Probability (FDIC guarantees all $20 Trillion in deposits --> High inflation continues) = ?

[LearningMachine]

To stop the bank run, what if there is no choice but for FDIC to guarantee all $20T in deposits. 

 

Before covid, bank deposits were at $15T, and 2011, they were at $10T.

 

With deposits guaranteed, what if certain percentage of $20T, say $5T, moves to money-market accounts, and government has to come in and print money to be able to make whole on that guarantee. 

 

High Inflation continues, and we learn inflation is not that easy to get control of, and we choose inflation over bank runs. 

 

What do folks think the probability of above scenario is? 

 

Wonder if there is another entity out there as strong as FDIC/Fed/Treasury that has the ability to effectively guarantee minimum price of its product (with some lag) so that it can keep member countries' budgets at least in line with inflation, and companies selling that product were available at unleveraged 10% FCF yield. 

Edited March 19, 2023 by LearningMachine

[Gregmal]

This has to happen and the longer they wait, the worse it will be. 
 

Another funny offshoot of Geriatric Jerry Powells rate crusade? Run on bank deposits by…..people looking for free money! After all, this free money, is only available to the haves…which gosh darn it, is how it should have been all along. 

[KJP]

1 hour ago, LearningMachine said:

To stop the bank run, what if there is no choice but for FDIC to guarantee all $20T in deposits. 

 

Before covid, bank deposits were at $15T, and 2011, they were at $10T.

 

With deposits guaranteed, what if certain percentage of $20T, say $5T, moves to money-market accounts, and government has to come in and print money to be able to make whole on that guarantee. 

 

 

What would be the mechanics of this?  If I withdraw money from my savings account to buy a Treasury, what does the seller do with the proceeds?

 

Likewise, would banks be insolvent if mass Treasury buying (increased demand relative to bank deposits) drove down yields (and drove up the prices) of the securities on banks' balance sheets?  I realize Treasury markets are very deep, but can they absorb $5 trillion of additional demand with moving yields down and prices up?  And can they given the apparently two-tiered Treasury market (only Treasuries owned as of 3/12/23 can be pledged at 100% of face under the Fed's new lending facility).

Edited March 19, 2023 by KJP

[Spekulatius]

1 minute ago, KJP said:

 

What would be the mechanics of this?  If I withdraw money from my savings account to buy a Treasury, what does the seller do with the proceeds?

 

Likewise, would banks be insolvent if mass Treasury buying (increased demand relative to bank deposits) drove down yields (and drove up the prices) of the securities on banks' balance sheets?  I realize Treasury markets are very deep, but can they absorb $5 trillion of additional demand with moving yields down and prices up? 

Treasury yields are already moving down, which sort of tells you that what we speculate here is already happening to some extend.

[LearningMachine]

36 minutes ago, KJP said:

 

What would be the mechanics of this?  If I withdraw money from my savings account to buy a Treasury, what does the seller do with the proceeds?

 

Likewise, would banks be insolvent if mass Treasury buying (increased demand relative to bank deposits) drove down yields (and drove up the prices) of the securities on banks' balance sheets?  I realize Treasury markets are very deep, but can they absorb $5 trillion of additional demand with moving yields down and prices up?  And can they given the apparently two-tiered Treasury market (only Treasuries owned as of 3/12/23 can be pledged at 100% of face under the Fed's new lending facility).

 

34 minutes ago, Spekulatius said:

Treasury yields are already moving down, which sort of tells you that what we speculate here is already happening to some extend.

 

Indeed, not saying it won't move the yields down, and treasury prices back up. 

 

My point is about the sequence of events, i.e. what if the sequence was like this:

• #1. FDIC guarantees all $20T in Deposits
• #2. Some people continue moving deposits to treasuries, driving treasury prices back up, causing held-to-maturities at banks holding treasuries to move up
• #3. Small and mid-size banks still end up losing deposits to treasuries, causing FDIC to step in, and Fed/Treasury to print more money if necessary.
• #4. $20T cash ($5T added during covid and possibly more added during #3 above) in people's hands continues going after limited goods & services, continuing inflation

 

 

Edited March 19, 2023 by LearningMachine

[LearningMachine]

32 minutes ago, KJP said:

 

If I withdraw money from my savings account to buy a Treasury, what does the seller do with the proceeds?

 

Selling bank parks the cash with the Fed, printing more money. 

[KJP]

Just now, LearningMachine said:

 

Selling bank parks the cash with the Fed, printing more money. 

 

How the does transaction print more money?  Won't my own bank's reserve balance go down by the equivalent amount since I've withdrawn cash to buy the Treasury?

 

 

[james22]

Why isn't buying BRK tomorrow just about risk-free?

 

Knowing the Fed has to bail out the banks if any Buffett investment/intervention fails?

 

Even he if backs away, he has to know what will then happen and act on it.

 

Insider trading is usually pretty profitable.

[KJP]

1 hour ago, LearningMachine said:

 

High Inflation continues, and we learn inflation is not that easy to get control of, and we choose inflation over bank runs. 

