An implicit guarantee known by all market participants linked to the explicit guarantee and to the behavior of regulators for decades.

The guarantee is that the gvmnt will bail out some specific CREDITORS of financial institutions btw, not necessarily all, and not necessarily the financial institution itself

Except that implicit guarantee (not even a regulation), that exists only in your imagination, kicked in only when there was risk of systemic collapse. The government let Bear Sterns go bust and would have let AIG go bust, but they couldn't let the whole system collapse.

In any case, I don't see how implicit guarantees have anything to do with your ranting against regulations. If it's implicit, it wasn't a regulation, was it?

The problem is to have too many entities classified as too big to fail .
So they had to bail out some entities .
And this was caused by deregulation , not regulations .

I will also make a general comment, Luciom. When you discuss things I don't know much about, I find some of your arguments quite persuasive and you come across as quite well read and that you know what you're talking about. But then you start talking about things I do know a bit about, and it becomes apparent that your knowledge is really quite superficial, and you're often misinformed and your arguments often make little logical sense. So, for that reason, I am really going to treat your views on things I don't know much about with a much bigger pinch of salt.

They didn't let b Stearns go bust, it was bought by JP Morgan for a very low price.

The threat (or promise) of government action is part of the process , which is why you need constitutional ban to government action in those fields.

And the implicit guarantee only has effects because of the explicit actions taken in the past, including the materialization of those implicit guarantees in previous crisis.

Saying that given it's implicit then it's not about regulation is a folly.

Take the opposite problem, when the government threatens regulations to have companies comply with it's requests (like when they censored during COVID). It's not like until they do regulate then it's not about regulation.

The power of regulation itself allows the government to threaten violence and achieve results. Very often nefarious ones with very bad long term consequences.

It's like saying threatening nuclear bombing of a country isn't a military topic because no bombing happened yet.

So, your thesis is that investment banks factor in being bailed out by the government in their assessment of counterparty risk, have I understood this correctly?

Not only investment banks, all market participants. They basically reasoned (and still do reason ) as if too big to fail institutions had a government guarantee for counterparty risk.

Then when the government for once did not apply the guarantee (Lehman brothers) they went "oh ****" having to freeze almost all operations because they now had to price every counterparty risk, had no internal procedures to assess it (remember they traded all that paper overnight as guaranteed paper even if it wasn't) .

So the apparently paradoxically thing was the government triggered the worst part of the GFC by not saving LB creditors in full, but that only happened because the regulatory framework and the actual actions of the last decades made everyone believe the government would have saved LB, while the gvmnt should have been out of the business of guaranteeing liabilities in general to begin with.

Mind, the real estate boom and bust would have happened anyway, credit cycles exist independent from gvmnt regulations and they quite probably would go bust more often without government regulation, but the size of the disaster would be far smaller.

From the point we are in with the entire edifice of finance built upon government guarantees it's hard to see a way out that isn't bloody and messy.

But unless some very radical action is taken to rebuild finance without government involvement crisis will always be disastrous, even if rare

You can certainly make a reasonable case for more or less government involvement in the financial services sector, but to say that the financial services sector should operate without any government involvement or regulation whatsoever is facile, IMO.

That's what I thought. You have absolutely no idea how to tie federal deposit insurance to the 2007-2008 financial crisis.

First, cash from customer deposits isn't what fueled a loosening of underwriting practices for residential mortgages. And in any case, removing FDIC insurance wouldn't have significantly affected amounts on deposit in the period leading up to the financial crisis.

Second, FDIC insurance has been highly effective at preventing depositor runs on banks. It is far from obvious to me that the financial crisis would have been less painful if depositors had engaged in more massive bank runs.

Third, it's a complete joke to say that FDIC insurance undermined incentives for customers to do due diligence on their banking institutions. Your average guy with $20,000 on deposit at XYZ Bank has no way of monitoring the safety and soundness of his bank.

Fourth, and I concede that this is just speculation, I suspect that eliminating FDIC deposit insurance would result in bank consolidation and increased prevalence of banks that are too big to fail.

But it has the words "federal" and "insurance" in it, so it must be responsible for something. Has anyone looked into the JFK assassination recently? Are we absolutely sure it wasn't tied to FDIC?

Investment banks do consider federal bailouts as part of an overall assessment of counterparty credit risk. For example, if you worked at Morgan Stanley in August 2008, and you were holding a mountain of credit default swaps written by AIG, you absolutely were taking the possibility of a government bailout into account when valuing those swaps.

That observation has little or nothing to do with FDIC insurance for customer deposits, however.

Fair enough. I wasn't actually disputing this was the case, I was just checking that I understood correctly since, well, not to put too fine a point on it, succinctness is not exactly Luciom's bag, so I was trying to distill his argument to its substantive element(s).

Yes ofc the federal guarantees reduces the frequency of bank runs, I didn't argue otherwise.

But if I write 50+ lines and you insist on not following the logic under which the existence of FDIC and all other regulatory and legislative actions in the past made it clear the guarantee extended to many more creditors, implicitly but for real as proven repeatedly, then you make it on purpose.

I mean you repeatedly ask me for why i think federal guarantees co-caused the crisis I give you the logic and you only comment stopping at the first layer which on it's face looks like it had nothing to do with GFC per se.

