Home
I assume banks will always be with us here on earth. They have enough power to influence governments and create laws that guarantee their existence. But as technology marches forward, the practical need for banks is evaporating. Allow me to make that case.

Someday all payments will be digital. We won't need ATMs, and we won't need anyone to process physical checks, or to check IDs. That much is easy to predict.

The world will always need scorekeepers for money, of course. But that's just a cloud application. Google could hack that together in a weekend. All the system needs to do is keep track of who has what, and make transfers between accounts according to electronic transfer instructions. If you like competition, imagine several clouds from different companies that all talk to each other.

One major function of banks is to inspire trust in depositors. But I think you'd agree that banks have screwed the pooch on the trust issue. If you had a choice of keeping your virtual money in Google's cloud application versus giving it to Bank of America or JP Morgan Chase, which one makes you feel safer? I'm looking at you, Jamie Dimon.

I think you'd agree that if the only thing banks did was keep track of deposits and move payments around, they are already nearly obsolete. But of course they do more. The loan side is the main reason banks exist.

In my earlier life, I spent a few years as a loan approver for a large bank. In theory, we used our expertise to examine small business startup applications and determine their credit worthiness. In reality, the customers' projections were total bullshit, so we ignored them, looked at the collateral, and applied simple rules of thumb. Some of the rules of thumb included:

1.      Make sure you have life insurance on key people.

2.      Don't make loans for someone's "hobby," e.g. a sporting goods store.

3.      Make sure applicants have plenty of skin in the game (their own money).

4.      Cut the revenue projections in half and increase the expense projections by 50%.

5.      Restaurants are bad ideas with the exception of established franchises.

6.      Husband-wife businesses are risky because of divorce.

7.      Has this sort of business worked around here before?

8.      Do the applicants have experience in this business?

9.      How much competition is there?

10.  Do the applicants have enough collateral to repay the loan if the business fails?

We had other rules too, but all of them would fit on a one-page checklist. It wasn't rocket science. If you imagine a future world in which anyone can lend money to anyone else, I think you'd find banks unnecessary.

For example, let's say someday in the future, a business wants a loan that is far too complicated for the average civilian to evaluate, and banks don't exist to do that work. What happens then? Well, in that world, you still have plenty of individuals who would be qualified and willing to evaluate even a complicated business situation. CPAs, for example, have that training. If qualified people loan their own money to a particular project, I'd probably feel comfortable lending my money as well, even if I don't understand the deal. I'd just make sure the lead individuals have good track records, and I wouldn't put all of my money in one deal. Let's say the qualified individuals take a higher share of the interest payments on the loan to compensate for their extra effort and talent. That seems fair.

Most bank loans are actually quite simple to evaluate. A typical business loan might involve a company that has been in business for decades and always runs short of cash in the spring as they build up inventory for the summer. It's a very low risk loan. That's the type that banks prefer. Untrained individuals could make those loans with their eyes closed.

My guess is that person-to-business lending would be every bit as good, or better, than bank-to-business lending. We already see something similar in the angel investing area, and that seems to work fine without banks.

I could imagine the government limiting individual loans to a percentage of the lender's net worth, just to keep things sane. Or perhaps the government would require some sort of minimum diversification instead. It wouldn't take many safeguards to keep people out of trouble. Social networks, such as Facebook, could provide all of the identification and background checking you need.

Credit cards would be unnecessary in the future. I assume credit cards are issued according to formulas that look at income, expenses, and credit scores. In the future, the cloud would have all of that information, since every bit of it would be flowing through the cloud for capture. The cloud could keep an ongoing credit figure for each person, without the need for an application. If an individual spends more than he has on deposit in the cloud, an interest calculation starts. It's that simple.

None of this can happen on this planet because banks have a death grip on governments, and society would be petrified of a change that radical. But if you think you hate big banks now, just wait until you realize how unnecessary they are.

When I start my new country, perhaps on Mars, my first two edicts will be as follows:

1.      No banks

2.      No insurance companies (for the same reasons)

I'll be taking applications for my country on Mars sometime soon.
 