 

 

By the way, I do agree with this fundamental point.  Regulators and politicians will choose inflation over many things, including the risk of depression. 

[Spekulatius]

9 minutes ago, KJP said:

 

How the does transaction print more money?  Won't my own bank's reserve balance go down by the equivalent amount since I've withdrawn cash to buy the Treasury?

 

 

Parking cash with the treasury won’t print money. If anything, it will take money out of circulation and sterilize it.

[LearningMachine]

6 minutes ago, KJP said:

 

How the does transaction print more money?  Won't my own bank's reserve balance go down by the equivalent amount since I've withdrawn cash to buy the Treasury?

 

 

 

Let's take a concrete scenario:

• #1. FDIC guarantees FRC deposits. 
• #2. John takes his $500K balance at FRC and buys treasuries 
• #3. FRC's reserve balance goes down into negative. FDIC doesn't have any more balance to help FRC.  Fed/Treasury step in to print cash using some mechanism, e.g. they give FRC $500K for treasuries with $500K face value, and $300K FMV, without expecting it to be paid back. 
• #4. BAC that had sold the $500K treasuries to John, takes the $500K and parks it with the Fed, earning 5% on that $500K, that is, $25K. 

 

Step #3 above prints $200K cash

Step #4 above prints $25K cash

 

Did I make an incorrect logical leap above? 

 

[LearningMachine]

10 minutes ago, james22 said:

Why isn't buying BRK tomorrow just about risk-free?

 

Knowing the Fed has to bail out the banks if any Buffett investment/intervention fails?

 

Even he if backs away, he has to know what will then happen and act on it.

 

Insider trading is usually pretty profitable.

 

Because Buffett is likely not going to be here for many years. 

 

If Buffett was going to be around, you could be safe in buying BRK knowing that even if it falls temporarily , Buffett would invest wisely and bring it back up. 

[LearningMachine]

10 minutes ago, KJP said:

 

By the way, I do agree with this fundamental point.  Regulators and politicians will choose inflation over many things, including the risk of depression. 

 

Because of that, I think BRK's Monday filing is likely to show something similar to his last Wednesday filing on what he purchased among all the noise :-). 

[james22]

3 minutes ago, LearningMachine said:

 

Because Buffett is likely not going to be here for many years. 

 

If Buffett was going to be around, you could be safe in buying BRK knowing that even if it falls temporarily , Buffett would invest wisely and bring it back up. 

 

But he knows that.

 

Why wouldn't he assure BRK's continued success by converting $100B cash into a dividend stream (and remove the risk of a successor spending it less wisely)?

[KJP]

8 minutes ago, LearningMachine said:

 

Let's take a concrete scenario:

• #1. FDIC guarantees FRC deposits. 
• #2. John takes his $500K balance at FRC and buys treasuries 
• #3. FRC's reserve balance goes down into negative. FDIC doesn't have any more balance to help FRC.  Fed/Treasury step in to print cash using some mechanism, e.g. they give FRC $500K for treasuries with $500K face value, and $300K FMV, without expecting it to be paid back. 
• #4. BAC that had sold the $500K treasuries to John, takes the $500K and parks it with the Fed, earning 5% on that $500K, that is, $25K. 

 

Step #3 above prints $200K cash

Step #4 above prints $25K cash

 

Did I make an incorrect logical leap above? 

 

 

This is much different than how I understood your original hypothetical.  At the end of the day, if Treasury has to spend $2 trillion backstopping failed banks, then I see the potential inflationary consequences.  But there are many steps, assumptions, and hypotheticals between (i) a change in the relative preference between deposits and Treasuries, and (ii) mass bank failures that require huge US government/Treasury backstop spending.  That is what I was trying to get at. 

[Valuebo]

16 minutes ago, LearningMachine said:

 

Because of that, I think BRK's Monday filing is likely to show something similar to his last Wednesday filing on what he purchased among all the noise :-). 

 

Why would he buy open market, esp with the size he operates at, when he can get better deals over the weekend? And I'm talking against my book here as I bought USB calls on Friday at -8% which might see a small rebound if there was to be some sudden news from WEB. 

 

I still don't think he wants to mingle too much with regional banks anyway, unless it gets very attractive. He also knows not to go at it too soon and that letting it "fester" some more gets him fatter pitches. Must be nice to know you can effectively make a great investment and simultaneously prop up confidence in the entire banking system in one go. Still see him going purely for the bigger whales out there, which will be the biggest (and only) beneficiaries when all is said and done. Just open market obv, none of the big players have any issues whatsoever, no matter the claims of some f**** idiots on fintwit... The idiocy and scaremongering is mindblowing I have to say.

Edited March 19, 2023 by Valuebo

[LearningMachine]

5 minutes ago, Valuebo said:

 

Why would he buy open market, esp with the size he operates at, when he can get better deals over the weekend? 

 

I don't still think he wants to mingle too much with regional banks anyway, unless it gets very attractive. He also knows not to go at it too soon and that letting it "fester" some more gets him fatter pitches. Must be nice to know you can effectively make a great investment and simultaneously prop up confidence in the entire banking system in one go. Still see hem going purely for the bigger whales out there, which will be the biggest (and only) beneficiaries when all is said and done. Just open market obv, none of the big players have any issues whatsoever, no matter the claims of some f**** idiots on fintwit... The idiocy and scaremongering is mindblowing I have to say.

