand. The following FRED graph gives an idea of the extent of the mismatch between deposits and reserves.
But we shouldn’t worry about bank runs because the government is here to help. In the US, the Federal Deposit Insurance Corporation (FDIC) insures checking accounts up to $250,000, and the banking system is regulated by a host of agencies, including the Federal Reserve, which also acts as a lender of last resort. These measures are intended to prevent and mitigate bank runs for the benefit of both the banks and their depositors. Though it should be obvious that they only conceal the fundamental problem and disperse the costs.
Murray Rothbard was a detractor of fractional reserve banking. He wrote on the changing legal definition of bank deposits—how they originated as warehousing relationships, or “bailments,” but over time came to represent debtor-creditor relationships. Ludwig von Mises also pointed to bank issues of fiduciary media (the proportion of deposits that cannot be redeemed), which artificially lower interest rates, as the cause of business cycles.
Nevertheless, a faction of Austrian and Austrian-adjacent scholars defends fractional reserve banking, saying that not only can it be sustainable, but it can also be beneficial in maintaining monetary equilibrium. I’m not convinced by this view, but it’s worth taking a closer look at one point that these scholars often make. They say that clear communication between the bank and its customers would solve the hairy problem of bank customers expecting the money at par on demand.
With such an agreement, “fractional reserve free banking” proponents say, depositors would know that they are effectively creditors to the bank and that the bank is therefore a debtor to them. This means that the deposits are technically and legally owned by the bank and that what the depositor has is technically and legally a callable loan to the bank. Clear agreements would mean that depositors understand that there is a chance that they won’t be able to get their money (actually, the bank’s money, in this view) immediately in the event of a bank failure. Of course, central banking and government-backed deposit insurance diminish customers’ expectation of bank responsibility—how much should banks be expected to disclose about the deposit relationship if most of their customers’ deposits are guaranteed by the government anyway?
In line with other fractional reserve free banking proponents, George Selgin argues that modern depositor agreements—the dense legalese most people skip—already establish this transparency.And he is right. Bank of America does make that disclaimer in its deposit agreement. I decided to take a closer look at other big banks’ fine print to see how standard this language is. What I found is that it isn’t standard and that even when a bank (including Bank of America) does use that language, it is still ambiguous because of other language in the document, especially in regard to the availability of funds. One bank’s fine print doesn’t even mention the possibility of bank failure and FDIC receivership.
Here is what I found.
JPMorgan Chase does not have debtor-creditor language. In fact, in the first section of the agreement, in which common terms are defined, it says that the “available balance” is “the amount of money in your account that you can use right now.” This does not indicate that Chase “owes” its customers the money or that withdrawals could be delayed. Chase explicitly calls its deposit customers “account owners” and say they have “complete control over all of the funds in the account.”
Bank of America describes the deposit relationship as “that of debtor and creditor,” but this language does not appear in its online banking service agreement, which only says that the online “Services may also be affected by your Deposit Agreement.” Bank of America doesn’t say much about the availability of demand deposits but is very clear about time deposits: “When you open a time deposit account, you agree to leave your funds in the account until the maturity date of the account.”
Wells Fargo does not use the debtor-creditor language to describe its deposit relationship. Like Bank of America, Wells Fargo says that account owners have “complete control over all of the funds in the account.”
Citibank very clearly defines its relationship with customers: “Citibank’s relationship with you is debtor and creditor.” But Citi also refers to the customer’s balance as the “‘Available Now’ balance,” even though a critical mass of depositors could run to withdraw their funds and find that the money isn’t so available.
US Bank does not use the debtor-creditor language to describe the deposit relationship. In fact, early in the agreement it refers to the “Owner’s Authority” of depositors, which includes “the power to perform all the transactions available to the account.” US Bank also says that the customer’s funds are available immediately: “‘Available Balance’ means the amount of money that can be withdrawn at a point in time.”
PNC does not use the debtor-creditor language to describe the deposit relationship. It does not even have a section on the possibility of bank failure and the process of FDIC receivership, which is in all the above banks’ deposit agreements.
So, only two of these six major banks have the debtor-creditor language, and the two that do have it introduce ambiguity by promising at-par-on-demand availability of funds. We are still a long way from clear communication about the status of depositors’ money, if we can call it theirs at all.
federal reserve government debt interest rates
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Schedule for Week of October 15, 2023
The key economic reports this week are September Retail Sales, Housing Starts and Existing Home sales.
For manufacturing, September Industrial Production, and the October New York and Philly Fed surveys will be released this week.
