What is happening now: banks

1. Banks hold onto your deposits

2. They give you 1%

3. Then lend out at 3% by buying T-bills

4. The difference is the profit

5. When Fed raises rates the value of the T-bills goes down (who wants a 3% T-bill when they can get a 4% T-bill?)

6. So even though the T-Bills are "safe" (they will pay back), the banks are short-term losing money on paper

7. They only have to take that loss if there is a run on the banks (depositors want their money)

8. Then the banks have to sell at a loss.

9. Then the bank goes bankrupt.

10. The solution is the Fed can loan the banks money for what they paid for the T-bills (since the money will all be paid back with interest).

11. The solution should include consequences (perhaps the Fed takes some equity in the banks.)

12. TLDR: The banking system is safe. But the Fed raising rates (similar to other times the Fed has raised rates) causes banks to have problems managing risk.