Thursday, April 4, 2013

One Ring to Rule Them All

The bionic mosquito takes a very hard-assed approach to banking; Why Not a Free Market in Money?  He argues that all commerce, including banking can be self-regulating based on voluntary agreements "with the requisite condition that members within the society by-and-large respect the non-aggression principle." No regulation necessary. I'm in complete agreement, except I should throw in that it will only happen in the very unlikely event that the present masters of the universe allow it to be taken from their cold, dead hands. Hope in one hand...

I've been puzzled for quite a while about two features of modern banking that don't fit together in any theoretical framework;

first - savings rates have been declining, and until recently (households have been de-leveraging in response to the credit crises) and interest on deposits have been so low there is really no incentive to financial intermediation. Even with extremely low reserve requirements, I don't see how there can be so many small banks, since home loans, after the death of traditional S&L's are usually originated by specialized mortgage bankers and small and medium consumer loans are (I'm guessing here) mostly done on charge cards. So I gather that  retail banks are making their money on large consumer loans such as autos, and lines of credit to small businesses. This is understandable, but where I live in suburban Washington D.C. there seems to be a bank on every corner, most of which no one ever heard of five years ago. It seems to me that this model could only work without real competition, meaning that these banks are essentially franchises of the Fed, a cartel where risk and reward are controlled and averaged out. Anything like a free market would eliminate 90% or more. Scary to the bankers. Almost nobody likes risk if a guaranteed small return is sufficient.

Secondly, credit cards are essentially zero-reserve loans, each purchase is made with "thin air" money up to the individual's credit limit and backed by nothing more than the merchant's trust that VISA will pay. I suppose it's not considered inflationary because much of it is extinguished month to month, but the total amount has got to be huge. I imagine it's close to FRB levels before Permanent QE. [I really should do some research before I post this. I really should floss more often, too]. This does seem very "free market" to me, because there is a circle of anonymous trust between the customer, the vendor and the bank that simply didn't exist with traditional banknotes - checks. It is higher velocity even than cash because of added protection from vendor fraud. I think this is close to free banking except that I strongly suspect it is also cartelized at the top. There was Visa, MC, and American Express which wasn't really credit (payable on receipt) and I think on the way out. A thinly disguised "natural monopoly" due to very high barrier to entry; it would be almost impossible for a new competitor to bootstrap that level of trust, except by an enormous player. I guess will see when "they" decide to let Morgan or Citi do a Lehman in the next crisis and we all get our GS cards, probably RFI implants.   That is a little scary.