The difficulty with closed end funds is they defeat the primary advantage of cash bank deposits which is nearly instant liquidity. A biz with cash on deposit likely expects to use it to meet obligations or take advantage of opportunities.
Banks historically borrow short and lend long, always a dicey proposition. Deposit insurance facilitates this but ties the hands of the Fed when the goal is to drain cash from the economy as is needed now. The Fed always comes to the rescue thus encouraging riskier behavior in order to entice new deposits from the CFO who wants an extra tenth of a point return - and they all do.
Then the finger is pointed at the lack of hedging except who would be the counterparty to such a hedge unless they captured a significant part of the upside in the option premium - see "extra tenth of a point" above. Finally, hedges that don't represent substantial cash positions wouldn't be reliable when the caca hits the fan anyway - you never really know if you have insurance until you present a claim, as the saying goes.
Want that extra tenth of a point? Buy treasuries at maturities that match your need for cash. Can't predict the need timing? Live with interest rate risk and the possible discounting (or premium - that's also possible) the market demands if you bought at a lower rate than prevails when you sell. Counting on bankers to be omniscient and always have your billions ready and waiting is just foolish.
Ah, will fix principal!
Yes, but it's a stop gap. It could prove disastrous is everyone kept running. But they will keep running as it is, so it's a horrible game.
More coming on this, David! best, Larry
Frank, Take a look at my Limited Purpose Banking plan. It's posted at https://larrykotlikoff.substack.com/p/limited-purpose-banking
It handles all your concerns.
best, Larry
There's something strangely inconsistent in proposing that a government courting default insure "all deposits" as a solution to a banking crisis.
BTW: ". . . reneging on interest and principle on federal debt." Common error. It's "principal." And "font," not "fount" for Mauldin's wisdom.
The difficulty with closed end funds is they defeat the primary advantage of cash bank deposits which is nearly instant liquidity. A biz with cash on deposit likely expects to use it to meet obligations or take advantage of opportunities.
Banks historically borrow short and lend long, always a dicey proposition. Deposit insurance facilitates this but ties the hands of the Fed when the goal is to drain cash from the economy as is needed now. The Fed always comes to the rescue thus encouraging riskier behavior in order to entice new deposits from the CFO who wants an extra tenth of a point return - and they all do.
Then the finger is pointed at the lack of hedging except who would be the counterparty to such a hedge unless they captured a significant part of the upside in the option premium - see "extra tenth of a point" above. Finally, hedges that don't represent substantial cash positions wouldn't be reliable when the caca hits the fan anyway - you never really know if you have insurance until you present a claim, as the saying goes.
Want that extra tenth of a point? Buy treasuries at maturities that match your need for cash. Can't predict the need timing? Live with interest rate risk and the possible discounting (or premium - that's also possible) the market demands if you bought at a lower rate than prevails when you sell. Counting on bankers to be omniscient and always have your billions ready and waiting is just foolish.