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If you think the financial system is evil or incompetent, please suggest a better way of doing things or go into the specifics about what is wrong. Ok, I'll gi

If you think the financial system is evil or incompetent, please suggest a better way of doing things or go into the specifics about what is wrong. Ok, I'll give it a shot, but bare with me as I am just a developer and don't really know much about economics. As I understand it, new money is created by banks loaning out more money than they have, which is called leverage. They do this by borrowing against the federal reserve, and the bank makes their money by charging their borrower a higher interest rate than the bank has to pay to the federal reserve. The banks assume the risk of a borrower not paying them back, and therefore get to be picky about who they lend money to. If I am correct in how the system works, I see two specific problems. 1. Banks are the only ones who get to decide who benefits from the creation of new money 2. Business's and individuals who are chosen to receive loans are now under pressure to not only pay it back, but also pay the interest, as well as taxes on whatever income they make to pay their debt. If we agree that the ability to create new money is necessary for a growing population, then the question is if this is the most efficient and fair way to go about it. I think a better answer is something close to basic income, but not quite. Instead of allowing banks to choose how much new money is created, and who benefits from it, I think there should be a governing body that decides how much new money needs to be introduced every year. Then that money gets evenly distributed to every citizen. Under this system businesses would not be able to grow as fast, unless they have private investors, or provide something people actually want to pay for. However the influx of money should create more investors, and make people more willing to spend money. The biggest problem I can think of with this approach is deciding how much money should be created.

aguyfromnb 7y ago
>Banks are the only ones who get to decide who benefits from the creation of new money How about we use the term "financial system" rather than banks. And in that sense, how is that different than: "a governing body that decides how much new money needs to be introduced every year. Except that it's mostly private (though heavily regulated), dynamic and market driven. You trust the legislators to figure out how much money is needed annually? Yikes. Also, I'm not sure why you focus on "new money". Money is fungible and the world is awash in it. We have negative rates through most of Europe, for crying out loud! "New money" goes to where it is demanded.
- jhoechtl 7y ago
  You answer that for the US where the fed system is indeed is indeed mostly private. Not so in most parts of the rest of the civilized world.
  - occamrazor 7y ago
    It is a commonly believed myth that the Fed is mostly private. The people in charge of monetary policy are appointed by government.
  - aguyfromnb 7y ago
    >Not so in most parts of the rest of the civilized world. We must live in totally different places if you'd prefer monetary policy be established by politicians. I'll take the academics, for better or worse.
jcfrei 7y ago
> The banks assume the risk of a borrower not paying them back, and therefore get to be picky about who they lend money to. This used to be the case but is not so common anymore today. A lot of debt issued by corporations or households (mostly mortgages) nowadays is securitized and sold directly to investors. The bank doesn't have the risk on their books and gets paid for their service (creating packages of debt with attractive risk / return ratios) but doesn't receive interest payments. > I think a better answer is something close to basic income, but not quite. Instead of allowing banks to choose how much new money is created, and who benefits from it, I think there should be a governing body that decides how much new money needs to be introduced every year. How would a governing body decide who can get a credit? A big part of banking is creating customer relationships and learning more about their companies, cash flows, growth opportunities or challenges. Because banks already have a good overview over a company's finances they are probably in the best position to estimate who would benefit from a loan and be able to pay it back.
- dec0dedab0de 7y ago
  How would a governing body decide who can get a credit? A big part of banking is creating customer relationships and learning more about their companies, cash flows, growth opportunities or challenges. Because banks already have a good overview over a company's finances they are probably in the best position to estimate who would benefit and pay back from a loan. The governing body would only decide how much is created not who it goes to. Every citizen would get an equal share of all newly created money. Banks would still be able to lend money as they see fit, but they would not be allowed to use leverage.
  - jcfrei 7y ago
    Ah, I see you are talking about helicopter money with leverage restrictions for banks. The money distribution part is being discussed as a potential successor to QE. I don't think restricting leverage for banks is in anyone's interest - assuming banks adhere to their capital requirements, don't take up unsustainable amounts of risk and need a bailout. Fractional reserve banking allows banks to offer their services for free and pay you for your money on their savings accounts. If you take that away you will simply have to pay for keeping an account or do your own research on how to invest the money, which will probably cause you more work and a worse risk / return ratio. Or take banks entirely out of the equation and allow everyone to simply keep their money at the central bank.
c22 7y ago
If the bank creates "new money" and lends it to a business who pays it back with interest, isn't it in fact the business who has "created" the money? From this perspective, the banks are really just making bets on who they think can create value. In reality I don't think new money benefits anyone in particular. If anything, inflation is detrimental to money holders. As alluded to in a sibling comment, this new money is distributed holistically and is for the benefit of the system itself (or a byproduct of the system, if you prefer).
- xenos345 7y ago
  Question is... are banks the best intermediary for determining who is capable of creating value? Perhaps in traditional established commercial lending, but would challenge its efficiency on newer orgs. One benefit of basic income would be that consumption is about as close to market driven as it gets. So naturally the money would flow to companies providing value to individuals based on their needs.
  - IanDrake 7y ago
    I don't see the relation to basic income. You could just say income and be correct. I'm not sure how free money makes consumers a better judge of value, when the did nothing of value to get the free money. In fact, behavioral finance studies have show that people use "mental accounting" and free money is seen as having little value.
xenos345 7y ago
I've been considering this very concept as well, and while don't claim to understand all of the ramifications behind it, I would love to hear experts discuss SWOT. My mental model always breaks down when considering international impacts to such a strategy. Currency, trade, and capital investment shifts.
deleted 7y ago
[deleted]

