For the last few years I've been keeping a close eye on the Turkish lira, for quite some time a large amount of monetary inflation has been occurring there:

In the last couple of weeks the conditions have worsened and a full on currency crisis has been emerging:

This drop in the purchasing power of the currency has led to a hyperinflationary situation. With extreme monetary instability you see various financial services operations get impeded then eventually stop operating entirely if things get bad enough. For example Apple customers are now unable to purchase things from the official store. But what happens when the currency instability starts to extend into the operations of the broader banking sector?

What happens in the event of a banking crisis? Effectively this situation means that the banks can't keep operating as normal, which is a highly disruptive situation many leaders are keen to avoid. One of the situations that leaders are especially keen to avoid is having all the citizens bank accounts become inaccessible since that would be a majorly destabilizing event. One of the potential tools to deal with a banking crisis is a bail out and another related tool is a bail in. I'll explain the mechanisms later in this article. Since 2014 bank bail in laws have started to be put into action via legislation in G20 countries, this is as a direct result of advice given by the Financial Stability Board and the Bank of International Settlements. This is a big regulatory change and despite the massive importance few people are aware that this legislation exists and fewer understand the practical and political implications that these interventions have. Turkey is a G20 country so the response to the current turmoil there might be worth keeping a very close eye on.

What is a bail in?

Banking has become a very central part of the monetary system in many countries for a variety of reasons. Also the practice of fractional reserve banking has become increasingly entrenched, this is the notion that a bank can have more liabilities than assets.

Because banks can loan out more money than they have they effectively have a completely different set of rules for dealing with money as compared to everyone else. There are also a completely different set of regulations as a result. The details of this matter a lot in practice and many people have misconceptions about how the system works. For example in Australia you do not actually own any money that you deposit into a back account. In many other countries the situation is similar, when you deposit your money you are entering into a contract in which you can be paid back later by the bank whatever you deposited plus any interest accrued minus fees (or perhaps minus interest if we go down the insane path of negative nominal rates).

Because the bank can loan out more money than it has in reserves in a fractional reserve banking system there's the potential that the bank will not be able to cover all the depositors in the event that they all want to withdraw their money. In response to many bank failures in history regulations have emerged to ensure that banks have enough capital on hand such that they are able to cover their day to day operations without running into liquidity issues.

These regulations first manifested as reserve requirements which mean that banks needed to hold a certain percentage of their depositors money in the form of cash and liquid assets. As time has gone on the regulatory requirement has shifted more towards capital requirements being a a limitation on the risk taking of banks. For example reserve requirements in the USA were dropped to 0% on 2020 March 15th, this is not quite the same as reserve requirements being abolished because the reserve requirements could be reintroduced later. Because of the way these impact the banking system they are actually an important part of monetary policy and have an impact on the stability of the banks.

So what happens in the case of the banks ceasing to have enough capital to operate? One approach is to let the bank fail outright in which case depositors would get paid out some fraction of the money when the banks assets get liquidated. The issue with this is that in a fractional reserve banking system depending on the reserve and capital requirements the depositors might end up getting a very small amount of their deposits paid out. Another approach is to make up the shortfall using taxpayer money, this is referred to as a bail out. Another approach is to not cover the shortfall and to reduce the amounts in people's accounts and give them equity in the bank as compensation, this is called a bail in.

What might cause a bail in event to trigger?

A poorly run bank might have a number of mismanagement issues that could cause the bank to run into troubles. The whole point of a well regulated banking system is to have checks and balances that try to prevent mismanagement from threatening depositors accounts. However even in places with well run banking sectors fractional reserve banks are not immune to larger economic events that can cause systemic banking issues.

