Thinking about bank runs. Prior to federal deposit insurance, why couldn't banks protect themselves from runs with explicit policies? Like, “if our deposits drop by more than X% in Y timeframe, we will automatically halt withdrawals.” Did any banks ever try this?
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Replying to @jasoncrawford
There was a consortium that would suspend convertibility and issue certificates. Will try to find the book cite for you later. It was a consortium because panics tended to spread, both because of customer perception all banks were at risk and because banks pulled deposits.
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Replying to @patio11 @jasoncrawford
Suspend convertibility = “At start of business on Monday, we no longer accept withdrawals to currency. We will issue you a certificate entitling you to payback from any member of the consortium at some indefinite point in future; if you need cash, sell it at a discount to anyone”
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Replying to @patio11 @jasoncrawford
Slapped by the Invisible Hand, Gorton 2010.pic.twitter.com/73yI8o1vm2
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Replying to @patio11 @jasoncrawford
It’s dry and disorganized but has been best meditation on the purpose and operations of deposit-taking institutions and the parallels to shadow banking which I’ve ever read. (Thesis of book is basically 2007 was a banking crisis on the repo market rather than usual diagnosis.)
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Replying to @patio11
Well my whole job right now is basically to read three dry and disorganized books and distill them into one clear and engaging ~4k-word blog post, rinse & repeat…
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Replying to @jasoncrawford
Best concept that I’ve taken away is “Information-insensitive debt.” I.e. If you loan me $X00k to buy a house then you have to care about updates to my ability to repay, but if you deposit $X00k with Resona, you don’t. Resona’s service to depositors isn’t just risk smoothing.
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Replying to @patio11
How is “information-insensitive” not just another way of saying “very low-risk”?
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Described at length and more coherently in the book, but there is a very difference from saying “I model patio11 as extremely low risk; T-bill plus 10 bps risk of default maybe” and “I can entirely ignore patio11’s situations.” When debt becomes suddenly info-sensitive CRISIS.
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