aguyfromnb 7y ago

>Banks are the only ones who get to decide who benefits from the creation of new money How about we use the term "financial system" rather than banks. And in that sense, how is that different than: "a governing body that decides how much new money needs to be introduced every year. Except that it's mostly private (though heavily regulated), dynamic and market driven. You trust the legislators to figure out how much money is needed annually? Yikes. Also, I'm not sure why you focus on "new money". Money is fungible and the world is awash in it. We have negative rates through most of Europe, for crying out loud! "New money" goes to where it is demanded.

jhoechtl 7y ago
You answer that for the US where the fed system is indeed is indeed mostly private. Not so in most parts of the rest of the civilized world.
- occamrazor 7y ago
  It is a commonly believed myth that the Fed is mostly private. The people in charge of monetary policy are appointed by government.
- aguyfromnb 7y ago
  >Not so in most parts of the rest of the civilized world. We must live in totally different places if you'd prefer monetary policy be established by politicians. I'll take the academics, for better or worse.

jcfrei 7y ago

> The banks assume the risk of a borrower not paying them back, and therefore get to be picky about who they lend money to. This used to be the case but is not so common anymore today. A lot of debt issued by corporations or households (mostly mortgages) nowadays is securitized and sold directly to investors. The bank doesn't have the risk on their books and gets paid for their service (creating packages of debt with attractive risk / return ratios) but doesn't receive interest payments. > I think a better answer is something close to basic income, but not quite. Instead of allowing banks to choose how much new money is created, and who benefits from it, I think there should be a governing body that decides how much new money needs to be introduced every year. How would a governing body decide who can get a credit? A big part of banking is creating customer relationships and learning more about their companies, cash flows, growth opportunities or challenges. Because banks already have a good overview over a company's finances they are probably in the best position to estimate who would benefit from a loan and be able to pay it back.

dec0dedab0de 7y ago
How would a governing body decide who can get a credit? A big part of banking is creating customer relationships and learning more about their companies, cash flows, growth opportunities or challenges. Because banks already have a good overview over a company's finances they are probably in the best position to estimate who would benefit and pay back from a loan. The governing body would only decide how much is created not who it goes to. Every citizen would get an equal share of all newly created money. Banks would still be able to lend money as they see fit, but they would not be allowed to use leverage.
- jcfrei 7y ago
  Ah, I see you are talking about helicopter money with leverage restrictions for banks. The money distribution part is being discussed as a potential successor to QE. I don't think restricting leverage for banks is in anyone's interest - assuming banks adhere to their capital requirements, don't take up unsustainable amounts of risk and need a bailout. Fractional reserve banking allows banks to offer their services for free and pay you for your money on their savings accounts. If you take that away you will simply have to pay for keeping an account or do your own research on how to invest the money, which will probably cause you more work and a worse risk / return ratio. Or take banks entirely out of the equation and allow everyone to simply keep their money at the central bank.

c22 7y ago

If the bank creates "new money" and lends it to a business who pays it back with interest, isn't it in fact the business who has "created" the money? From this perspective, the banks are really just making bets on who they think can create value. In reality I don't think new money benefits anyone in particular. If anything, inflation is detrimental to money holders. As alluded to in a sibling comment, this new money is distributed holistically and is for the benefit of the system itself (or a byproduct of the system, if you prefer).

xenos345 7y ago
Question is... are banks the best intermediary for determining who is capable of creating value? Perhaps in traditional established commercial lending, but would challenge its efficiency on newer orgs. One benefit of basic income would be that consumption is about as close to market driven as it gets. So naturally the money would flow to companies providing value to individuals based on their needs.
- IanDrake 7y ago
  I don't see the relation to basic income. You could just say income and be correct. I'm not sure how free money makes consumers a better judge of value, when the did nothing of value to get the free money. In fact, behavioral finance studies have show that people use "mental accounting" and free money is seen as having little value.

xenos345 7y ago

I've been considering this very concept as well, and while don't claim to understand all of the ramifications behind it, I would love to hear experts discuss SWOT. My mental model always breaks down when considering international impacts to such a strategy. Currency, trade, and capital investment shifts.

deleted 7y ago

[deleted]