There's a number of systemic issues that could cause issues in the banking sector that are severe enough to see banks fail. The Bank of International Settlements¹ has a set of indicators that represent systematic dangers to the banking sector, they call these "Early Warning Indicators". These 5 indicators are early warning signs that there are substantial risks to the banking sector in any given currency zone:

1. Credit to GDP gap
2. Debt service ratio
3. Household debt servicing
4. Cross border claims to GDP
5. Residential property prices

These measures look at local banking statistics, if any of these get too far out of control they represent elevated risks of a banking crisis forming. The BIS claims that there's a 50% chance of a banking crisis if any of these are tripped. These indicators are relative to national trends in the nation that is being studied. The reason that these are based on the existing national trends rather than using global trends is worth going into some more detail about.

Take a place like Australia for example, there's been an absurd housing bubble, and this bubble has been growing for more than a decade at this point in time (Maybe even since the late 1990s). While this is a completely insane situation with a variety of hugely negative societal consequences this doesn't trigger an indicator for an impending systematic banking crisis. The reasoning is that after a couple of decades of this going on the banking system the economy has likely changed in ways that have accommodated these sorts of elevated prices. Make no mistake these changes to the economy are not positive at all but they are changes that impact the banking and financial sector. So the banking sector in Australia is likely able to handle higher real estate prices, compared to say global baselines, as long as the current rates of change are not exceeded. Crazy is normal in real estate here, so there's no extra impending systematic risk to the banking sector in the short term under these guidelines. That said the real estate market craziness will make a collapse that much worse in the event that it does happen even if this doesn't contribute to the probability of such a collapse happening.

But for comparison we have some other parts of the world where house prices have gone up substantially on the back of hugely leveraged low-interest rate fuelled debt sharply in the last few years are at risk of triggering one of these early warning indicators because their banking systems are not acclimatized to this. Canada is a great example of such a nation, when I first lived there real estate was dramatically cheaper, the average cost of housing was lower, the median cost of housing was lower and importantly the cost of the cheapest housing was also lower. The rapid increase in housing prices has not been accompanied by a rise in wages so many people are now facing significant financial stress from putting a roof over their heads. This is destabilizing in a number of ways not limited to just the banking sector.

To use a mathematical term the important thing here is the second derivative of change, that's the factor that can trigger banking crises.

For more details see the BIS analysis of these indicators. I'll give a quick summary of the five early warning indicators:

Credit to GDP gap

This represents the private sector debt (meaning non government and non banking sector debt) relative to the GDP.

Total Debt service ratio

Private economy debt. How much interest is being paid by private sector debts relative to the incomes that they are having. This is based on a 20-year rolling average.

If debt grows too fast there's going to be increasing problems with people and companies servicing their debts. Once this gets bad enough you start seeing lots of defaults and just generally a slowdown in economic activity.

Household debt servicing

This is just purely how much households are able to service debts that they have. A rise in indebtedness of households has a huge impact on the economy, like the private sector debt if there's problems servicing this debt you can start to see defaults. Also when people start finding most of the money going towards debt servicing you end up with a situation where repayments start reducing the amount of money spent in the real economy. While this isn't necessarily related to the stability of the banking sector in the short term if households can't service their debts then political problems start to emerge in a hurry.

Cross border claims to GDP

This is how much foreign money is coming into the whole system as a whole. If there's too much foreign money coming in relative to GDP this is a problem because too much money starts causing bubbles. More money being available than there are quality investment opportunities tends to lead to malinvestment which is what we saw in the 1990s Asian Financial Crisis where so much money was coming in to some countries that there simply wasn't the capacity to invest it all. This is where we got projects like the petronas towers which for a few years were the tallest in the world, so much money was sloshing around which enabled projects like this to happen. We have seen similar effects in Dubai lately. Because the best investment opportunities were already oversubscribed, therefore in no need of excess capital, if you wanted to invest money into those markets the remaining opportunities would get increasingly marginal and risky. Even though this seems counterintuitive to many, too much foreign direct investment is actually a very bad thing for an economy, so bad in fact that it forms an early warning indicator for banking crisis. This was a big factor in the 1997 Asian debt crisis. There's a lot of aspects to this issue, even in non crisis times, so I hope to be able to return to this topic in a future article.

