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Post by Dan Hoglund on Jan 8, 2019 13:26:41 GMT
This might be a stupid idea or obvious... Anyway, todays monetary system is a two tier system. We have 1st tier central bank money and 2nd tier private bank money. Credit cards are basically just a way to manage 2nd tier money debt.
Private bank money are created when loans are taken from private banks. When person A takes a loan from bank B they swap liabilities and assets. The liabilities of Bank B held in A's bank account are considered money.
Now what if bank B decides to outsource this money creation and let the customers take care of it themselves? They just provide the infrastructure for it. Instead of being a taxi company they would be the Uber of banking!
What is needed? Well some sort of digital marketplace just like a stock market. Sellers of debt comes to this market with some sort of credit score, buyers pay with liabilities defined in this system, let's call these liabilites 3'rd tier money. Just as other types of money it only gets created when debt is bought. Buyers and sellers can be anonymous to each other and the system doesn't even need to care, if it makes sure all the assets and liabilities created stays in the system it just needs to keep track of what 3'rd tier money is backed by what assets. And this matching could be on a unit by unit basis. A positivt balance of 3:rd tier money could be backed by houndreds of sources of assets and each unit would know it's source.
Everyone who has acces to a 3'rd tier money account can exchange them with eachother as payment for anything. If someone has a positive balance of 3'rd tier money and want 2:nd tier money, there will be assets backing that 3'rd tier money that can be located by the system, automatically bought back from the holders, and given to Bank B in exchange for Bank B creating it's own liability.
Thoughts?
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Post by JP (admin) on Jan 11, 2019 18:40:28 GMT
We sort of already have a third tier: fintechs (ie mPesa, Alipay, p2p lenders etc). Fintechs build on top of the infrastructure provided by banks.
Mind you, fintechs don't actually do what you're talking about, creating new money. A deposit held at a fintech is always 100% backed by an underlying deposit at a bank, so fintech money is little more than a facsimile of bank money. The greatest challenge to switching from a full reserve fintech model to one in which money "gets created when debt is bought" is the regulatory framework. To become a money creator, one needs a bank license, and these are expensive.
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Post by Dan Hoglund on Jan 11, 2019 23:32:46 GMT
We sort of already have a third tier: fintechs (ie mPesa, Alipay, p2p lenders etc). Fintechs build on top of the infrastructure provided by banks. Mind you, fintechs don't actually do what you're talking about, creating new money. A deposit held at a fintech is always 100% backed by an underlying deposit at a bank, so fintech money is little more than a facsimile of bank money. The greatest challenge to switching from a full reserve fintech model to one in which money "gets created when debt is bought" is the regulatory framework. To become a money creator, one needs a bank license, and these are expensive. Hi JP! Yes, it has to work by creation from new debt to count as a new tier in my mind. Is that what defines money creation then? Because third tier money wouldn't be fungible with 2nd tier money, it would all live inside the ecosystem of whatever fintech that offers it and could just as well be called tokens and no one who's not part of the system would consider it money. |
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Post by JP (admin) on Jan 13, 2019 11:51:26 GMT
We sort of already have a third tier: fintechs (ie mPesa, Alipay, p2p lenders etc). Fintechs build on top of the infrastructure provided by banks. Mind you, fintechs don't actually do what you're talking about, creating new money. A deposit held at a fintech is always 100% backed by an underlying deposit at a bank, so fintech money is little more than a facsimile of bank money. The greatest challenge to switching from a full reserve fintech model to one in which money "gets created when debt is bought" is the regulatory framework. To become a money creator, one needs a bank license, and these are expensive. Hi JP! Yes, it has to work by creation from new debt to count as a new tier in my mind. Is that what defines money creation then? Because third tier money wouldn't be fungible with 2nd tier money, it would all live inside the ecosystem of whatever fintech that offers it and could just as well be called tokens and no one who's not part of the system would consider it money. Third tier money, and here I'm thinking mobile money in places like Kenya, needn't be entirely hived off. Mobile money systems can be made interoperable with each other, so that customers of different networks can interact. These third tier networks even be designed to work directly with the second layer, ie a payment can originate from a mobile money user and end up in the account of a second tier bank customer. |
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Post by Dan Hoglund on Jan 14, 2019 21:06:03 GMT
I'm not familiar with those but I'm guessing that kind of mobile money is not originated from creation of new debt? The way I can see it could work to get an exchange mechanism from third to second tier money when it is all newly created is that the fintech that is providing the infrastructure is also a bank. Then whenever someone wants to get regular bank account money the bank takes over the assets (legal contracts) backing the 3rd tier money. That's essentially where we would be right after a person took out a regular loan from a bank although the backing would be much more fragmented here since I suggested third tier money could be backed on a unit by unit basis. I mean all money is backed so my idea here is to outsource the creation to the public but keep track of exactly how each unit originated and lock the backing in the creators accounts so they can be taken over by the bank on demand to provide the exchange mechanism.