But it's the whole building up of federal guarantees , not only deposits but mortgages as well, explicit and implicit, that causes excess risk build up. Excess vs a scenario with no federal guarantees, where they implode sooner.

The guy with 20k has the same tools to judge the solidity of his bank counterpart the random guy who wants to buy a smartphone has of actually knowing how smartphone performs before he buys them: asking around.

In a world where the state isn't involved firms build up credibility , reputation, other firms build a credibility about assessing firm credibility, and the customer does his job of choosing in an informed way if he wants to, or pays the price of ignorance if he doesn't.

As with every other good or service in the economy.

It is not because of the benignity of the state and it's holy regulatory duty that I know the restaurants I go to don't serve rat meat.

You don't need a state regulator telling you how quick tab loading must be in a browser for it to be legal.

And btw a ton of depositor headaches would be solved if we just allowed people to put money somewhere without it being a ****ing loan to a financial institution.

Maybe in a world with no depositor guarantee firms start offering checking accounts which aren't loans to a bank, rather the equivalent of digital safes , where your money isn't lent to anyone without your express permission, and you just spend it when you see fit. Then they have to reward you appropriately for risk if they instead want to loan it.

And then if you are getting yield, when you lose it's your loss and you suck it up.

This whole idea of most money being actually a loan is one of the original sins.

Some proposals are about the fed giving access to depositors, you just have that as the default state guaranteed option, the rest pays you more but the risk is up to you.

That would actually be a state role which could be justified under minarchism, if we put the payment system under the short list of essential, existential elements of society, then have the state provide the basic option if the market can't (like with the police).

Or the fed does that and then you deal with private companies for the actual UX and all added services, but your money is never a loan unless you want it to be so and you get rewarded appropriately.

Yet again another option would be streamlined account where your money is used to buy tbills, you cash getting a day loan from the intermediary who then proceeds to sell the proper amount of tbills.

The intermediary takes fees for operation and a cut on the tbill yield.

Your money is then a loan but an actual direct loan to the state, rewarded appropriately at market rates, instead of a guarantee with a cap.

See how many ways you can fix what you want to fix without regulatory violence?

If it's all so simple, is there a lobby or something? For Wall Street deregulation? Has to be.

And the broke-brains are likely voting republican for the generic sense that they're owning the libs via limiting the bureaucracy on business.

They do it's the same logic. It's the same state and regulatory agencies, which is why the purportedly independent FDIC did the fed and gvmnt bidding (saving all depositors even over 250k) immediately in like 2 weeks with SVB

And implicit bailout guarantees are predicated on the same logic of the FDIC (which couldn't cover any actual big crisis with it's funds ).

The FDIC is the explicit, visible tip of the huge government put iceberg on financial markets.

There is lobbying for specific deregulation and obscure carve outs for specific firms/sectors because that gives them a competitive advantage, but incumbents very much like the regulatory state which they captured decades ago and which keeps competitors kneecapped, see fintech being greatly slowed by incumbent written regulations for example.

Regulators work for the incumbents before being regulators and go back there afterward often enough, jfc it's all transparently done against competitors and the people in general.

That endless string of one-sentence paragraphs didn't do much to convince me that you know what you are talking about. But much like our dearly departed Cuepee, you have proven that you have more keyboard stamina than I do. For that reason, I am going to withdraw from this discussion. I leave the last word to you (or the last 5000 words). Others can judge for themselves which of us has a better understanding of this issue.

Geithner bailed out half of the financial world after being a key regulator for a long time, then went managing a big private equity firm in the last 10 years.

Yet the gullible people are the "maga" people against regulation

Lol, the maga people can't spell "regulation".

Too complicated for me. Y'all carry on. Luciom, love ya, you maniac!

If you said they couldn't spell rendezvous I'd agree but regulation isn't too tough of a word.

I did, in the very post you're responding to here.

But I'll walk this back a bit...I shouldn't have been accusatory with my post, as I have no reason to think the unclear language was intentional.

You said in the more recent post "Very Serious People do tend to make more money and/or have the sorts of jobs that rely on them accepting the propaganda (as per Chomsky on the topic below)", and if someone hadn't seen the previous exchange, they might not have understood the Chomsky quote isn't directly related to "VSP" at all, but is a quote that you felt expressed a related sentiment. Just wanted to make that clear, but instead I expressed it in a way that might have sounded like you were being misleading, so my apologies if it came across that way.

But no, that still isn't a common usage of Very Serious People. I'd be pretty surprised if more than 5% of people would understand what you meant if you used it that way. Actually, more than 1% would surpass my expectations.

Yeah, it should be your middle name, amirite?

Ebbs and flows in the market are different than bubbles. It is extremely likely we would have less bubbles with less regulation.

Agreed, that was the law passed under clinton that forced banks to give loans to people who didn't otherwise qualify for a loan. It was the ultimate ticking time bomb that he knew another president would have to deal with while he got praise for helping poor people.

This is a gross oversimplification as well. The reality is that the government, mortgage lenders, investment banks, RMBS purchasers, CRAs, and home buyers all have some share of the blame for the 2007-2008 financial crisis.

Anyone who claims that responsibility lies overwhelmingly with just one of the entities or groups that I listed above is pushing a political agenda.