The Economist has an excellent article discussing the gradual extension of government into the business of banking. With the recent bailout of Silicon Valley Bank depositors, authorities have signaled that virtually all deposits are implicitly backed by the US government. When you deposit money in your local bank, you are essentially lending the funds to the US Treasury, which then re-lends the money at the exact same interest rate to the commercial bank. We’ve already socialized a big portion of our banking system.
Here’s how The Economist concludes its essay:
Another looming change is the issuance of central-bank digital currencies, which could give the public another alternative to bank deposits. In recent years economists have worried about the risk of such currencies becoming de facto narrow banks that drain the legacy system. But some argue banks would work fine if the public switched their deposits for central-bank digital currencies, so long as the central bank stepped in to replace the lost funding. “The issuance of [such currencies] would simply render the central bank’s implicit lender-of-last-resort guarantee explicit,” wrote Markus Brunnermeier and Dirk Niepelt in 2019. This scenario seems to have partly materialised since the failure of SVB, as deposits have fled small banks for money-market funds which can park cash at the Fed, while the Fed makes loans to banks.
The prospect of banks becoming de facto government-funded should alarm anyone who values the role of the private sector in judging risk. Yet the difference between deposit financing underwritten by multiple layers of the state and funding that is provided directly by the state itself is getting harder to distinguish. A more explicit role for governments in the banking system may be the logical endpoint of the road down which regulators have been travelling for some time.
Many people are concerned that a central bank digital currency (CBDC) could increase the role of the government in our financial system. Unfortunately, that ship has already sailed.
There are good reasons to oppose a CBDC, but in my view they relate more to issues of privacy. It is unlikely that a government issued digital currency would allow the sort of privacy associated with paper currency. As they like to say on one of David Henderson’s favorite TV shows: “For that reason, I’m out.”