WI: Chicago Plan Implemented

Ian_W

Banned
S&L's got the ability to offer checking accounts in the late 70s. That would not be legal under the Chicago Plan. Only banks that solely held government bonds could offer any demand deposits.

"Dear Mr Johnson,

Can you kindly transfer $120 from my brokerage account at Bear Sterns to that of Mr John Smith at Lehmann Brothers, in settlement of an off-market transaction.

Dated 22 July 1949"
 
The actual Chicago Plan recognises this, and explicitly calls for inflationary government policy aimed at adding 15% to wholesale prices, attached to making gold non-convertible and a bunch of other stuff.

Point 10 and point 11 are, however, pretty fuzzy on how that is supposed to happen.

That isn't enough IMO. Just because things are more expensive that doesn't mean there are more useful investments happening. You could have the worst of both worlds, 1970's stagflation on crack.
 
Semantics aside, money market funds are vulnerable to runs, since, until 2016, they often advertised themselves as being redeemable at face value (in 2016, the SEC required floating share prices for funds not invested in treasuries).
For institutional funds. Not retail funds.

And thanks to the collapse of Lehman, several funds did not have the assets to pay back their investors, leading to runs.
Yes, and? I'm aware of all of this, thank you very much; the point is that the reorganization you propose would do absolutely nothing to change any of this, not directly. Money market funds are very specifically not banks, so they would not be illegal under the regulations you describe. The entire behavior of American regulators since the 1930s, particularly the SEC, points very strongly against the idea that they would be proactive and aggressive in cracking down on banking-like activities by non-bank actors.
 

kernals12

Banned
"Dear Mr Johnson,

Can you kindly transfer $120 from my brokerage account at Bear Sterns to that of Mr John Smith at Lehmann Brothers, in settlement of an off-market transaction.

Dated 22 July 1949"
I don't see how that could cause any problems.
 

kernals12

Banned
That isn't enough IMO. Just because things are more expensive that doesn't mean there are more useful investments happening. You could have the worst of both worlds, 1970's stagflation on crack.
The gold confiscation and dollar devaluation did occur and it did what it was supposed to do.
 

kernals12

Banned
What, extend the depression out another 6 or 7 years?
Screen Shot 2019-05-18 at 5.51.02 PM.png

Sure, let's go with that.
 

Ian_W

Banned
Brokerage accounts have balances that are, by definition, equal to their assets.

But they are NOT held at what the Chicago Plan defines as a Deposit-Bank. They are held at what the Chicago Plan defines as a Lending-Company.
 

Ian_W

Banned
Thinking about it, the problems with accelerating the growth of the Not-Banks are even worse with the Chicago Plan than with OTL.

The key issue is that companies need finance. They can get it directly, through issuing bonds, or they can get it indirectly, by borrowing money from intermediaries who take deposits or issue bonds (or both).

Issuing bonds is expensive, so only big companies do it - small companies, in OTL, borrow small to medium sums from deposit taking banks.

Now, under the Chicago Plan, all the corporate finance gets funnelled thru Lending Companies, who can't take deposits.

Therefore all "small finance" - critically *including* mortgages to householders, has to go thru Lending Companies ... who cannot access the funds at Deposit Banks but need to go to the bond market.

Therefore, when these entities start to fail, they keep failing, and commercial credit freezes.

Just like OTL 2007, really, where the FDIC-insured Banks were overwhelmingly ok, and anyone reliant on commercial paper was in a lot of trouble.
 

kernals12

Banned
But they are NOT held at what the Chicago Plan defines as a Deposit-Bank. They are held at what the Chicago Plan defines as a Lending-Company.
But the value of the account is equal to the assets underlying it. If you put $100,000 in a brokerage account and the value of the securities it is invested in drops to $99,000, then if you close the account, you will get $99,000. This means there's no harm to the bank's balance sheet and therefore, there's no chance of a run. And because of the volatility, this scheme would make for a terrible checking account, but it would pose no risk to the financial system as a whole.
 
Thinking about it, the problems with accelerating the growth of the Not-Banks are even worse with the Chicago Plan than with OTL.

The key issue is that companies need finance. They can get it directly, through issuing bonds, or they can get it indirectly, by borrowing money from intermediaries who take deposits or issue bonds (or both).

Issuing bonds is expensive, so only big companies do it - small companies, in OTL, borrow small to medium sums from deposit taking banks.

Now, under the Chicago Plan, all the corporate finance gets funnelled thru Lending Companies, who can't take deposits.

Therefore all "small finance" - critically *including* mortgages to householders, has to go thru Lending Companies ... who cannot access the funds at Deposit Banks but need to go to the bond market.

Therefore, when these entities start to fail, they keep failing, and commercial credit freezes.

Just like OTL 2007, really, where the FDIC-insured Banks were overwhelmingly ok, and anyone reliant on commercial paper was in a lot of trouble.

Quick Q, what do you think should have been done to prevent runs on commercial paper? What are the options usually suggested?
 

kernals12

Banned
Thinking about it, the problems with accelerating the growth of the Not-Banks are even worse with the Chicago Plan than with OTL.

The key issue is that companies need finance. They can get it directly, through issuing bonds, or they can get it indirectly, by borrowing money from intermediaries who take deposits or issue bonds (or both).

Issuing bonds is expensive, so only big companies do it - small companies, in OTL, borrow small to medium sums from deposit taking banks.

Now, under the Chicago Plan, all the corporate finance gets funnelled thru Lending Companies, who can't take deposits.

Therefore all "small finance" - critically *including* mortgages to householders, has to go thru Lending Companies ... who cannot access the funds at Deposit Banks but need to go to the bond market.


Therefore, when these entities start to fail, they keep failing, and commercial credit freezes.

Just like OTL 2007, really, where the FDIC-insured Banks were overwhelmingly ok, and anyone reliant on commercial paper was in a lot of trouble.
They can issue stock.
 

Ian_W

Banned
Quick Q, what do you think should have been done to prevent runs on commercial paper? What are the options usually suggested?

You can't stop runs on commercial paper.

But what you can do is have the government borrow a bunch of money and buy new shares in the companies that need the liquidity.

Note this is what was done OTL with GM and so on, and it worked.
 
This wasn't a typical depression. And it was the rapid decline, not the slow recovery that made it a great depression.

Usually the deeper the decline, the more rapid the recovery. CapU is so low after a deep depression that you tend to have strong recoveries. You don't have to invest in new equipment, you merely have to rehire people to utilize the old equipment once the recovery happens.
 
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