A 35% increase relative to 3 years ago is the criteria to trip this warning indicator.

This was a problem in the Cypriot financial crisis due to a large number of foreigners using Cypriot banks as a place to park their money. More about why this is such an issue in practice with bank bail ins later.

Residential property prices

Basically a bubble in residential real estate impacts the entire economy. If residential prices in real terms increases over time at a rate higher than it did compared to the past trend this is greatly destabilizing. For example if real estate increased by a couple of percent each year for decades then has a year where it increases 10% then next year 15% and the year after 25% you'd be triggering this warning indicator. Any sort of runaway growth in residential real estate prices is tremendously destabilizing for a country.

This indicator is more powerful than all the other ones. If this is happening then the banking sector is far more at risk and this lowers the threshold to all banking crisis problems. The reason this indicator is more important than others is because everyone has to live somewhere, so if there's problems in residential real estate it tends to impact everyone.

This was a problem in the Cypriot financial crisis.

What about the stock market?

I found it interesting that the stock market wasn't listed in the BIS early warning indicators since the stock market is in such an extreme bubble at the moment with a large number of people exposed to the stock market these days. Even if you aren't directly invested in the stock market the distorting impacts of the stock market likely impact your life in a multitude of ways.

There's a paper called Predictable Financial Crises by Greenwood, Hanson, Shleifer and Sørensen. That paper explicitly covers the impacts of the stock market on the stability of the financial system and I'd recommend reading it. Effectively big bubbles in the stock markets create risks to the banking and financial system more broadly and when this happens in conjunction with one of those other early warning indicators the risks of a financial crisis go up.

It's entirely possible that a major stock market crisis could cause a banking crisis but that isn't something that's talked about in those BIS indicators.

Who is currently at risk of a bail in

In 2021 there are 15 countries that have tripped two of these early warning indicators and one that has tripped four of these! This indicates a much higher likelihood of a systemic banking crisis happening, which would create the exact sort of conditions where a bank bail in might be considered.

This is not a comprehensive list by any means, there are other possibilities outside these 5 categories that could cause a bank to not be able to cover it's depositors money. We see this for example with banks like Lehman brothers where the bank just simply does not have enough collateral to cover it's obligations, this sort of situation can happen via mismanagement or via banking regulations that are not sufficiently strong. History tends to show that if banks aren't tightly regulated they tend to spectacularly self destruct. This perhaps is not surprising because of the moral hazard that banks can engage in when regulations are not in place to force them not to.

We see countries like Canada being in particularly bad shape with Canada hitting 4 out of the 5 warning indicators. The only indicator they didn't hit was for housing, you might be asking "but isn't Canada experiencing a historic housing bubble?" and the answer is a resounding yes to a bubble. However the housing insanity in Canada didn't meet the criteria because that particular problem has persisted long enough to not be counted a short term trigger anymore. Even as far back as the mid 1990s foreign direct investment in Canada's housing market had started to inflate the prices which caused additional stresses on locals looking for a place to live. This has meant that people have had to take on more debt to buy housing and has also pushed rents up, this is a large part of why Canada has tripped the indicators on cross border claims vs GDP and also issues with household debt servicing. Unfortunately the future of the banking sector there is going to have a significant rough patch unless something miraculous happens. Given so few people even admit there's a problem it's hard to see how they will find a solution, however I really hope for the sake of people there that they do.

Unintended consequences - the real problem with bank bail ins

The G20 made a push a while back to get it's member states to introduce bank bail in laws. Back in 2018 Australia passed bank bail in laws with very little media attention, most people in the country were unaware of what had changed. I first became aware of this when I encountered this article and I didn't hear about the bill passing at the time. There was very little media coverage of these legislative changes at the time. This seemed to be a common theme for all the G20 countries that passed bail in laws, there was very little media coverage and because it was a bit of a complicated piece of banking legislation most citizens really wouldn't know why it was important. To this day most people in Australia are unaware of these changes and the consequences they could have, I believe the same situation occurs worldwide in all countries that have not experienced a bail in.