Rank Up Rank Down Votes:  +100
  • Print
  • Share

Comments

Sort By:
0 Rank Up Rank Down
May 29, 2012
When a bank loans $100 they only need to have $10 in deposits, the other $90 is invented out of thin air and registered with a central bank. This is how the money supply increases. The money supply decreases when loans are paid off. In your fantasy world the amount of money doesn't naturally increase or decrease based on economic activity. Funny how even people who have worked at a bank don't understand this.
 
 
May 28, 2012
What an optimist! Interesting to see one who writes such a pessimistic blog being such an optimist. Maybe without optimism we would all go insane? Anyway, I hope you turn out right and me wrong, but what I think is big financers will finance the first colonies and you can bet they will maintain their death grip from the get go. They may even have the power to increase their grip, if anything, by bypassing laws that exist on Earth and inacting new ones with more sneaky loopholes. (plenty of precident for this kind of thing in the past) Plus as long as humans remain the same, they will likely have the same problems and weaknesses. We may not really need banks from a logical perspective, but dollars to donuts they will still be calling the shots many generations from now. Maybe that is why people like to believe in God, Aliens, cosmic evolution, etc, cuz then you can hope for divine intervention to help humans get more evolved than we are now or that there might be some reason we could get there. Otherwise, it will likely be same shXX/diff day.
 
 
May 27, 2012
I just read an article in the news paper, about W. Edwards Deming; by Steven Reive.
Mr Deming was a doctor of physics, who after WW2 helped rebuild japans economy.His ideas helped japan to surpass american ingenuity, and quality in the automotive industry. His concepts where based on "statistical process control".Or quality control.

At the very basic level, his principles where just based on creating a better product and gaining trust...

And Yes, its not rocket science.

The foundation of trust in regards to big banks has deteriorated. The banks don't even trust each other to lend among them selves, and so why would the general public trust the banks. Distrust And lack of integrity has become the status quo, and Unfortunately the general public don't have much choice in the matter right now.

The Financial industry want us to believe that the system is not changeable... I call bull @ ? $ *...

That is linear thinking.We don't live in a linear world. There are multiple directions that can be taken to solve problems.

Why cant,google, pay pal, and possibly some other individuals, and or entity's start a new bank that people can trust. or in other words, make a better product.

Thats what self regulation, and capitalism is about right?













 
 
May 27, 2012
Let me guess, you would do this because you plan to hack mars google or whatever and give yourself all the money in the world?

Literally.


Future libertarian on mars suggests you drop the virtual economy and go back to the gold standard. Realistically virtual economies are already in play. They are called MMORPGs. WoW has an economy bigger than a lot of nations. Eve has one with an actual economist in charge to advise the development team.

BTW, what about pawn shops? Would they be allowed? They are sort of like banks in that they lend but at least the require collateral up front.
 
 
May 26, 2012
Lots of interesting points there, and a lot of food for thought. At the same time, I don't think it's fair to lump all banks, large and small, into the same melting pot.

Small, local banks are often tuned to a particular industry. Agriculture comes to mind. If you have small farm owners who are looking for short-term loans, you go to a bank that understands that industry, and over time, knows you as well. In this way, banks become almost like co-ops where people put their money in and allow the bank to determine good investments from bad, since the bank employees know finance, the industry they're serving, and the people who are both their contributors and their borrowers.

It's true that banks sometimes screw up. The housing crisis was partly caused by banks that let their desire to make money overcome their prudence. They knew that there wasn't enough insurance to cover all the bad loans they were making; they knew that Fanny Mae and Freddy Mac wouldn't be able to buy all those crappy loans, even though they (those quasi-government institutions) not only encouraged (and in some cases virtually demanded) the banks to make those crappy loans, but told them there was no problem with covering the "few" that would go bust.

The same thing happened in agriculture, to go back to my earlier point. Banks encouraged farm expansion assuming that there wouldn't be any catastrophic reversals in agriculture. When those unanticipated events happened, people lost their farms - but the banks lost, too. They were left holding property worth less than they'd loaned on it, just as with the housing crisis. Ultimately, though, it's the responsibility of the individual to make the final decision; the banks may encourage you more than they should have in a perfect world; but at the last count, it's up to you.

