Death of Banks
January 21, 2015 11:22 PM   Subscribe

The End of Banking: Money, Credit, and the Digital Revolution - "Unregulated banking with access to government guarantees is an enticing business model. It offers the profits of excessive risk-taking in good times, and allows passing on the inevitable losses to taxpayers in bad times."

Why banking got out of control in the digital age
What happened in 2008 was really a shadow banking panic. Institutions that had taken advantage of unregulated markets effectively stuck a gun to the head of regulators and demanded a bailout. It was the equivalent of the banks saying: "Bail our unregulated businesses out (despite the fact we never abided by the rules) or the financial system gets it."

So what's to be done? [...] What our pseudonymous authors propose... is that the functions of money and credit are separated and assigned to the public and the private spheres, respectively... public authorities would retain control of money creation, but credit creation would become fully disintermediated. [...] But how do you prevent the formation of inside money [shadow banking] given that even non-financial firms are making strides in this capacity?

In the authors' opinion it's all down to accounting standards. Their key proposition, consequently, is to redefine what constitutes technical solvency as... The total value of financial assets of a company has to be less than or equal to the value of its equity. As they explain: "This reading highlights that companies have to back assets that are someone else's liability with their own funds, that is, equity. Companies cannot finance credit with someone else's credit."

Over in the public outside-money world, meanwhile, the authors propose that money issuance be fully digitised so that policymakers are able to charge both liquidity fees (negative interest rates) or to distribute unconditional income as and when needed for price stability reasons. As they conclude, in this way the intimate link banking creates between money and credit is broken: "It assigns the current payment function exclusively to money. The monetary authority can exert full control over the quantity of money in circulation, because credit can no longer be transformed into money. Under a systemic solvency rule, credit creation does not lead to money creation."
  • Why banking is flawed and how to fix it - "Under these rules, banks would no longer create money. Rather, independent central banks would take on that task. McMillan suggests they could moderate inflation or deflation by charging companies a fee for gathering liquidity, or by distributing cash directly to citizens."
  • Banking in the Digital Age: Banks Out of Control - "In addition to carefully explaining how the financial sector maneuvered itself into the financial crisis of 2007–08, it presents several unconventional ideas to do away with regulatory capital arbitrage that sticks taxpayers with the bill for bankers' risk taking. The book proposes a fairly straightforward policy framework that promises to reduce shadow banking, decentralize financial services from too-big-to-fail banks, improve regulation, and realign the private and the public sector with transparent monetary policy."
  • The CFA Institute Blog Reviews The End of Banking - "Of course, the monopolist will never adapt freely, as it is only society who has an interest that the competition authority enforces its decisions. The End of Banking shows how the definition of solvency has to be adapted to the digital age. To update the legal rules defining solvency is ultimately a political decision that has to be taken against the interests of the established banking institutions. You cannot expect the institutions who exploit today's flaws in corporate law to renounce their right and to voluntarily upgrade their business model."
  • Will Alternative Finance Bring About "The End of Banking?" [1,2,3] - "The book is basically about the rise and fall of banking. Banking was essential for economic development in the industrial age. But with the digital revolution, it got out of control. Information technology allowed bankers to circumvent regulations, rendering them by and large ineffective. On the bright side, however, information technology allows us to organize a financial system that no longer needs to build on banking. Well, to put it into one sentence: 'The End of Banking' shows that a financial system without banking is both desirable and possible in the digital age... The biggest problem the alternative finance space faces is that they are heavily disadvantaged against banks. Banks have access to deposit insurance, too-big-to-fail guarantees and Federal Reserve liquidity."
posted by kliuless (19 comments total) 53 users marked this as a favorite
A bunch of the links here seem to be Google search results that go via Google's servers before redirecting to the target. They might go away in the future & need replacing with their targets.

Great set of links though - will be reading with interest!
posted by pharm at 11:44 PM on January 21, 2015

[Thanks for the heads-up, I stripped a couple of redirects there.]
posted by goodnewsfortheinsane at 12:18 AM on January 22, 2015

Im a cynic, so I really doubt that there will be any change that will be of real-world benefit to me. Change, sure, but it will be of the meet the new boss, same as the old boss variety. That's why I keep all my money in my mattress...ok, who am I kidding, there is no money.
posted by Literaryhero at 12:44 AM on January 22, 2015

meet the new boss, same as the old boss

Not to disagree at all with what you're saying, but parenthetically I think that could now read as optimism.

I had a boss who was fond of telling the staff "if you always do what you've always done, you'll always get what you always got". I had to point out to him that to most of our staff that was now not a challenge but a promise: and moreover, one we couldn't make good on.
posted by Segundus at 1:18 AM on January 22, 2015 [9 favorites]

I don't pretend to have any thorough understanding of this kind of stuff but cryptocurrencies as mentioned in the first link and the fact that each bitcoin-fragment is intensively tracked makes me wonder whether you could have a currency where each individual unit of it has a different value, and the rules for how those values change could assist in accomplishing various societal and financial system functions.