This was a very significant moment in Australian banking legislation, if only in part due to how deeply anti-democratic the process was. For the most part there was very little community consultation and the legislation was rushed through the parliament, such an important vote was passed with very few senators in attendance. Tellingly it was passed on a voice vote which allowed the people to not have to associate their names or their political parties with the vote. Such an exercise in cynicism is unfortunate, but it is telling that nobody wanted their name on this.

This begs the question, why was this legislation ever suggested? What benefits and drawbacks does it have?

The bail in topic is a bit nuanced with many issues of moral hazard involved. Unfortunately bail outs and bail ins put the risks the decisions made by the banks onto other parties. In theory the difference between a bail in and a bail out is ultimately in who pays for the mistakes of the banks, in practice looking at recent history shows that outcomes are far more murky as they are heavily subject to the political expediencies of the moment.

Why bail ins are claimed to be a good thing

By first going into some of the details given for why bail ins have been proposed as a legislative approach to dealing with systemic banking crises we have a better chance of understanding what problems they aim to solve.

Banking has increasingly come to dominate many aspects of people's lives and not in a way that's caused people to step back and think about it. There's a large number of people who mindlessly use cashless payments for everything and many people don't spend much time thinking about money at all. The people who just tap/swipe/insert their plastic banking cards into terminals to pay for everything are in effect making all of their transactions via the banking system. The dependency that people have generated on this system means that a disruption to this system would be incredibly disruptive more broadly to society. Now whether or not people should have this dependency on the banks is an entirely different issue, but because they do, any issues that could threaten the smooth operation of this system are worth dealing with. People have been wondering what to do in response to systemic problems in the banking sector and bail outs and bail ins are tools that warrant some seriously thought.

In recent history we have seen governments intervene to ensure the banking system continues to operate smoothly. Perhaps the most publicly obvious case of this were the bail outs that happened in the wake of the 2007-2008 Global Financial Crisis. This however was not the first such intervention into the markets, just the first intervention that really caught the attention of the general public. In many of these cases taxpayer funding has had to be used as part of the process of bailing out the banks. This of course is problematic because taxpayer money is getting used to bail out private entities. This increases burdens on the taxpaying populace but often not in a way that a democratic populace is likely willing to support since they frequently have had no say in the actions of the banks that their money is being used to bail out.

Given that banks and regulators know that the banking system has a tight integration with much of the current economy there's strong vested interests to make sure this system keeps running smoothly. So what do we do in times of banking crises where there's systematic risks to the operation of the banking system as a whole? Perhaps one of the simplest responses when the liquidity of a bank falls below a feasible level is for the government to use taxpayer money to cover that shortfall. This of course is only feasible without huge consequences if the amount needed is sufficiently small relative to the amount that can be provided by the taxpayers. The case where this is not so raises some very difficult questions, since doing this approach might not be feasible without either printing money to bail out banks with or some sort of greater appropriation of taxpayer money to support the bail out. When a bank is big enough to have these problems start impacting the system as a whole we refer to this as a Systematically Important Bank, and at the global level we refer to these as Globally Systematically Important Banks (often referred to by the acronym G-SIB). Effectively there comes a point at which it is not feasible to bail out multiple banks via taxpayer money if they are too big as the overall consequences for doing so can become more negative than just letting the banks fail. This is of course a problem because in a bigger banking crisis there's likely to be a domino effect where a bank failure can lead to further bank failures. One such mechanism for this to occur is via credit contagion.

There are some substantial moral hazard issues if the banks know that they can be bailed out by taxpayer money. The idea is that if banks are allowed to take speculative positions with depositor money then there's a huge moral hazard introduced if they can be bailed out by taxpayers in a liquidity crisis. If a bailout is known to be the likely response then this introduces a large number of perverse incentives where there is now incentives to take risks that would otherwise be entirely imprudent. If the risky investments go well then the banks win but if the investments going bad means the taxpayers end up having to pay the downside risk is greatly changed.

