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That outcome is certainly possible. But even that scenario would be quite a departure from what we have now, where banks have almost no reserve requirement and

by lifty 8y ago

That outcome is certainly possible. But even that scenario would be quite a departure from what we have now, where banks have almost no reserve requirement and they can create as much money as can be absorbed in the economy, which in turn is influenced mainly by central bank interest rate. Lending money entails risk and in a situation where the interest is set by a central bank and there are little to no reserve requirements, that risk gets shifted to the population that has to bailout the banks. In the scenario that you outlined, its probable that the reserve would much higher than the current 1-3%, which would lead to risk being more directly held by the bank making the loans and the depositors of that bank. And the argument goes that this might lead to more skin in the game and probably less reckless behaviour. Also, in such a system interest rates would be set by the market, based on the amounts of savings in the economy and the demand for loans.

deleted 8y ago
[deleted]
lokedhs 8y ago
I just don't see your reasoning. By what mechanism that is not provided today would the banks stop doing what they do today? What mechanism would control the exposure that banks take on?
- lifty 8y ago
  Bitcoin and other cryptocurrencies are easier to store securely compared to bunches of cash, which would lead to less pressure to store them in a bank. Deposits would be incentivised using interest rates (set by the market). That and the banks not being able to create money would lead to them being more dependent on deposits; this in turn would put more pressure on banks that exhibit risky behaviour and favour banks that keep a healthy balance sheet. And why would there be more pressure to adjust risky behaviour? Because people would take their money out of banks that exhibit that behaviour, which would re-inforce behaviour that has the right ratio of risk/return. This does not happen now because banks don't need almost any deposits to make profit. This risk adjustment already happens in financial sectors that have skin in the game. For example, if a hedge fund looses money, sooner or later people will take their money out of it.
jhanschoo 8y ago
> But even that scenario would be quite a departure from what we have now, where banks have almost no reserve requirement and they can create as much money as can be absorbed in the economy, which in turn is influenced mainly by central bank interest rate. I don't see how a Bitcoin bank as outlined above can be regulated to have a reserve requirement either. Arguably, this offers even less protection than a traditional bank, due to the inability of the public sphere to regulate it. And still, as long as a Bitcoin bank is perceived as sufficiently trustworthy based on past behavior, people would use it. Next, I don't share your view that interest rates being set by the market is a good thing. Economies were far more fragile and volatile back when they were backed by bullion. The vast majority of people who have income from labor comparable to their net worth prefer that their net worth not fluctuate so much that they may not consistently maintain their standard of living, and this is helped by a steady interest rate. A rational agent prefers this unless their net worth greatly eclipses their ability to obtain wealth from other forms of capital.
- lifty 8y ago
  I don't have full conviction that the situation I described will lead to better outcomes but I am not convinced by the current system either, and it's worth considering how the system could work with the newer tools that we now have. > I don't see how a Bitcoin bank as outlined above can be regulated to have a reserve requirement either. Arguably, this offers even less protection than a traditional bank, due to the inability of the public sphere to regulate it. And still, as long as a Bitcoin bank is perceived as sufficiently trustworthy based on past behavior, people would use it. The reserve requirement is something set through the political process so is independent of the properties of the money, so that can go either way both in a fiat or cryptocurrency system. The difference with cryptocurrencies is that you don't have as much need to store them in a bank. One reason to loan them to the bank is to get some kind of return on the money. In this situation reckless behaviour might be driven out faster, just like in the hedgefund industry. > Next, I don't share your view that interest rates being set by the market is a good thing. Economies were far more fragile and volatile back when they were backed by bullion. The vast majority of people who have income from labor comparable to their net worth prefer that their net worth not fluctuate so much that they may not consistently maintain their standard of living, and this is helped by a steady interest rate. A rational agent prefers this unless their net worth greatly eclipses their ability to obtain wealth from other forms of capital. Since I get most of my income from labour, I can tell you that I would prefer to have a slight deflation in prices every year and maintain my purchasing power, without having to go through all kind of hoops and loops to invest my money in bonds, stocks and other risky things. As to old economies being backed by bullion, I tend to agree there. Bullion can be a poor monetary base due to its lack of divisibility. But there were probably more things that lead to fragile economies than the fact that money was backed by bullion. Of course, there are problems with limited money supply systems. How would governments finance wars? You would have to finance things through taxation which is very unpopular.