For example, I wonder if the units of currency that a company pays in dividends to its owners might be permanently attached to that company's actions, so that in the event of some malfeasance or negative externality from the company's business practices being discovered at a later date after the dividends are paid, the profits themselves from that malfeasance or negative externality could be held accountable and could change in value appropriately, rather than whoever reaped the profits getting off scot-free via financial and legal indirections as they do now.

Of course, even if such a system were useful for the above scenario it would likely also just be turned into another tool by which the wealthy and powerful would secure their own control and exploit the poorer and weaker and the disadvantaged. And plus we'd probably all have to become cyborgs and need to have parts of our intellects refitted just to understand and effectively use such a currency, à la "Economics 2.0" in Accelerando by MeFi's own cstross. (The ebook for Accelerando is free to read / Creative-Commons-licensed btw; see the link to his blog at the bottom of the Wikipedia article.)
posted by XMLicious at 2:34 AM on January 22, 2015 [1 favorite]

Thanks for the heads-up, I stripped a couple of redirects there.

The redirects may have been for a reason. I can't access the first link its paywalled. Sure enough that is the case, I can get to the first link when going through Google first.
posted by stbalbach at 4:30 AM on January 22, 2015

I can't access the first link its paywalled.

Google cache is the only way around it I can find right now.
posted by ryanshepard at 4:49 AM on January 22, 2015 [1 favorite]

Great set of links though - will be reading with interest!
I see what you did there!
posted by edheil at 5:32 AM on January 22, 2015 [6 favorites]

Literaryhero: Change, sure, but it will be of the meet the new boss, same as the old boss variety

Seriously, this is worse than the "BSABSVR" retorts from "independents" (who are actually Republicans).

Seriously, your POV is that it doesn't matter what changes happen because nothing will change and everything will always suck. Yay.

AND YET... Somehow 2008 managed to suck lots more than 1997 did. So the solution is we should just accept our fate as flotsam, and do nothing?

OR... we can try to improve things. It won't mean that suddenly there will be no more poor, and the richest person in the world will only have 2.5x as much money as the poorest person in the world, or whatever your vision of economic utopia is - any more than the 14th Amendment ended black oppression, or the Civil Rights Act did. Yet, still, it's getting better for racial equality in the US.

We've illegalized anti-competitive monopolies. That made our economic system stronger. It didn't mean J. Paul Getty died penniless, as he probably deserved. But it got better. We instituted some national welfare programs to help the displaced, disabled, and so on. It got better.

"The rich will probably still find ways to profit" is not an argument; it's whining.
posted by IAmBroom at 6:58 AM on January 22, 2015 [6 favorites]

one weird trick: google the title and click on the link :P
Why banking got out of control in the digital age [cache]

the cache works too, tks! oh and the reuters and CFA reviews also have pretty good overviews.

as for bitcoin, as the authors say, it's a bit(!) of a distraction for various reasons -- like "access to deposit insurance, too-big-to-fail guarantees and Federal Reserve liquidity" + the bottom line for me, besides death, that it's not backed by any tax base (yet?) -- which _i think_ keeps it from having a very good 'store of value' function, but as a 'means of exchange' payments protocol ('unbundling' 'money') it could potentially be adopted, esp ironically if regulated (by the fed/s?) and if we ever get to low-cost sustainable energy... so again the trick (as the authors say ;) is: "To update the legal rules defining solvency [which] is ultimately a political decision that has to be taken against the interests of the established banking institutions. You cannot expect the institutions who exploit today's flaws in corporate law to renounce their right and to voluntarily upgrade their business model."
In the first scenario, a financial crisis hits before today’s financial startups have managed to create sufficient amounts of inside money to become systemically relevant. The short-term debt they created might experience a run, but the government will have no reason to bail out savers. In this case, Silicon Valley’s invasion of Wall Street will fail and the profits of banks and current shadow banking institutions will remain uncontested.

In the second scenario, the aspiring banking institutions from Silicon Valley manage to create such large amounts of inside money that the prospect of their failure intimidates regulators, central banks, and governments. If this happens, government guarantees will be extended to today’s financial startups similarly to how money market mutual funds were guaranteed during the recent financial crisis. As a result, the aspirants will become permanent members of Wall Street. They would have morphed into just another form of banking. No longer will they be a disintermediated and transparent alternative to banking as they like to portray themselves today.

