Only in the most inefficient way possible. The 'problem' is banks are limited in what they can do with this money which ends up creating investment bubbles and other market distortions which hurt the economy overall. If you slowly transitioned banks so they could not invest this money over say 100 years the net result would not be harmful.
In the end money is not actual wealth, it's simply a representation of wealth. Anything that turns money into more money needs an intermediary where some cash flow is generated. And those intermediary's are often harmful see in excess like pay day loans.
>>The 'problem' is banks are limited in what they can do with this money which ends up creating investment bubbles and other market distortions which hurt the economy overall. If you slowly transitioned banks so they could not invest this money over say 100 years the net result would not be harmful.
Um, no. The type of investing you suggest includes the risk of losing the money. This doesn't work with commercial banks because they are insured by the federal government, i.e. the taxpayer. When people put money in the bank they expect it to stay safe. That's why the concept of a bank exists in the first place. If there was the risk of it evaporating due to bad investments, that would basically be more of "privatized gains, socialized losses."
I think you misunderstood my comment. Banks are currently allowed to loan out a percentage of their deposits IE: they need to keep say 10% cash on hand and can loan say 90%.
I am saying if your raise that percentage to 11% cash on hand not much changes. Then next year that becomes 12% cash on hand... until banks can no longer lend money.
At no point in this process is physical wealth destroyed only shifting how loans are created.
If the reserve requirement is 10%, the banks actually loan 990%. That is not a typo.
Of the deposit account, they keep 10% in the vault/Fed, and loan out 90%. Of that 90%, they keep 10% in the vault (9%), and re-loan 90% of it (81%). Of that 81%, they keep 10% in the vault (8.1%) and re-loan 90% of it (72.9%). Sum the series, and the effect on the money supply from loans and the reserve requirement is to divide the vault cash by the reserve requirement to get the bank account totals.
Raise the requirement from 10% to 11% and the circulating money supply drops from 10 x vault cash to 9.1 x vault cash. Raise it again to 12% and that drops to 8.3 x vault cash. To keep things steady, you have to print extra money for the express purpose of putting it into reserves.
The de jure impact of the reserve requirement on the money supply isn't "not much"; it's actually huge. But that is only down to the point where it goes below the de facto requirement imposed by normal bank operations. You drop the requirement to 0%, and banks will still keep cash on hand to cover their own needs. It is certainly possible to raise it all the way to 100% (or even higher, by requiring that banks freeze some of their own cash when accepting a deposit). But that would have to be done very slowly and cautiously.
In theory that's correct, but in practice banks re-sell loans all the time by packaging them as bonds. So total outstanding home loans has been decoupled from that equation.
Further, the velocity of money is important which reduce the multiplier in practice.
However, if your taking this seriously yes you need a curve which is why I said 100 years, but only listed 90 years worth of changes.
I don't see why this is a blanket terrible idea - a ban on loans with interest, which are the only sort of loans that are economically rational for the lender, is a moral principle of one of the world's most popular religions (Islam) and used to be a moral principle of another (Christianity) until it was corrupted by capitalism in its lands. So we must at least concede that the idea of a world where loans are forbidden is well within the Overton window.
A world where people don't need loans seems like a pretty good world, honestly. I've been fortunate enough that my parents were able to finance my college education out of their savings, and I rent my apartment because I don't want a big mortgage, and my life is I think better compared to people I know with student loans and mortgages. A world where everyone has the same access to resources that I had is a worthy goal, and if we can fund that by banning loans, seems fine.
There is a whole industry of sharia-compliant finance to work around the ban on loans. The solution for the christian dislike for money-lending back on those days was for non-christians to do it. A world where people don’t need loans might be nice, but not all the people can use your parents’ money (and depending on what you want to do and how rich is your family, even you might need additional financing).
Wait, why are interest-free loans the only kind of economically rational loans? Commercial debt contracts include interest, and are executed exclusively between sophisticated buyers and sellers of debt.
I think I put too many negatives in that sentence. I am claiming that interest-bearing loans are the only economically rational ones (because otherwise you're taking on nonzero risk for definitely zero reward), and interest-free loans used to be widely acknowledged as the only morally justifiable ones.
No, you can still make a loan by buying a bond etc.
I simply feel banks have conflicting goals as they need to be 'good at' customer service and making loans. This creates a lot of poor incentives and economic distortions.
The difference is people fronting money for loans would need to take on real risks without FDIC protection or have safe deposits but need to pay for bank services.
Ok, so we don’t let banks loan money. I guess they may still take deposits but if they are not going to pay any interest people will keep accounts as low as possible.
On the other hand, all the financing needs will be covered by other means. These “non-banks” will have to obtain capital as equity and debt, maybe even loans from other non-banks, but certainly not as deposits.
What was the problem that we where trying to fix anyway?
> What was the problem that we where trying to fix anyway?
Risk of financial collapse. Banks are risky because they have a lot of leverage, people more directly loaning money may take a 20% hit after a housing collapse, but that's not such a big deal.
The banks that collapsed during the last crisis are not the kind of banks that take deposits and give out loans. They were the kind of non-banking businesses that you talk about.
And one of the reasons for the crisis was “shadow banking”, because many home loans were not really given by banks (some were directly created by other institutions, some were first created by banks but then packaged and sold). The subprime crisis would not have happened, at least to the same extent, if loans had been kept in the balance sheets of banks.
You are right, I was thinking of large (systemic) failures and actually I had completely forgotten about WaMu. Clearly forbidding the banking business (as in savings and loans) would prevent bank failures. But I´m not sure the alternative businesses that would fill the void would be much better.
I suspect, but can't prove companies that need to demonstrate comptitence in lending to gain access to capital would be better at making loans than companies who gain capital by doing other things and then suddenly have access to a lot of capital and need to find a use for it.
Consider tech companies like Apple/Google/Microsoft have access to vast amounts of Capital yet does not really effectively use it for much.
