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mrbluze writes:
"An interesting blog post by Charles Hugh Smith on Why Banks Are Doomed: Technology and Risk.:
The funny thing about technology is that those threatened by fundamental improvements in technology attempt to harness it to save their industry from extinction. For example, overpriced colleges now charge thousands of dollars for nearly costless massively open online courses (MOOCs) because they retain a monopoly on accreditation (diplomas). Once students are accredited directly--an advancement enabled by technology--colleges' monopoly disappears and so does their raison d'etre.
The same is true of banks. Now that accounting and risk assessment are automated, and borrowers and owners of capital can exchange funds in transparent digital marketplaces, there is no need for banks. But according to banks, only they have the expertise to create riskless debt.
...
One last happy thought: technology cannot be put back in the bottle. The financial/banking sector wants to use technology to increase its middleman skim, but the technology that is already out of the bottle will dismantle the sector as a function of what technology enables: faster, better, cheaper, with greater transparency, fairness and the proper distribution of risk.
There may well be a place for credit unions and community banks in the spectrum of exchanges, but these localized, decentralized enterprises would be unable to amass dangerous concentrations of risk and political influence in a truly transparent and decentralized system of exchanges.
It's still early days, but can new electronic currencies such as Bitcoin become mainstream without the assent of governments?"
(Score: 4, Interesting) by Anonymous Coward on Monday February 24 2014, @12:03PM
In the current system, the only ones who can create money are the banks (yes, every bank creates money, not just the central banks; it's just that the central banks regulate the amount of money the other banks can create; that's basically the core of fractional reserve banking). So you cannot replace banks with market places without changing the monetary system, or your money will simply vanish (literally, because money is created by banks giving out loans; as soon as those loans are paid back, the money created that way vanishes again).
Now you cannot simply allow everyone to create money that way for the same reason you cannot allow everyone to print their own banknotes: This would cause massive inflation. Therefore replacing banks with market places would only work if at the same time the monetary system is changed away from fractional reserve banking. Which is a political change, not a technical one.
(Score: 3, Interesting) by migz on Monday February 24 2014, @12:43PM
If the banks can create money out of thin air, why should individuals NOT be allowed to? Why do banks get a special license to print money from the king, but the plebs are locked up for forgery if they do the same?
Your inflation claim seems to be a bit of a straw man. Sure those who are dishonest, and profligate with their home-made money will soon lose value (inflate). However those who choose to Sheppard their currency, possibly by making it redeemable for a recognized commodity (viz. gold) would gain credibility as a medium of exchange. Ideally this could be non-fractional, but that would be the issuers responsibility, and the users choice.
The need for political endorsement is a weak one. I live in a country that had some very funny laws on the books (apartheid) and the politics were forced to change by reality.
So called black market currency will grow once government backed currencies lose credence.
It's a scary thing for people who have misplaced faith in government to monopolize this important function. I'm not saying that there is no place for government, but like separation of church and state, money needs to be de-politicised. At this level economics is like physics, it's inevitable, and no amount of wishful thinking (viz. politics) can make things fall up.
(Score: 4, Informative) by starcraftsicko on Monday February 24 2014, @01:47PM
Lots of people don't understand fractional reserve banking. I barely understand it, but I'll share what I know.
You have some money. For the sake of discussion, I don't care if it's metric pounds of gold or paper notes. Let's say it's $100 for now. You give it to the bank. The bank agrees to hold it and let you collect it later and to let you write notes to people (checks) that can be redeemed for some of your money. The bank doesn't just take your money and lock it in a vault (any more....), it loans it to me.
I want to buy a house. The bank agrees to let me pay back over time, but gives me the whole sum now. I pay the money to the person who has the house. Guess what he does with that money... he puts it in the bank. A magical thing has occurred - You have $100 in the bank, and so does that guy I bought the house from. The same $100, counted twice. And the bank can lend it again. So $100 becomes $200 becomes more... and it's all (relatively) honest.
The system I've described is 0 reserve banking. It is entirely possible that you could write a check for $5 for blow and that, when the check is presented to the bank, the bank could have no money because I am in the midst of the house transaction I mentioned. When this happens and the bank can't pay, it's bankrupt - a big friggin' mess.
Where the 'King' in your complaint come is is that he makes some rules (Do this or my royal thugs will lock you in a small cage!) to ensure that your checks for hookers and blow can be cashed. He may make the bank buy insurance (FDIC), but additionally, he requires that the bank keep on hand some fraction of your original deposit at all times. This prevents many bankruptcies, and also serves to put an upper limit on how much money banks can "create". In practice, the 'King' changes this percentage from time to time to try to control the money supply.
Why can't you do this? You can. But there a lot of things you have to do before the King will give you that insurance. And without the insurance, nobody trusts you... or at least they trust you less than the bank down the street with FDIC.
Someone else has to do the car analogy.
(Score: 1) by scruffybeard on Monday February 24 2014, @02:50PM
Your description of how the system works is right. The article rambled too much for me to understand it, but the author generally asserts the premise that banks are dead, and everything can be crowd sourced. How the heck am I going to crowd source the loan on my house or my car? Do I list 1000 creditors as having a lien on the title? What recourse does someone have if I fail to pay them back, meaning will it be worth it to them to take me to court over the $100 they loaned me so I could buy a $40k car? I believe that technology will change how we interact with banks, and perhaps some of their functions, but they are going to be around for a very long time.
(Score: 3, Insightful) by maxwell demon on Monday February 24 2014, @03:51PM
There's another aspect to this: Often you hear that fiat money is not backed with anything. But that's not really true: If the bank gives you a loan, they usually demand a security, that is, something they can get if you can't pay your loan back. For example, for a mortgage they'll have your house as security. If you cannot pay the money back, they'll take your house instead. That is, the money created by your loan is ultimately backed with the house you've bought with that money.
The Tao of math: The numbers you can count are not the real numbers.