by lifty 8y ago

deleted 8y ago

[deleted]

lokedhs 8y ago

I just don't see your reasoning. By what mechanism that is not provided today would the banks stop doing what they do today? What mechanism would control the exposure that banks take on?

lifty 8y ago
Bitcoin and other cryptocurrencies are easier to store securely compared to bunches of cash, which would lead to less pressure to store them in a bank. Deposits would be incentivised using interest rates (set by the market). That and the banks not being able to create money would lead to them being more dependent on deposits; this in turn would put more pressure on banks that exhibit risky behaviour and favour banks that keep a healthy balance sheet. And why would there be more pressure to adjust risky behaviour? Because people would take their money out of banks that exhibit that behaviour, which would re-inforce behaviour that has the right ratio of risk/return. This does not happen now because banks don't need almost any deposits to make profit. This risk adjustment already happens in financial sectors that have skin in the game. For example, if a hedge fund looses money, sooner or later people will take their money out of it.

jhanschoo 8y ago

> But even that scenario would be quite a departure from what we have now, where banks have almost no reserve requirement and they can create as much money as can be absorbed in the economy, which in turn is influenced mainly by central bank interest rate. I don't see how a Bitcoin bank as outlined above can be regulated to have a reserve requirement either. Arguably, this offers even less protection than a traditional bank, due to the inability of the public sphere to regulate it. And still, as long as a Bitcoin bank is perceived as sufficiently trustworthy based on past behavior, people would use it. Next, I don't share your view that interest rates being set by the market is a good thing. Economies were far more fragile and volatile back when they were backed by bullion. The vast majority of people who have income from labor comparable to their net worth prefer that their net worth not fluctuate so much that they may not consistently maintain their standard of living, and this is helped by a steady interest rate. A rational agent prefers this unless their net worth greatly eclipses their ability to obtain wealth from other forms of capital.

lifty 8y ago
I don't have full conviction that the situation I described will lead to better outcomes but I am not convinced by the current system either, and it's worth considering how the system could work with the newer tools that we now have. > I don't see how a Bitcoin bank as outlined above can be regulated to have a reserve requirement either. Arguably, this offers even less protection than a traditional bank, due to the inability of the public sphere to regulate it. And still, as long as a Bitcoin bank is perceived as sufficiently trustworthy based on past behavior, people would use it. The reserve requirement is something set through the political process so is independent of the properties of the money, so that can go either way both in a fiat or cryptocurrency system. The difference with cryptocurrencies is that you don't have as much need to store them in a bank. One reason to loan them to the bank is to get some kind of return on the money. In this situation reckless behaviour might be driven out faster, just like in the hedgefund industry. > Next, I don't share your view that interest rates being set by the market is a good thing. Economies were far more fragile and volatile back when they were backed by bullion. The vast majority of people who have income from labor comparable to their net worth prefer that their net worth not fluctuate so much that they may not consistently maintain their standard of living, and this is helped by a steady interest rate. A rational agent prefers this unless their net worth greatly eclipses their ability to obtain wealth from other forms of capital. Since I get most of my income from labour, I can tell you that I would prefer to have a slight deflation in prices every year and maintain my purchasing power, without having to go through all kind of hoops and loops to invest my money in bonds, stocks and other risky things. As to old economies being backed by bullion, I tend to agree there. Bullion can be a poor monetary base due to its lack of divisibility. But there were probably more things that lead to fragile economies than the fact that money was backed by bullion. Of course, there are problems with limited money supply systems. How would governments finance wars? You would have to finance things through taxation which is very unpopular.