The main problem with bail outs is that it makes the taxpayers and general public be exposed to risks that were made by the private sector for the benefit of that private sector. Clearly this is a problem and something needs to be done about it.

I think to avoid much of these problems you need to strongly regulate the risks banks can take with depositor money. This seems to be a necessary step. The main idea behind bail-ins is that you remove the explicit taxpayer support in case of something going wrong in the banking sector. The idea is that this reduces the moral hazard and risks that will be put onto the tax paying populace.

Lessons from Cyprus

Perhaps one of the best ways to see the practical impacts of a bank bail in is to see what happened in Cyprus. I think this is a good article that covers some of the events. This article that talks about the fall out of the Cyprus bail ins is extremely instructive. I kept a rather close eye on the Cyprus banking crisis at the time it was happening but I missed a lot of very important details because back then I just knew a whole lot less about how the banking systems worked and thus didn't really know what to look for. For example something I didn't realize at the time was that the "emergency bail in" in Cyprus was discussed for over a year, which is a mightily long time in an emergency.

For some background it's important to know the context in which this happened. After 2009 there were a number of different debt crisis situations that happened in the Euro zone, this era has been referred to as the European debt crisis. Something that is a major complication with monetary policy in the Euro zone is that there are many member states that share a currency but yet have different governments. Also another strange aspect to this is that countries themselves were issuing government bonds but yet the currency these bonds are denominated in are not national currencies. When the European debt crisis started to get more severe Greece, Portugal, Ireland, Spain and Cyprus started to have problems repaying and refinancing their government debt. Problems emerged due to local banks that were over leveraged. Now those countries were somewhat restricted in their responses to the crisis because of their lack of ability to set sovereign monetary policy due to the shared usage of currencies. There were definitely some credit contagion problems in this crisis too, the financial system in Cyprus was already stressed but then got pushed into a full blown crisis in 2012 when they were exposed to the haircut with the restructuring of Greek debt which them meant Cyprus wasn't easily able to fund its governments expenses. This period of time is often referred to as the 2012–2013 Cypriot financial crisis.

The initial proposal from the EU negotiators was that there be a one-off confiscation of 6.7% of bank deposits up to €100,000 and 9.9% for amounts higher than €100,000 on all domestic bank accounts. Banks had to be closed to prevent a massive run on the banks occurring as the confiscation suggestion massively harmed the confidence the general public had in the banks. Withdrawal limits were imposed such that people could only take out 100 euro a day. Unfortunately austerity measures can deepen these crises instead of improving them because fundamentally government financing and bank financing is not like personal finances so applying the intuitions people have from personal finance to other realms can be bad². The other thing is that politically speaking confiscating the money of the poorest people to bail out the decisions of the banking sector is not something that will be popular. It was these sort of reasons that the initial proposal was met with robust widespread public disapproval which caused the plan to be changed to be a 15.6% confiscation but only on deposit amounts above €100,000. Despite this on 19 March 2013 the Cypriot parliament rejected the deal with 36 votes against and 19 abstentions. That nobody in elected office voted in favor of the confiscation of their citizens money as a condition of a bail out from the European central bank is telling.

How fast is a crisis?

A major challenge in addressing a banking crisis, unlike an engineering crisis such as a bridge collapse or a dam collapse, is that banking crisis situations tend to not be so well defined in terms of a starting and ending time³. To an outsider things can appear to reach a crisis point quickly but to someone with more knowledge things tend to take an especially long time to reach a crisis point, in some cases it feels like an eternity of time between events that are sure to trigger a crisis and the crisis going mainstream. A contemporary example of this is the Evergrande crisis, I became aware of this 6 months ago when I came across these tweets from TheLastBearStanding. Speaking of whom I'd highly recommend reading their article about the Volatility squeeze as this has all the ingredients of a slowly then quickly scenario that few people are paying attention to now but everyone will be paying attention to later if it blows up.