—– Monday, Octo…
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For manufacturing, September Industrial Production, and the October New York and Philly Fed surveys will be released this week.
8:30 AM ET: The New York Fed Empire State manufacturing survey for October. The consensus is for a reading of -1.5, down from 1.9.
8:30 AM ET: Retail sales for September will be released. The consensus is for a 0.2% increase in retail sales.
This graph shows retail sales since 1992. This is monthly retail sales and food service, seasonally adjusted (total and ex-gasoline).
9:15 AM: The Fed will release Industrial Production and Capacity Utilization for September.This graph shows industrial production since 1967.
The consensus is for a 0.1% increase in Industrial Production, and for Capacity Utilization to decrease to 79.6%.
10:00 AM: The October NAHB homebuilder survey. The consensus is for a reading of 44, down from 45 in September. Any number below 50 indicates that more builders view sales conditions as poor than good.
7:00 AM ET: The Mortgage Bankers Association (MBA) will release the results for the mortgage purchase applications index.
8:30 AM: Housing Starts for September. This graph shows single and multi-family housing starts since 1968.
The consensus is for 1.405 million SAAR, up from 1.283 million SAAR.
During the day: The AIA/Deltek's Architecture Billings Index for September (a leading indicator for commercial real estate).
2:00 PM: the Federal Reserve Beige Book, an informal review by the Federal Reserve Banks of current economic conditions in their Districts.
8:30 AM: The initial weekly unemployment claims report will be released. The consensus is for 210 thousand initial claims, up from 209 thousand last week.
8:30 AM: the Philly Fed manufacturing survey for October. The consensus is for a reading of -6.8, up from -13.5.
10:00 AM: Existing Home Sales for September from the National Association of Realtors (NAR). The consensus is for 3.94 million SAAR, down from 4.04 million in August.The graph shows existing home sales from 1994 through the report last month.
12:00 PM: Discussion, Fed Chair Jerome Powell, Economic Outlook, At the Economic Club of New York (ECNY) Luncheon, New York, New York
10:00 AM: State Employment and Unemployment (Monthly) for September 2023 unemployment fed federal reserve home sales real estate unemployment
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Ferrari to accept crypto payments in the US
Ferrari’s decision to accept cryptocurrency payments was driven by market demand and dealer requests, with numerous clients investing in digital currencies.
…
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Ferrari’s decision to accept cryptocurrency payments was driven by market demand and dealer requests, with numerous clients investing in digital currencies.
Ferrari will accept cryptocurrency payments for its luxury sports cars in the United States due to customer demand. The carmaker also plans to accept crypto payments in Europe.
According to an Oct. 14 report from Reuters, Ferrari’s chief marketing and commercial officer, Enrico Galliera, confirmed the intentions of the luxury car brand. Ferrari’s choice to accept cryptocurrency payments was driven by market demand and dealer requests, with numerous clients, including crypto-savvy young investors, having invested in digital currencies.
Although Galliera didn’t specify the number of cars Ferrari expects to sell via crypto payments, he reportedly stated that the carmaker’s strong order portfolio is fully booked until 2025. Ferrari aims to test this expanding market to connect with potential buyers beyond its usual clientele. The luxury automaker plans to introduce cryptocurrency payments in Europe by the first quarter of 2024 and expand to other crypto-friendly regions after.
For its initial phase in the U.S., Ferrari has reportedly partnered with major cryptocurrency payment processor, BitPay. This collaboration enables transactions in Bitcoin (BTC), Ether (ETH) and USD Coin (USDC).
Galliera confirmed that there will be no additional fees or surcharges when using cryptocurrency, as BitPay will promptly convert cryptocurrency payments into conventional fiat currency for Ferrari’s dealers, ensuring they are shielded from cryptocurrency price fluctuations.
BitPay will also verify the legitimacy of the digital currency, ensuring it does not originate from illicit activities, money laundering or tax evasion.
Related: Madeira announces creation of Bitcoin business hub for innovation
Many large corporations have hesitated to adopt cryptocurrencies due to their price volatility and associated transaction impracticality. Among these companies is Tesla, the electric vehicle manufacturer, which initially started accepting payments in Bitcoin in 2021. However, CEO Elon Musk suspended this payment method due to environmental concerns.