 

I was not saying that the Monday filing would show that he purchased regional banks in the open market. 

 

To the contrary, I was saying that the Monday filing would likely show what his Wednesday filing showed :-). 

See https://www.sec.gov/Archives/edgar/data/315090/000089924323008649/xslF345X03/doc4.xml .

Edited March 19, 2023 by LearningMachine

[Valuebo]

1 minute ago, LearningMachine said:

 

I was not saying that the Monday filing would show that he purchased banks in the open market. 

 

To the contrary, I was saying that the Monday filing would likely show what his Wednesday filing showed :-). 

See https://www.sec.gov/Archives/edgar/data/315090/000089924323008649/xslF345X03/doc4.xml .

 

 

My bad, gotcha!

[Gregmal]

8 minutes ago, Valuebo said:

Just open market obv, none of the big players have any issues whatsoever, no matter the claims of some f**** idiots on fintwit... The idiocy and scaremongering is mindblowing I have to say

Lol yup. If someone tells me they’re on twitter it’s an immediate -5 credibility points. It’s a worthless cesspool of attention seeking egomaniacs and people pretending to be experts so they can sell you shit.

[LearningMachine]

21 minutes ago, james22 said:

 

But he knows that.

 

Why wouldn't he assure BRK's continued success by converting $100B cash into a dividend stream (and remove the risk of a successor spending it less wisely)?

 

You could have purchased BRK with the same logic on Dec 7, 2007.  But then, he was 77, and now he is 92. 

This time, BRK is also sitting on 44.1% of the portfolio in a single stock that has not yet adjusted for treasuries yielding higher than (FCF-SBC or buyback) yield on that stock and has not yet adjusted for many risks over risk-free treasuries. 

Edited March 19, 2023 by LearningMachine

[LearningMachine]

59 minutes ago, KJP said:

 

This is much different than how I understood your original hypothetical.  At the end of the day, if Treasury has to spend $2 trillion backstopping failed banks, then I see the potential inflationary consequences.  But there are many steps, assumptions, and hypotheticals between (i) a change in the relative preference between deposits and Treasuries, and (ii) mass bank failures that require huge US government/Treasury backstop spending.  That is what I was trying to get at. 

Thanks @KJP for pointing out the assumptions causing “leakage” in logic. Exactly what I was looking for.

 

I agree the percentage of deposits moving to treasuries might not be as high as 25%.  Some depositors might continue to just move deposits from small and mid-size banks to BAC and JPM. 

 

Also, agree we probably won’t have mass failure of banks, and government would act with bigger and bigger measures before that happens to at least guarantee depositors.

 

I think one thing is likely for certain. The extra $5 trillion in deposits created during Covid is here to stay as guaranteed. Fed/treasury/FDIC is not going to choose using bank failures as a way to reduce some of this increase. To the contrary, they will likely be willing to print more money if needed to backstop any bank failures that FDIC is not able to cover.

Edited March 19, 2023 by LearningMachine

[Ulti]

https://www.wsj.com/articles/what-gets-lost-when-you-rescue-markets-d5e4bc32?st=ahz0d003jx3n6ty&reflink=desktopwebshare_permalink

[TwoCitiesCapital]

I think there should be two separate tiers of FDIC insurance. 

 

The current 250k limit is probably good for retail/individual accounts. 

 

Then there needs to be a higher tier limit for larger accounts that is significantly larger and charges an additional surcharge fee for the additional insurance. 

 

It's crazy to think corporations and individuals are bank experts enough to do due diligence on the solvency/liquidity of banks before depositing with them. Separately, it's also crazy to think that corporations would do that due diligence on thousands of separate entities to keep below 250k at each. 

 

Allow for higher FDIC limits and CHARGE extra for it on those specific accounts. 

[james22]

1 hour ago, LearningMachine said:

You could have purchased BRK with the same logic on Dec 7, 2007. 

 

No, 2008 (GS) or 2011 (BAC). Both earned great returns.

 

1 hour ago, LearningMachine said:

But then, he was 77, and now he is 92.

 

All the more reason for him to act now to benefit BRK after he is gone.

 

1 hour ago, LearningMachine said:

This time, BRK is also sitting on 44.1% of the portfolio in a single stock that has not yet adjusted for treasuries yielding higher than (FCF-SBC or buyback) yield on that stock and has not yet adjusted for many risks over risk-free treasuries. 

 

Eh.

[LearningMachine]

11 minutes ago, james22 said:

 

No, 2008 (GS) or 2011 (BAC). Both earned great returns.

 

 

Point is Buffett was more likely to be alive in those subsequent years after 2007 than as of today. 

 

From 2007 to 2009, BRK was almost cut in half price. 

 

You don't want to be in a situation where BRK faces a similar drop and Buffett is no more to help, when you could have been outside BRK to take 2009-like opportunities. 

Edited March 19, 2023 by LearningMachine