Upon more investigation there were obviously troubles in this space at least as far back as 2015. This led to all sorts of weird things like what was to be the worlds tallest residential skyscraper being abandoned after significant extremely expensive construction work had been done. I think this goes to show that things take quite a long time to happen, it's the ignorance that people have to the early stages that makes it seem like these crises happen faster than they really do. Because if you aren't actively looking then the major crisis events that demand your immediate attention tend to only happen rather late in the piece after things are already at a major crisis point. A lot of far more subtle events usually need to happen well before anything evolves into a large crisis.

Take for example the repo crisis of 2019, sure there was a point at which it turned into a crisis but the events that led up to that point perhaps go back as far as the GFC since many of the monetary policy problems of the GFC never fully got resolved. Many people see this problem as a continuation of the GFC and I tend to agree that the GFC never really got fully resolved. Very large problems in the eurodollar markets have persisted and many problems with monetary flows have gone back at least a decade before the repo crisis. And these problems have root causes that go back even further than that.

This raises an important philosophical question, financial crises very rarely pop up with no warning. Sure there's a lot of people who have their heads thoroughly in the sand because they don't want to be warned but that doesn't mean there's no warning signs. Regulators and other informed participants in the markets usually become aware and have a lot of lead up time before a crisis develops. So given this long time frame with lots of indicators of problems there's some questions we really need to discuss about any legislative approach that reacts to these crisis situations in a reactive manner. For example in Cyprus discussions were going for over a year as to what to do before the bail in was announced. And as mentioned earlier the broader Eurozone debt crisis started years before that. Put simply this crisis took a long time to start then lasted a long time.

It seems as though being proactive might be a lot better than being reactive in this space with regards to some of the early warning signs. Of course this might be politically difficult in an environment where people are unaware of the early warning signs. Educating people about these signs might be a crucial part of changing the regulatory landscape and allow there to be more political will to fix problems before they get out of control.

Who ends up owning the bank in a bail in event?

The unintended consequence of bail in legislation changing the ownership of the bank is a central problem for bail ins. What this does is give the largest depositors direct ownership of the bank, these people however may not be the best people for running the bank and may have no interests in doing so.

Something we saw in the Cyprus situation is that there was a lot of offshore money parked in some of the bank accounts. In the event of a bail in this would mean that substantial amounts of bank ownership would be transferred to whoever owned these accounts. But what if these people aren't able to own shares in a bank due to differences in laws in the different regions? What if these people don't want to own shares in a bank? What if there are political or economic issues with this change in ownership?

What about sovereignty concerns? In smaller countries like Cyprus that have a smaller economy it could be entirely possible that foreign direct investment could cause a situation whereby systematic banking issues could cause the banks ownership to move more to foreign controlled parties in the event of a bail in. This might not even be politically feasible. This is of course a highly relevant issue when you consider that too much foreign investment can cause a banking crisis in the first place. Smaller countries might have significant sovereignty concerns in the situation where foreigners can take over the banks in the case of distress in the banking system.

But putting aside these concerns there's that of people taking ownership of something that they almost certainly don't want. After all getting shares in a distressed bank in exchange for your money isn't a trade that the vast majority of people would voluntarily take. I figure that if wealthy people wanted ownership of publicly listed banks then they could just purchase those shares directly. If they have not done so will those people then want to just liquidate those newly granted shares immediately?

As you can see there's a lot of very difficult questions that are raised when you think about the consequences of how bail in laws change ownership of the banks. And ownership must change to make a bail in a reasonable policy as for without this you'd just be left with a seizure of depositors funds to cover the mistakes made by the bank. It's one thing to have people depositing money in a bank account, and of course there's legislation around this. But it is an entirely different situation to transfer ownership of the bank itself to these people. I don't have the answers to all these difficult questions, but unfortunately I don't think many of the legislators did either.

