What do the following road signs share in common?
You probably answered that they are all confusing, and I would agree. Some of you would have answered that they all involve conflict, and that too is correct. The most astute would have said that some involve conflicts of privileges (as in the privilege to walk your pet or use a sidewalk in a certain area), and others are conflicts of obligations (as in the case of being obliged to not make a right-hand turn, while also being obliged to turn right).
At best if you saw these signs in real life you would probably laugh and take a picture. At worst you would be paralyzed with fear, not knowing which is correct and what the punishment is for choosing incorrectly one over the other. Alternatively, and probably like most people, you would choose one or the other, and you would plead your case if caught by the authorities.
Modern banking laws suffer from a similar conflict. Depositors are told that they have access to their funds at all times (i.e., on demand), and that they will get back the exact same amount as they put into their account (i.e., the deposit will be redeemed at par value). Bankers have a different set of privileges. They are allowed to make use of these funds, and hopefully they will not be set upon by too many depositors asking for their funds at the same time.
There is a clear conflict created by such banking laws. Depositors have continual access to their funds, while bankers also are allowed to have access to these funds. There are too many simultaneous claims to money at any one time. Or stated differently, since money is only usefully to buy goods, there is too much money and too few goods.
This system functions so long as the depositors do not redeem too many of their deposits at once. The system breaks down (shockingly fast, as recent events can attest) when a critical mass of depositors asks simultaneously for the money which is rightfully theirs. At this moment the conflict becomes apparent, as the bank has invested or lent these deposits to a third-party, and there is an insufficient amount left in reserve to honor these redemption requests by depositors.
This is the case of the increasingly common bank run. It is at this moment that the conflict created by banking laws becomes apparent, with bankers and depositors each claiming that they are the rightful claimant of the money in question.
Although I have titled this article “legislating confusion through conflicting laws”, it should be clear that the conclusion is much worse than a mere confusion. Confusion is annoying at worst, and can even be comical at times. The result of the conflict in banking laws is angst and ire. In most situations we can determine, without too much trouble, who is right and who is wrong when conflict develops. The way the laws of modern banking are structured we are left with two people in the right, both doing what the law says they are allowed. But the result – bank runs or bank insolvencies – signals that there is most definitely a conflict.
Even worse is that there is no good solution to the conflict as long as it persists. The most recent spate of bank insolvencies has been solved via one of two ways. Either the bank in question has been bailed out, in which case innocent bystanders have had to pay for the problems of others. In this solution, the conflict between banks and their depositors has not been paid by either party, but has been papered over via a wealth transfer from other citizens. Alternatively, bail-ins (e.g., converting depositors into equity holders) have changed the rules of the game midstream. Depositors were told that they had a claim to their money at par value and on demand, and deposited it in good faith of that fact. Now they find out that they can have their money after waiting for the mess to be sorted, and only at whatever the market values it at. This solution too is an injustice.
There is an easy alternative solution. Change the laws to remove the original conflict. Depositors will have a claim to their deposit at all times, similar to what they presume to be true today. In its place, banks will have to renunciate their claim to using these deposits. Such a shift will not imperil the world of finance – equity investments and loans are still available, though the latter will not be financed with deposits. Bank runs will be removed from the scope of potential events, and events such as have become the norm over the past five years will become a thing of the past.