When you purchase something, anything, how much time do you spend reading reviews; checking up on the quality of the product? How much time would you dedicate towards choosing a daycare for your child, or a doctor for your family?
Companies have to build and maintain their reputations in order to keep old clients, and attract new ones. It’s a simple fact of life that customers care about the quality of the companies in which they place their trust – unless, of course, that company is a bank.
Sure, people complain about their banks, perhaps when they are charged an unwarranted ATM fee, or denied a home equity loan. The customer service? Garbage of course. But, hey, what can you do. They’re all the same.
The last 30 years have been somewhat unique in the world of banking. After a quick but painful bout of high inflation during the 1970’s in the US, there hasn’t really been that much going on in the global financial sector. Yes, there have been periods of “over-exhuberance” such as the stock market and real-estate bubbles, as well as the introduction of new multi-national currencies such as the Euro – and banks have gotten a lot of bad press, particularly over the TARP program. But even while grumbling and complaining, most of us carry on as usual, banking with the very institutions that left a bad taste in our mouths.
So how much do you know about your bank(s)? What are their outstanding liabilities; their assets? What risks do they face? Are they solvent?
Do you care? If you don’t, you’re not alone. In recent history individuals haven’t really needed to inspect the balance sheets of their banks, because of one simple fact: banks don’t go belly-up anymore.
Once upon a time, banks were businesses like any other, and had to maintain enough liquidity to cover depositor panics. To some, this was a problem, one which central banking and FDIC insurance was designed to solve: Design a relief valve and keep the panic out of the system, and suddenly, bank runs disappear.
There is another side to the argument, however. Bank runs, while acute and somewhat frightening, may have also served a valuable purpose: that of keeping banks honest. Under threat of depositors demanding their money, banks were more conservative with their lending practices, opting instead to keep more capital on hand to maintain their reputations.
So what does all of this have to do with Bitcoin? First, it is the author’s opinion that we are approaching a new period of systemic bank failures, but that despite institutional support such as the Federal Reserve and depositor’s insurance, depositors will once again find that “money in the bank” doesn’t mean what it did a decade ago.
The reasoning for this prediction is that thanks to the inherent moral hazard created by government guarantees, global financial pressures have been building for such a long time that the energy has to resolve itself, somewhere, and in a catastrophic way. One possible outcome would be for the multi-decade US Treasury Bond bull market to come to an abrupt end. While many banks are better-capitalized than at any point during the past 8 years, almost all of them have significant sovereign debt exposure. A 10-15% move in the bond market might not be cause for concern, but a 30-50% correction would render most banks inoperable.
Bitcoin, on the other hand, allows you to be your own bank (sure, Bitcoin is volatile, but it’s also young). With traditional checking account interest rates so paltry, the only reasons that people place money with banks is for the convenience of financial services, namely: transfers, deposits, cash flow, and accounting. What many people still don’t know, is that their money is not 100% safe. It might be mostly safe, but it’s not 100%. Take, for example, the fiasco which continues in Cyprus, in which deposit accounts above a certain threshold received a significant haircut (read: direct confiscation by the bank). In addition, Cypriot citizens are still suffering under strict capital controls – unable to pull out more than a few hundred Euro per day – more than 6 months after the crises.
If Cyprus is the canary in the coal mine, and more bank “bail-ins” are to follow, perhaps in larger countries with greater global clout, then wouldn’t it make sense to care about the financial health of your bank? You didn’t have to care before, because the world had been lulled into complacency by a more-or-less dependable financial system. But you might have to care in the future.
Learning about Bitcoin led me to question my own financial understanding. Has it led you to question yours? In a world of insolvency, who can you put your trust in? It’s a tough choice – but I’d bet on you.