Confidence in the banking system

The whole modern monetary system is based on confidence. Because the money in circulation is not explicitly backed by anything any more the importance of maintaining confidence in money is more important to systematic stability of the banking system than perhaps ever before. In regular times (at least in the past⁴) the vast majority of monetary creation is done by the private sector via commercial banks. Because of this confidence in money is inextricably linked to confidence in the banking system.

I think this is perhaps the biggest real danger of bail ins, bail in events are utterly corrosive to the confidence anyone could have in the banking sector. And that lack of confidence can really catch on quickly as history so clearly shows. A common misconception people have is that they "own" the money in their bank accounts, however as I wrote about previously this is actually not so. A bank account is not a bailment contract in many countries, such is the confidence people have in the current system that they might actually refuse to accept this legal fact about how the banks work. And with fractional reserve banking accounts have to not be bailments since the bank is not required to have as much capital available to actually repay all the account holders were they to request their funds at the same time. The idea is that you can have confidence in the banking sector to allow you to live your day to day life without needing to worry about things like reserve requirements and capital requirements and regulations like the Basel banking accords. The whole point of the system is that if there's sufficient confidence in the system you can do your financial dealings without having to be burdened by all these details. And I can tell you knowing the details is a huge burden on multiple levels.

Bail in events creates a problem for all the local banks due to a potential collapse in confidence that a bail in would have on the populace even if their accounts were held at the other banks. In the more connected modern world it wouldn't take long for people across the world to hear about a bank bail in happening somewhere else, much like how I was getting daily updates about the Cyprus crisis while living on another continent. A lack of confidence need not be constrained just to national borders and with enough bail ins and instability I'm fairly sure it would not be, people love posting outrage online and posts like "all our money was stolen by the banks" would go viral in a hurry⁵. This starts raising questions like "could this happen to me?" and since the G20 countries have mostly pushed the bail in legislation forward into law the answer to anyone sufficiently interested to find out is yes. Now because of all the major downsides of a bail in being triggered I think there is major political and economic reasons that this won't be the first choice of a well functioning system. But as the financial institutions of the world slip who knows what will happen. This uncertainty though can greatly change people's behaviors, just the notion that your bank is fallible and you could lose your money is deeply unsettling. And it should be unsettling too, if banks can take on too many risks with other people's money that is a major problem. As I mentioned earlier there's a LOT of people these days who don't think about what the nature of money itself is. Sure people might think about finances and do other sensible things with their money but they are far less likely to actually step back and question what money itself is. And the current banking and financial system is really only feasible because people do not ask those questions. The relative unpopularity of Austrian school economics I think is related to this, and well frankly the general populace does not deeply study economics at all regardless of the school of thought. I think though if bail ins and bail outs happen again people will start to ask those tough questions about what money is.

How do we avoid getting here?

When there's a lot of talks about banking instability at a systematic level it's usually an indication that things are already bad. To appropriate an existing quote, the best time to prevent a banking crisis was twenty years ago the next best time is now.

But how do we prevent these sorts of crises from happening? This is a tough question but I think it mostly revolves around improving risk management and reducing moral hazards. For this to happen we need to be getting more people to be aware of what money actually is in the modern world. If we can fix the money we can fix the world. Specifically because of the fact that banks are given the special privilege of being able to create money there are strict rules that need to be in place as a result to prevent the whole system from self imploding. Ultimately I think there needs to be more sound money for these problems to resolve themselves. There also needs to be a lot more transparency into the banking system, that we allow entities to create money without this process being completely transparent to the public speaks volumes as to our political systems.

As the quote from Henry Ford goes:

It is well enough that people of the nation do not understand our banking and money system, for if they did, I believe there would be a revolution before tomorrow morning

I dream of a future where this quote no longer holds true. A future when people understand the banking system that controls their money would be a better future. A future where people can have access to a stable banking system that doesn't inspire revolutionary urges when one investigates the inner workings of it would be a better future for us all.