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Source link: http://archive.mises.org/15757/commerce-is-a-peoples-revolution-daily/

Commerce Is a People’s Revolution, Daily

February 21, 2011 by

Joseph Schumpeter is smiling while the equity holders of Borders stock are crying. FULL ARTICLE by Doug French

{ 5 comments }

A. Viirlaid February 21, 2011 at 6:49 pm

I like Doug French’s idea of novel, experimenting, transnational banks in the new electronic world.

For example, we could have banks that take deposits into either their left-hand side (LHS) or the right-hand side (RHS). (This is just a shorthand term, used here for convenience. But it will relate to whether the deposit you are trying to make with your money is going to be available for borrowers to access, or whether it will be held by such a bank for safekeeping only — this last is the full-reserve part of this bank.)

The RHS is the side that Re-lends your money (under the length of term and interest rate you request) to a borrower.

You can see who the borrower is, and even follow their business success on-line, but you cannot ask for, nor get back, any portion of your lent (deposited) money before the pre-specified term of the loan is up — nor will you get any interest back, other than what you agreed to at the time you made your deposit (“investment”). The bank will match you up with the borrower, and will take a small fee from the money you will earn, at the time you earn it.

Of course, if you make your lending ‘terms’ too draconian for any borrower to agree to, no one will take you up on your offer — these money transactions will occur in an auction market that exists between all these novel banks — after all in the electronic world, where information is freely available, should you ask for unrealistic terms, no one will borrow the money you wish to invest.

The portion of your money you do not wish to lend out will go the the LHS of your bank, and be available for you to access anytime, but you are charged a time-based fee on the money that is in safekeeping at your electronic bank — the bank cannot legally lend out any of this money from your funds, no matter what, by legally-binding agreement between you, the depositor, and your bank. But the bank has a right to earn some agreed-upon revenue from this money, since it is providing a service for you that you wish to make use of.

Douglas French February 22, 2011 at 3:49 pm

Yes, that would be the idea. Technology can make this all happen. Undoing fractionalized banking via the legal route is very difficult as the law is 200 years old.

1811 in Carr V. Carr, the court had to decide whether the term “debts” mentioned in a will included a cash balance in a bank deposit account. Master of the Rolls Sir William Grant ruled that it did, since the money had been paid generally into the bank and was not earmarked in a sealed bag, it had become a loan rather than a bailment.

Five years later in Devaynes vs. Noble, despite an attorney’s argument that “a banker is rather a bailee of his customer’s funds than his debtor…because the money in…[his] hands is rather a deposit than a debt, and may therefore be instantly demanded and taken up,” the same Judge Grant ruled that “money paid into a banker’s becomes immediately a part of his general assets; and his is merely a debtor for that amount.”

In 1848 in Foley vs. Hill and Others, Lord Cottenham ruled “Money, when paid into a bank, ceases altogether to be the money of the principal; it is then the money of the banker, who is bound to an equivalent by paying a similar sum to that deposited with him when he is asked for it….The money placed in the custody of a banker to do with it as he pleases…”

We have plenty of examples of loan banking — payday loan operations and private lenders…but no deposit bank can compete with FDIC insurance and FDIC insurance requires the bank to “serve” its community by lending its deposits.

But as the ancient relic of a bad idea–fractionalized banking falls apart under the weight of the costs of the worldwide regulatory system, technology can pave the way to institute a safer more efficient substitute.

A. Viirlaid February 23, 2011 at 10:17 am

I recently, rather belatedly, learned about the P2P lending and borrowing business model —— still evolving —— as described at several links —— I will exclude these links for now, because it appears that the presence of those links is preventing my response from being accepted by the auto-screener at the blog server.

While this business model is still clearly evolving with the many of today’s initiatives, and while this model still needs to mature over another decade of experience and tinkering, this model is nevertheless, even today, perhaps the best hope we have (so far) in the real world of what Doug writes.

We can be hopeful, that the end-result of this ongoing evolution (revolution?) might either replace the Fractional Reserve Banking model, or might be the START of whatever else eventually replaces that broken system —— or if not displaces, at least provides an effective, and moral competitor to that other very (IMO) immoral and harmful system.

IMHO, the ongoing fervor in the various ‘cyber world’ social network and business models currently offers the greatest hope for the overthrow of not only decrepit oligarchies, but also for the overthrow of decrepit banking and money-system models.

