lizgdal objects to straw man arguments and gives 2 examples, from GoofyHoofy and from me:

1. (GH) What do you think would have happened if the Fed had done nothing? Or, as before the emergence of the Fed a hundred years ago?

These are straw man arguments. Waste of time.

2. (me) Rationalwalk thinks a startup with $10 million should have...

Distorting what other people think is poor form and meaningless mind reading unless you have a quote to back it up.

Rational Walk didn't like the first comment, because he never said the Fed should do nothing - he said that the Fed's traditional response (lending generously against good assets, taking over an insolvent bank, providing liquidity, etc.) was appropriate, without bailing out unsecured depositors. Goofyhoofy responded by saying that other people had suggested abolishing the Fed, allowing banks to fail, etc., which is true, but by asking RW "What do you think would have happened if the Fed had done nothing?", he did make it sound like that was RW's proposal.

As for my comment, that RW believed businesses should have been more aware of SVB's finances, or that only $250,000 was FDIC-insured, and so should either invest directly in a Treasury-ladder corresponding to their projected cash needs, or divide assets among numerous banks so that all were guaranteed, this is exactly what RW did propose:

Instead, it would have been very easy to purchase $1 million of treasury bills maturing every week this year to cover cash flow needs. Instead of having $50 million sitting in the bank at the start of the year, the startup would have kept $1 million in the bank for immediate liquidity. Every week, a treasury bill would mature and be deposited in the bank providing liquidity for next week. The CFO might have even opted to split the $1 million into four fully insured FDIC accounts at separate banks. rationalwalk.com - Fragile capitalists

I agree with most of RW's thinking on the need to maintain responsibility, among corporate bank account holders, who, beyond a certain amount of money, are not just bank deposit holders but actually investors, who must take responsibility for their investments. What is that 'certain amount'? One proposal I have seen, that makes sense to me, is to say that any account with 0% interest is essentially a bank account and not an investment; I think if you are a small business that has raised $10m in venture capital, you either buy a Treasury ladder, or you plock your money in a bank account with zero interest, and then you have guaranteed access to the cash, with no timing constraints, and that should be guaranteed. Getting people to split that into 40 different $250,000 accounts is not only a pointless waste of their time, but it ends up guaranteeing all the money anyways.

The other argument for better guaranteeing account holders, is that the current crisis may lead to a massive outflow from small regional banks who are not too big to fail (TBTF), and this is not a desirable outcome. The government's tardiness in indicating that all real bank accounts will be guaranteed, not just the ones in TBTF banks (aka SIB, systemically important banks) is likely to lead to many more bank runs, as small banks end up needing to sell their long bonds at a big discount and themselves become insolvent. The government is very likely to end up bailing out more account holders after the fact, just because they have dithered at making sure contagion from the SVB/Signature failures does not lead to further regional bank failures.

dtb