The Silicon Valley Bank collapse illustrates a common misconception about banking. When people put their money in a bank, there’s a natural tendency to think that the bank is just hanging on to it, when in reality it typically lends the money out.
In the bank run scene from It’s a Wonderful Life, George Bailey advises his panicked depositors: “You’re thinking of this place all wrong, as if I had the money back in a safe. The money’s not here, your money’s in Joe’s house … you’re lending them the money to build and then they’re going to pay it back to you as best they can.”
A run creates an artificial shortage of cash. FDR famously explained the same paradox in his very first fireside chat, which persuaded people to start putting money back in banks.
But there’s a way to bank that is guaranteed to ensure that anybody can always get their money out, no matter what the circumstances or amount: a Federal Reserve account. Currently, only banks have access to these, but there’s every reason for the public to have them too.
Morgan Ricks, John Crawford, and Lev Menand worked up a proposal for “FedAccounts” back in 2018 for The Great Democracy Initiative. (Menand and Ricks formerly worked for the Treasury Department.) Sen. Sherrod Brown (D-OH) introduced legislation along their lines back in 2020.
A FedAccount would work like a plain-vanilla checking account, where you can deposit money and make payments with a debit card or check. There would be no account fees or transaction fees and no minimum balance requirement, but no overdraft coverage. All citizens, residents, and domestic businesses would be able to get one.
A FedAccount program would solve multiple chronic problems simultaneously. First, the unbanked and underbanked would have access to a permanent, free, no-frills banking option. According to a survey from the FDIC, in 2021 about 5 percent of Americans had no bank account, and another 14 percent who did still sometimes relied on other bank-style services like money orders or payday loans.
Not only would FedAccounts all but eradicate these sources of expensive short-term credit or payment, it would also make it vastly easier for the government to make payments to citizens. During the coronavirus pandemic, for instance, the IRS struggled mightily to get relief payments to tens of millions of individuals through paper checks. In many cases—disproportionately the people who needed the money the most—addresses were wrong, and payments were delayed for months or never showed up at all. The Social Security Administration and other welfare agencies would also find it much easier to pay beneficiaries.
In addition, the speed and efficiency of the payments system would be greatly increased. Financial transactions through the Fed’s Fedwire system—which already handles over $4 trillion in payments per day—clear immediately, while bank transfers often take a day and debit card transactions can take even longer.
FedAccounts would also increase fairness. For one thing, transactions between them would be free, and so would certainly come to make up a large share of total transactions. That would cut into the fat profits of the credit card cartel—which has imposed a de facto national sales tax of 1–2.5 percent, directed into their own pockets—and allow merchants to cut prices.
The net effect of FedAccounts would be to shrink the size of the financial sector, as many depositors move their money out of banks.
For another, these accounts would pay better interest. The Fed’s interest rate on its bank accounts is supposed to be part of how monetary policy works, but banks drag their feet when rates increase while decreasing them immediately when rates are cut. At time of writing, for instance, the interest rate on reserves was 4.65 percent, but typical savings account rates at big banks ranged from 0.1 percent to 4.25 percent. With FedAccounts, everyone could enjoy that better interest rate—and a subsidy of the financial sector to the tune of tens of billions annually would be ended.
This option would also improve the effectiveness of monetary policy. By cutting out the middleman, Fed efforts to tighten or loosen credit would take effect much more quickly.
Most importantly, a FedAccount would greatly reduce financial instability, because accounts would be completely secure regardless of their size. The Fed, of course, would not just keep the money in a safe, but it is impossible to have a bank run on a central bank that can create money at will. Ricks, Crawford, and Menand are surely right to expect that tons of businesses would leap at this opportunity.
A bank account that is absolutely secure would be extremely valuable for all kinds of firms that want to reduce their risk or just don’t want the inconvenience of having to figure out alternative deposit insurance. It was very stupid of Roku to keep half a billion dollars in a single SVB account, but businesses could do that in a FedAccount risk-free.
This, in turn, would make financial regulation simpler. As the authors point out, a lot of the ultra-complicated regulations in the Dodd-Frank bill are about ensuring that financial firms don’t rely too much on risky short-term funding sources (like “repos”) that are vulnerable to bank run–style crises of confidence. The security of FedAccounts would quickly crowd out this kind of funding, and make the task of regulation easier.
Finally, the net effect of FedAccounts would be to shrink the size of the financial sector, as many (or even most) depositors move their money out of banks. It’s long since time that Wall Street, along with its ridiculous share of corporate profits, got taken down a peg.
The dirty truth about the financial system is that the whole thing functions on the back of government systems and guarantees. The Treasury/FDIC rescue of SVB and Signature Bank has apparently inaugurated yet another guarantee in the form of unlimited deposit insurance even for huge accounts—just one more way that bankers privatize profits and socialize losses. It would be far better to extend that same kind of white-glove government service to ordinary Americans in the form of a simple checking account at the Fed.