Both scenarios are dire and point to the fundamental underlying problem: In the current regulatory framework, financial innovation ultimately turns into unregulated banking... that manage to transform illiquid loans into inside money and, via the implicit government guarantees that come along with this business model, pass on some of the risk to society.
which leads us to...
Electronic Money: "How and Why to Eliminate the Zero Lower Bound"
posted by kliuless at 7:42 AM on January 22, 2015 [3 favorites]

This all sounds suspiciously like the standard libertarian bullshit about how regulations can't work and are actually bad, the FDIC is evil, so let's create crazy private solutions for it all.
posted by Sangermaine at 7:51 AM on January 22, 2015 [2 favorites]

oh and yea, re: 'it gets better' apparently according to one estimate...
Bribery is 15% of transaction value in global logistics and logistics is 12% of GDP. So 1.8% of every dollar spent by every human on earth is apprehended by a corrupt backdoor transaction just in logistics. [1,2]
taking the shadow banking stat from the FSB of $75 trillion (stock/flow comparisons be damned ;) this is around 100% of global GDP!
posted by kliuless at 7:56 AM on January 22, 2015

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posted by charlie don't surf at 8:32 AM on January 22, 2015

kliuless: oh and yea, re: 'it gets better' apparently according to one estimate...
Your data has nothing to do with "getting better or worse". Are you claiming that this corruption is a new thing here on Earth?

Most importantly, that has nothing to do with the idea that we try to should fix things even if they aren't likely to be resolved perfectly, which was my fundamental point.
posted by IAmBroom at 8:53 AM on January 22, 2015

i wasn't disagreeing with you :P it was more of a 'if you think that's bad' in a corruption gets a lot of attention but the officially sanctioned, right in front of our nose, stationary bandit kind too often gets a pass; does this have: "nothing to do with the idea that we try to should fix things?" it's a call to action!
posted by kliuless at 9:02 AM on January 22, 2015

goodnewsfortheinsane: “[Thanks for the heads-up, I stripped a couple of redirects there.]
One presumes they were Google redirects because they're links to, e.g. The Financial Times, and that's the easiest way to read the article without a subscription. It was to save us the trouble of searching for the title on Google ourselves, because a link from Google allows access to the article where a direct link invokes the paywall.

As for the content, I know there's no putting the toothpaste back in the tube, but I'd dearly love real, state chartered, community based banking to come back into fashion. I don't think the FIRREA was a net positive for our local economies. This next round of banking consolidation isn't likely to be good for people either.
posted by ob1quixote at 10:53 AM on January 22, 2015

That's sorta bonkers. How about we look to countries with well regulated TBTF banks like Canada rather than try to imagine a revolutionary future?
posted by jpe at 3:51 PM on January 22, 2015

-Shedding Light on Shadow Banking - "The Canadian authorities will need to decide how to implement the reforms that are agreed at the global level. Some measures that could be considered include:"
  • Establishing consistent standards for how haircuts are set on repo transactions, including numerical minimum haircuts for some types of transactions;
  • Requiring that originating securitized products have enough skin in the game to align their incentives better with those of investors;
  • Making money market funds less vulnerable to runs, through an appropriate combination of capital and liquidity requirements, and restrictions on withdrawals;
  • Establishing a clear and consistent framework for regulating other shadow banking institutions;
  • Limiting banks’ exposure to shadow banking activity; and
  • Providing the right degree of transparency around many aspects of shadow banking, so that market discipline can work better.
-Monitoring and Assessing Risks in Canada’s Shadow Banking Sector
-Shadow banking enters the spotlight; will an economic shadow follow?
-The shadow banking sector has been feasting on government-insured mortgages

or alternatively from the reuters link:
It starts with an accounting distinction. Bank assets would be classified either as real, in other words claims on physical or distinct immaterial objects; or as financial, assets which appear as liabilities on the balance sheet of some other institution.

Next, regulators would ensure that financial assets were 100 percent-backed by common equity. And lastly, in a combined regulatory and accounting change, the value of a company’s real assets would have to be greater or equal to the value of the total of its liabilities.

This final fix is where the book goes beyond previous proposals to mend finance through concepts such as narrow- or limited-purpose banking. The implication of McMillan’s recommendation is that many derivatives, for which a counterparty’s losses could be infinite, would be banned. What’s more, the intended application to financial and non-financial companies alike would include shadow banking, addressing the so-called “boundary problem” of regulation that other approaches to improve the system fail to solve.
which do you think would be easier to sustainably monitor and enforce over the long run?
posted by kliuless at 4:26 PM on January 22, 2015

For example, I wonder if the units of currency that a company pays in dividends to its owners might be permanently attached to that company's actions

Fascinating idea.

Unfortunately, I'm afraid that in the real world, it would wind up like the fact that 80% (or whatever) of US currency has traces of drug residue on it, and thus is probably drug money, and thus give it to the nice officer right now before he shoots you.
posted by Hatashran at 8:08 PM on January 22, 2015 [1 favorite]

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