Magazine: The Truth Behind Cuba’s Bitcoin Revolution: An on-the-ground report
cryptocurrency bitcoin crypto btc currencies cryptoUncategorized
Caroline Ellison wanted to step down but feared a bank run on FTX
Former Alameda CEO Caroline Ellison recognized she wasn’t doing a good job months before the company filed for bankruptcy, but Sam Bankman-Fried persuaded…
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Former Alameda CEO Caroline Ellison recognized she wasn’t doing a good job months before the company filed for bankruptcy, but Sam Bankman-Fried persuaded her to stay.
Caroline Ellison wasn’t doing a good job leading Alameda Research in 2022, and she did not hide it. Excerpts from her personal notes shared as evidence by prosecutors in Sam Bankman-Fried’s trial revealed details about the trading firm’s struggles and its CEO’s desire to resign weeks and months before FTX collapsed.
Ellison spent over 10 hours testifying during Bankman-Fried’s trial this past week, notably entering through the front doors of the United States District Court for the Southern District of New York in Manhattan, joined by her attorneys. Ellison said she had not seen Bankman-Fried since the crypto empire failed in November 2022, but their communication had eroded months before.
In April 2022, their romantic relationship ended, and Caroline started avoiding meetings with Bankman-Fried even though they still lived in the same luxurious apartment in the Bahamas. Alameda’s growing liabilities with FTX and the breakup with Bankman-Fried made her consider leaving the company altogether.
“I feel like neither [Sam] Trabucco nor I have been doing a great job of pushing on stuff,” she wrote in the document to Bankman-Fried, which was shared as evidence during her cross-examination by the former FTX CEO’s defense counsel.
One more Caroline Ellison courtroom sketch.
— Ariel Givner, Esq. (@GivnerAriel) October 11, 2023
This one featuring SBF himself! https://t.co/q3O6xqxEhl pic.twitter.com/cQJbj5V1H7
Bankman-Fried asked her to stay on, saying that her departure could create rumors about Alameda’s financial health, thus harming FTX’s credibility, so Ellison remained CEO.
Ellison joined Alameda as a trader in 2018. By 2020, she handled most of the company’s operations, while Bankman-Fried focused on his newly launched crypto exchange, FTX. In August 2021, she became co-CEO alongside Sam Trabucco, who stepped down a few months later, leaving her in charge of the company. In August 2022, Trabucco officially resigned as co-CEO.
Ellison was against creating FTX, she revealed. “I didn’t think of myself as ambitious before I started at Alameda, but I believe I became more ambitious” under Bankman-Fried’s incentive, she said.
As CEO, Ellison was in charge of handling Alameda’s crypto lenders. In mid-2022, after the Terra ecosystem failed, the company’s open-term loans stood at $1.3 billion. The market downturn drained liquidity from crypto assets, prompting Alameda’s lenders to demand loan repayments.
According to Ellison, Bankman-Fried instructed her to keep repaying creditors via Alameda’s line of credit with FTX. In other words, Alameda would use FTX’s customer assets to repay crypto lenders. At the time, its line of credit with the exchange stood at $13 billion.
As lenders demanded loan repayments and Alameda’s balance sheets, Bankman-Fried suggested Ellison use “alternative means” for presenting the company’s financials. In the following months, Ellison would create many additional versions of a balance sheet to deceive creditors.
Early in November 2022, an alternative version of Alameda’s balance sheet was leaked. Ellison was on vacation in Japan at the time, but she had to travel to FTX Hong Kong’s office to deal with the company’s crisis.
While the balance sheet data didn’t reflect the company’s reality, it was enough to spread rumors and trigger a bank run on FTX a few days later, exposing an $8 billion gap between the companies.
Having cooperated with the U.S. Department of Justice since December 2022, Ellison will soon receive her sentence regarding the seven counts of fraud and conspiracy to commit fraud she was charged with.
Magazine: Blockchain detectives — Mt. Gox collapse saw birth of Chainalysis
blockchain crypto crypto
New senate bill proposes to punish makers of AI-generated deepfakes
US senators draft NO FAKES bill to ban unauthorized AI copycats
Ford has harsh words for striking UAW workers
Porsche invents new product based on best-selling supercar (it’s not for the road)
Terraform Labs contends Citadel Securities had a hand in its stablecoin collapse
September CPI and PPI
Nasdaq 100 (QQQ), Communication Services (XLC) and Transports (IYT) New Bullish Bias in IT
NFTs aren’t dead — they’re just resting
Cleveland Fed: Median CPI increased 0.5% and Trimmed-mean CPI increased 0.4% in September
Ellison Testifies Bankman-Fried Was “Freaking Out” About Inability To Raise Capital From Saudis
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