I am sure everyone reading this is aware of the problems created by
greed in our financial system. I raise a question whether we should
mend it or end it. And I give some links, facts
and food for thought for slower money, no intermediaries
and reference to turning back the process of controlling the money
supply out of financial institutions.
One of the things I have been wondering is whether we truly need a financial
system.
One of the problems with our system is simply that people invest in
short term instruments or demand deposits. They expect repayment when
they want to. They wish to receive interest or certainly don't begrudge it
when they get it.
And the bank might invest in a long term mortgage at a much higher rate.
And a moral hazard is created when a bank invests in increasingly risky
investments. This is particularly true of federally insured decioned
and those too big to fail. (Robert L. Hetzel, "Should Increased Regulation of Bank Risk Taking Come from Regulators or From the Market"
Economic Quarterly Volume 95 Number Two, Spring 2009 pages
161 - 200.
And our financial system is still dysfunctional.
It does not have to be this way, Senator Carter Glass in
the depression
asked, "Is there any reason why the American people should be taxed
to guaranteed the debts of banks...." And after the depression, they argued
that banks should simply be a payment mechanism, holding money safely.
Other organizations would provide investment.
And I question why we allow those wish to invest on
a short term basis with long-term instruments and just as importantly
with those firms that are investing long term such as forest product
companies like Weyerhaeuser.
As Mr. Hetzel put it, "Financial institutions
took on excessive risk in the period from 2003 to the Summer
of 2007. They did so through the use of leverage that involved borrowing
short-term, low-cost funds to fund long-term, illiquid, risky assets."
And one should mention the Slow Money movement. And
Peer to Peer investment for individual loans directly from one
person to another.
Of course one of the problems as the comments pointed out is the risk
of default and the difficulty of collection. A national EFT system
would prevent that. (All money transactions are on one central government
site. If one agrees to pay $50.00 a month, it comes out of your account.
Since, all money is in one system, one could not bypass the automatic debit
by simply switching deposit institutions.)
I talk about accountancy being public,
all transactions and contract being public. Thus, one could find out
what a firm's liabilities are, it s possible revenues, without the need
of financial intermediaries including accountants.
Why do we need a stock market?
And we have 10,000 different mutual funds, more than the total
number of stocks. Companies should just make their Initial Public
Offering or when they wish more capital sell more stock.
Then people buy the stock and own it forever.
What economic purpose do day-traders have or those who time the market,
independent of whether they can do it or the Rational Expectations Random
Walk theory applies.
Stock holdings now turn over in less than six months.
If people were to buy and never sell their
stocks or other securities, the government can run a system
to hold stocks as one would not need brokers.
The Singapore Depository Exchange Program is an example of this idea.
They wouldn't be able
to make any money anyway.
The
New Economics Foundation postulates that money creation (e. g. the TARP)
should be done by crediting it to the Government as public revenue.
Banks would not create new money. They estimate that this would save
66 billion pounds in the United Kingdom, 114 billion dollars in the United
States anc 160 billion in the Euro. Generally, it is equivalent to
five to fifteen percent of total tax revenues.
With fractional reserve banking, banks create money. Thus if we have a
ten percent reserve requirement, when one deposits ten dollars into one's
banking account, one hundred dollars can be loaned out. I asked my professor
of Intermediate Economics, does the bank profit on the interest on
the ten dollars deposited or the one hundred dollars created. Thus, when
one makes a deposit, and if the banks charge eight per cent interest,
They earn the equivalent of 64 per cent revenue - whatever they pay in
interest.
And I don't really understand what the point of having bonds have a maturity
date is? For example, I own in my retirement portfolio, BNSF Railway
which matures in 2045. Are they really going to have some sudden chunk of
money then to give back to me (and other investors) the original principal.
Of course not. The date is artificial, except that a firm that has debt
maturing will probably have to scramble to find new financing. Bonds
should be perpetual.
One would have to save more as one couldn't liquidate toward the end of one's
life. But the United States doesn't save enough as it is, and I think
giving to one's children, whether literally as inheritance, or metaphorically
by leaving one's stocks and perpetual bonds to one's favorite charity.
Assume that one earned seven percent on one's bonds.
Long term corporate bonds in the high-yield category pay this amount.
Assume ones earning
time is fourty-five years.
That means one would have to save a third of one's income to fully replace
one's average income at the age of sixty-five. It is a conservative
estimate because it does not take into account compounding. One can take
the seven percent bonds that one earns over fourty-five years and invest
that so if one were just saving for retirement, they could get away with
a lower savings rate. And after about ten years, one would have a modest
but steady
income in case of disability or unemployment.
The finance sector, including
insurance, is six million people out of a work force of 135 million
Of these we have
145,000 Personal Financial Advisors,
321,850 loan officers.
As some people complain about the
compliance
costs of our
tax system, we have 66,000 tax examiners (working for the government
presumably)
and 63,000 tax preparers.
Of course, I believe that the Share economy is the ultimate way to do this. This among other things eliminates the distinction between debt
and stocks and eliminates all issues of leverage.
But certainly by having people purchase directly loans or stocks and holding
on to them and not
not having intermediaries, can get rid of many of the problems we have now.
If you need liquidity, hold cash. If you want to use your money in
a few years, loan to a farmer to buy seed or fertilizer for this Summer's
crop, and if you want a long-term investment, give a loan to someone
going to college or medical school, invest in a forestry company or
for those who want the opportunity to cash in big,
one can invest in a company with an interesting idea for our energy economy or
an idea on how to cure cancer.