Large banks aren't all bad, either. They work internationally, foster trade, assist in balancing currencies, and help companies expand, both domestically and foreign. They aren't all bad, and it doesn't seem like we would all be better off without them.

The problem with a huge, centralized system that has access to a lot of information about you vis-a-vis finances is similar to the problem with a great big centralized system to collect votes. The more you consolidate many points of entry into one, you make fraud and hacking that much easier. It's far easier to affect the outcome of an election if all the votes are in one central data base than if they're spread out all over the country. The same could be said for banking - do you want one huge server farm to hold all the country's financial information in it? I sure don't.

So for now, Scott, I'll pass on the idea of moving to Mars to free myself from banks, if just for the mortgage side of things. But don't let me stop you; have a fun trip to planet four.
 
 
+6 Rank Up Rank Down
May 26, 2012

@Kingfisher
*Where modern banks and insurance companies have failed us is that instead of simply aggregating the risk, they started making wagers on it, creating a moral hazard which encouraged more and more risk taking. And the issuance of IOUs that were based on other IOUs, instead of actual products.

So instead of eliminating banks, you should create a system that mitigates risk, instead of creating it.*

Best topic in awhile & good comments, especially by Kingfisher.

Once institutions become speculation games, we feel the downside of how we do business.

Eventually, the only way to avoid being put at risk by these speculations is to return to bartering. Then I know I recieved fair value without it being destroyed from afar.



 
 
May 26, 2012
There are a lot of comments here talking about how "pooling" the banks together would help mitigate the risk.

But remember the financial meltdown? AIG was too big to fail because so many other banks and insurance companies were linked together in a complex chain of transactions. Each company was spreading the risk by getting insurance. Once they had insurance, they could over extend again -- because they were insured against loss.

And nothing has changed since then. We need confidence in the system. I have no confidence in a giant "cloud".
 
 
May 26, 2012
"I could imagine the government limiting individual loans to a percentage of the lender's net worth, just to keep things sane."

Bwa-ha-ha-ha!

Are you serious? The government? When banks were lending out money at 10X their assets, it was the government urging them to increase it to 20X or 40X or 100X -- because everyone has a "right" to a mortgage.
 
 
May 26, 2012
What you have just described is Bitcoin combined with the collective credit model once used by Prosper.com before the man came down on their heads. As a response to the poster who said that a disruptive event would be required before Bitcoin takes any dominant position in the market, would the collapse of the Euro qualify?
 
 
+4 Rank Up Rank Down
May 26, 2012
If you've ever been in the finance industry you know how commonly banks make errors that cause the consumer to be unable to get money from his account, or card, when he really needs it. What you're proposing is to "anti-perfect" that system even further by having the same people who brought us the school system, the Post Office, and Medicare run it.

If such an abomination ever occurs, the people will find a way to create a substitute currency just so they can hold their money in their hands again, even if it's cigarettes. Look at prisons -- inmates have been doing this for centuries, even under the tightest surveillance man can devise.
 
 
May 25, 2012
Bitcoin will be very slow to catch on without help from a hugely disruptive event. Like say, an
eco-terrorist group breaks into a bird flu research lab, stealing and spreading viruses. The old and weak around the world would die, including the whitehairs that run the world's banks.

For Britain, it took the massive disruption of WWII before they were able to bring in the NHS, which of course brought cataclysmic changes to their healthcare, legal and insurance industries.

 
 
May 25, 2012
The other failure of the banks is a direct result of growing economic inequality. A billionaire who looses half of his livelyhood is still filthy rich, but for most people something like that would seriously affect their quality of life. As such, people with lots and lots of money can afford to take huge risks, while un-rich people don't have that luxury.

As such maybe the best solution is to stratify banks.

On the very top you have investment banks, where only the richest of the rich can put their money. These banks are completely banned from lobbying, but are free to make all the risky loans they want. Loans and deposits are not insurable in any way, shape or form.

Below that you have credit unions. Shares are equal to deposits, but you are not allowed voting priviliges above a certain threshold. These banks are tightly regulated and can only make certain safe loans. All deposits are government insured in exchange for compliance to regulations. These banks may also offer insurance.

