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The problem isn’t matching the duration of the loans to the deposits.

The problem is that the value of the loans is in reality about a third (probably less, maybe much less) of the deposits.

Let me give you a very simple example: The bank receives a long term deposit of 300k, then they lend that out on a mortgage for 300k, then the realestate market tumbles because the population isn’t growing and the housing market is grossly over built. The borrower then walks away from the house because it is grossly underwater, leaving the bank with an abandoned house in a deserted neighborhood.

Now the bank owes 300k plus interest on an asset worth 100k if it is lucky. If this is representative of the banks holdings the Bank is now bankrupt (interesting word) it doesn’t matter that the bank doesn’t have to pay off the debt for 30 years, the bank should be closed down at this point. The longer the bank continues to operate and lose money the worse the situation becomes.

What has happened is that we have a ponzi scheme with the government now depositing money into the banks in the vain hope that the people that walked away from their upside down mortgage will come back and start making payments.

The bottom line is that without inflation, the whole system comes crashing down, eventually. The only question is how this crash is going to work itself out. I haven’t got a clue.

I understand that the banks are broke. And as I imagine the system, CD’s would now trade at discount prices reflecting the expected returns (safest tranches would still be untouched, riskiest tranches would trade at firesale prices). As they mature, people get paid the full dividend untill the bank is out of equity, and then the return of the bonds with the matching maturity after that.

The point is that if you have neither this maturity system, which i propose, or the federal guarantee of deposits, which we currently have, you would have people storming banks like headless chickens at the first sign of trouble. This setup is bankrun proof, it would react more like the stock market, and less like the withdrawal derby.

Wanton bankruns is why the federal guarantee was introduced in the first place. This is my idea for replacing it.

Not that I have a clue either;
The only way out of the upsidedown mortgage debacle is for the holder of the note to sell at the current rate. Someone has to take the loss, and it shouldn't be you and I. We the homeowners should be able to shoulder the burden if we want, we don't answer to shareholders. Government could step in and limit the losses by extending the time or amounts over time, but the banks own it. They should man up and go to bankruptcy if that's all they got.

Avoiding the fire-sales that should be happening, the ultra low price real estate that should be on the open market right now, should tell you something.

This is a system designed to keep certain people rich. And the rest decidedly out of the loop. It is not a system that even considers people who can't find safe havens for capital but might find bargain real estate interesting. This is fast becoming, or already is well beyond a free market.

It's a good time to consider what banking should really be. Our country, our free enterprise system, and our future depends on our banking system.
And we've never gotten it right yet.