Clearly there are problems that will require time to adjust to —— for example, how to confidently evaluate the fundamental credit-worthiness of prospective borrowers before one invests (‘deposits’) one’s saved funds. But I have faith that, as in other areas, the Internet will find ways to improve upon, and even surpass the (rather faulty) systems that land-banks use in assessing their portfolio and investments’ risks. The Internet could hardly do worse than the risk-assessment performance we saw with brick and mortar banking system leading up to 2008.

What most attracts me to P2P and what I identified with was the seeming lack of any element of the “fractional reserve” banking-element in these businesses. That is to say, there did not seem to be any money-multiplier effect.

So, what a person lends (‘invests’) is not available to that investing individual in the same way that his/her deposit in a regular retail bank would be available —— that is, the ‘same’ money being available, at the SAME time, to the depositor AND to the borrower. This new model seems to be a 100% commitment of whatever funds one decides to invest —— there is no artificial net-new money-creation going on behind the scenes as in Fractional Reserve Banking. There is no fraud in that sense, nor is there any goosing via the unfortunate ‘stimulation’ built into the traditional Fractional Reserve Banking System.

So it seems that a lender would have to wait to see if any interest or principal comes back, before that lender can once again make use of his/her funds. It seems that ‘savings’ actually equals borrowing —— at the very least, Debt in such a model cannot exceed Saving.

This of course is the Holy Grail for Austrian Economists when it comes to the correct process for saving and lending. So it should be seen as a desirable development.

Austrians all abhor the current situation where banks and near-banks and the government and its agencies, most egregiously The FED, can cause Total Credit to balloon (far beyond Total Saving) in a grievous societal-harm-causing manner, causing periodic unmitigated human damage via booms and busts.

What gives me hope is that the banks perhaps sense a rival to their own broken business model here —— especially in an environment where The FED artificially forces interest rates so low, so as to make the Proposition to Save One’s Money (via traditional bank deposits) to be almost ludicrously illogical —— when The FED should in fact encourage saving in order to build a stronger and more stable economy and society. That is why I personally am so angry with The FED —— you would think the Social Engineers at The FED, of ALL people, would understand this rather simple concept.

Below is the paragraph that caught my eye and gave me hope.

It is taken from the article “Lending Club Builds a Marketplace for Peer-to-Peer Loans”.

The money flowing through Lending Club and its handful of competitors is miniscule compared to the trillions of dollars lent by U.S. banks each year. Nevertheless, the concept could one day evolve into a whole new type of financial institution that upends banks’ traditional lending practices, says David Schehr, an analyst for the banking practice of tech consultant Gartner. “It’s a disruptive model, but how large it will become remains to be seen.”

For now, banks are tracking peer-to-peer lending companies like Lending Club, stopping short of calling them a threat. “We really don’t have a position,” says Nessa Feddis, vice-president and senior counsel for Washington trade group American Bankers Association.

Another hopeful sign is contained in some of the comments of people who have made investments in (or borrowed from) the P2P ‘marketplace’. It seems that Americans actually feel good about having some connection with those that would use their funds or with those that provide those funds. It has a small-town feel to the whole enterprise. Who would have thought that “small is beautiful” even if a San Franciscan is lending to a Pittsburgher, all the way across the nation?

I will provide links in the next post.

Joe February 22, 2011 at 5:20 pm

As I sat in my living room I downloaded this wonderful book from Barnes & Noble to my Nook e-reader. When I was a teenager I couldn’t have imagined I would be able to do such a thing. Not only is it convenient but the price on the e-reader is lower than buying the hard copy. Yes life has changed and it will continue to change because progress will continue as long as we don’t totally go socialist.
I am a man over 60 years old and I found this book to be exciting and refreshing. It offers inspiration to anyone that should read it. If I were young and just starting out I would sleep with this book.
Doug does bring up the one downside to the book when Andy Kessler talks about expanding the money supply. Just overlook that and embrace the genius of this book. Also, don’t think that Andy is just some evil capitalist that wants to put everyone out on the street. If you take away that from the book then you missed the point he is making. After reading the book I finally got rid of my Covered Wagon.
Read the book and find out what classification you fall into. As Andy says there are a very small minority of “creators” that contribute the most to our higher standard of living. The key is to not stifle their genius and we all will reap the rewards.

Vanmind March 8, 2011 at 10:52 am

Facebook wouldn’t exist without having turned toward filthy statism:

http://www.youtube.com/watch?v=ZMWz3G_gPhU

Don’t ever visit the site for any reason.

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