Below that you have treasury branches. These are essentially sub-branches of the central bank. They pay exactly the central interest rate on all deposits, but offer no services and give no individual loans. In fact the only way to make a deposit or withdrawl is by electronic transfer.

Lastly there are insurance companies. These are very very tightly regulated to insure they are not creating moral hazards of any kind (disconnect between risk and reward).
 
 
May 25, 2012
It seems you have eliminated fractional reserve banking, so instead of banks loaning 10x of what they have on deposit, individuals will loan 10% of what they have. That is a pretty extreme lowering of the available credit.

So in your country on Mars, who or what controls the money supply?
 
 
May 25, 2012
You have oversimplified banks and insurance companies, an easy mistake to make when you think of money as a physical object rather than an abstract concept.

Money as it is today is measured in dollars and euros and yen, but confusing currency with money is like confusing a yardstick with a yard. Money, as it is today, is nothing but an IOU, and the value of that money is determined not only by the nominal value of it (as in 'IOU one dollar worth of stuff') but also by the chances that the IOU won't be redeemable when you want it to.

Banks and insurance companies do essentially the same thing. They aggregate risk. Whenever a bank issues an IOU they consider the chances that it won't be redeemed. Whenever an insurance company makes a policy they are considering the chances that something expensive will happen.

Individuals can do this, but it is socially beneficial for large groups to collectively take the same risks. For example if the risk rate is 10%, nobody wants to be the 1 out of 10 person that gets all the negative consequences, so they agree to share the risk and spread it out.

Where modern banks and insurance companies have failed us is that instead of simply aggregating the risk, they started making wagers on it, creating a moral hazard which encouraged more and more risk taking. And the issuance of IOUs that were based on other IOUs, instead of actual products.

So instead of eliminating banks, you should create a system that mitigates risk, instead of creating it.
 
 
May 25, 2012
I can't believe no one has mentioned bitcoin yet.

http://en.wikipedia.org/wiki/Bitcoin
 
 
May 25, 2012
The cashless society might be nearer than you think. http://www.huffingtonpost.ca/2012/03/17/sweden-cashless-money-paper-coin_n_1355255.html
 
 
May 25, 2012
I see EMU below had the same idea as me. Oh well, I guess I'm not the only genius here. :)

Also the profanity filtering seems overly aggressive. The word that got filtered in my previous post was the plural for "entity". Or maybe that's an insult in some other language? :)
 
 
May 25, 2012
I think bank-like !$%*!$%* would spontaneously reform. This is mainly due to the need to loan cash amounts that are too risky for individuals, but perhaps not so risky for a *pool* of individuals. Each of these individuals would probably like to see a positive return on their investments for making these loans.

So while this entity may not be like a bank as we know it, it'd certainly be bank-like in many regards.

Also, I don't think you have to go to Mars to pull this off. When you create your floating island nation, you can test drive this idea there.
 
 
-1 Rank Up Rank Down
May 25, 2012
Scott's hit on the insurance thing before I believe. I should be able to buy into the insurance that I want. I'm exercise, don't smoke, eat well, and don't have a risky profession. I should be able to buy into an insurance cloud with like-minded people, instead of having to fund the people that aren't taking care of themselves. As their fun would deplete faster, their premium is higher, but because it should be.
I get that it's a different topic from the banks, but maybe bank-clouds could be similar in idea....you buy in to the one that has the risk portfolio that you're comfortable with.
 
 
+14 Rank Up Rank Down
May 25, 2012
How long will it take until someone thinks how nice it would be to aggregate the whole thing and have a big pot of money where people pay in, withdraw and get interest by lending out some of it?
The default risk would be averaged across lots of people and there'll always be a bit of cash over in case someone needs his money right away.

I think it's a good idea and I even have a name for it: "bank". :-)

Insurance is similar. That averaging out effect is the reason for its existence. How would you do that? You need health insurance because it's unrealistic and ineffective to force every individual, babies included, to have a million dollars sitting around waiting for the decades long treatment for ALS, Steven Hawking style. And general liability insurance is just as bad.
 
 
 
Get the new Dilbert app!
Old Dilbert Blog