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> Low-risk borrowing would get utility loans, producing actually-guaranteed-AAA investments. I think this is where it falls over. Providing an actual guarante

by mrec 10y ago

> Low-risk borrowing would get utility loans, producing actually-guaranteed-AAA investments. I think this is where it falls over. Providing an actual guarantee for things that are low- but not zero-risk is just another way of saying "mispricing risk", and it creates the wrong incentives for pretty much everyone. Borrowers want to push the definition of "low-risk" so they can borrow at a subsidized rate. Lenders (in which I'm including the people buying your "actually-guaranteed-AAA investments") want to push it so that they can lend at zero risk but still make nonzero profit. Governments administering a public utility banking system want to push it because jam today gets votes today, and who cares about tomorrow? IMO this is all happening already with the artificially-low interest rates being pushed by central banks almost everywhere; if they wanted to repeat 2008 I'm not sure they could do a better job. My idea of "utility banking" would exclude any kind of loans. It would include only things which are genuinely risk-free, like transfers and deposits.

Bartweiss 10y ago
This is a reasonable point. The distinction I was hoping to draw was between cash-flow loans and investment loans, where the former are (like interbank overnights) non-zero risk but immensely reliable. But it's probably impossible to set up that system without people manipulating it to get profitable rates (...like interbank loans). Certainly, we don't have a great track record of the government properly evaluating what's actually for real safe. I was thinking that we could keep limit lending by preventing rate-based profits (like electric companies, which profit on coverage but not prices), but realistically that just moves the incentive from profit to popularity. Hand out good loans to bad risks, get reelected, blame the markets when they explode. Sounds painfully familiar, actually. So yes: likely better to treat financial services as different from risk-bearing products altogether. You'd have utility "money storage" that does deposits, transfers, maybe offers financial advice, but doesn't extend any credit/investment of its own.
wallace_f 10y ago
That's a good point. We would still want to separate the stuff like home loans from higher risk, more profitable finance.
- mrec 10y ago
  What practical form would this separation entail? If they're really lower-risk then they'll naturally attract lower interest rates; what do you envisage beyond that?

by mrec 10y ago

Bartweiss 10y ago

This is a reasonable point. The distinction I was hoping to draw was between cash-flow loans and investment loans, where the former are (like interbank overnights) non-zero risk but immensely reliable. But it's probably impossible to set up that system without people manipulating it to get profitable rates (...like interbank loans). Certainly, we don't have a great track record of the government properly evaluating what's actually for real safe. I was thinking that we could keep limit lending by preventing rate-based profits (like electric companies, which profit on coverage but not prices), but realistically that just moves the incentive from profit to popularity. Hand out good loans to bad risks, get reelected, blame the markets when they explode. Sounds painfully familiar, actually. So yes: likely better to treat financial services as different from risk-bearing products altogether. You'd have utility "money storage" that does deposits, transfers, maybe offers financial advice, but doesn't extend any credit/investment of its own.

wallace_f 10y ago

That's a good point. We would still want to separate the stuff like home loans from higher risk, more profitable finance.

mrec 10y ago
What practical form would this separation entail? If they're really lower-risk then they'll naturally attract lower interest rates; what do you envisage beyond that?