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Post by Antti Jokinen on Jan 16, 2019 12:39:24 GMT
keep track of exactly how each unit originated and lock the backing in the creators accounts so they can be taken over by the bank on demand to provide the exchange mechanism. Hi, Dan! First, and unrelated to the quote above, I could think of money market (mutual) fund shares as a 3rd tier of money. Technically they are not exactly what you seem to be looking for, but the end result is more or less the same: someone holding what is considered as safe as money, tradable to more traditional bank deposits, while there are debtors on the LHS of the balance sheet. Second, related to the quote above, do you mean that if the specific backing went sour, then the holder of a specific deposit/credit would suffer a 1-to-1 loss? If so, that doesn't sound like money to me. It sounds like a system for tracking owner-/holdership of specific bonds/obligations. For these credits to be considered money, they should always trade at par with bank deposits. You will not achieve that if you link them to some specific debt obligations. |
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Post by Dan Hoglund on Jan 17, 2019 11:54:36 GMT
Hi, Dan! First, and unrelated to the quote above, I could think of money market (mutual) fund shares as a 3rd tier of money. Technically they are not exactly what you seem to be looking for, but the end result is more or less the same: someone holding what is considered as safe as money, tradable to more traditional bank deposits, while there are debtors on the LHS of the balance sheet. Second, related to the quote above, do you mean that if the specific backing went sour, then the holder of a specific deposit/credit would suffer a 1-to-1 loss? If so, that doesn't sound like money to me. It sounds like a system for tracking owner-/holdership of specific bonds/obligations. For these credits to be considered money, they should always trade at par with bank deposits. You will not achieve that if you link them to some specific debt obligations. Hi Antii! I actually didn't think this though in all details, like what happens when people can't pay back what they owe to the person that gave them the loan.  But I see no reason why it wouldn't trade at par with bank deposits as long as there is an exchange provided by the bank trading at 1-1? But that causes follow up questions, like why would people ever own 3rd tier money if they can become worthless on a per unit basis. Or why would the Bank take over bad backing? Well, perhaps the system is able to provide a better interest rate than regular bank accounts? Why not, some of the work is outsourced. And if the backing is fractioned per unit it would be rare that any total sum of units is all that bad. Maybe on some trades the bank will take a loss but it is still worth it as it provides the exchange mechanism keeping the whole system going. Maybe this is all a bit too far fetched with this unit by unit backing idea, I'm not sure. |
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Post by Antti Jokinen on Jan 17, 2019 19:28:16 GMT
Dan, let me try to test your idea a bit more.
You said in your first post:
You say that debt is bought and paid with liabilities, but the only one who has a liability in this system seems to be the one who has sold/incurred debt. You talked about bank liabilities in the traditional system, but said that in this system the bank is just providing the infrastructure (incl. accounting system, I assume). So if you say that people trade liabilities in this system, then they actually are trading (divisible) IOUs of the debtors. Is that what you had in mind? At least that ties with your idea of backing on a unit-by-unit basis, too.
I don't understand how the buyers of debt can pay for it with 'liabilities defined in this system' that are created only when debt is bought. Would you like to elaborate this? Yes, a traditional bank can in some way be said to be "buying" debt of the debtor and "paying" for it with its own liabilities (money) it creates at that moment, but that language is in itself misleading, and turns into nonsense in the situation you have in mind.
When it comes to 'fintech money' mentioned by JP, I agree that it obviously fails the test. As JP explains, that's because these fintechs only take existing money on to the LHS of their balance sheet (B/S) when they issue new money as credits on the RHS of their B/S. Unlike you, Dan, suggest, the test cannot be about new debt, though, because traditional banks also create new money when they buy already existing (non-money) debt instruments, like government bonds. So I'd suggest the test is really about the contents of both sides of the B/S. (1) Is there stuff on the RHS which is called 'money'? (2) Does the amount of that stuff exceed the amount of stuff that is called 'money' on the LHS? If the answer to both of these questions is 'yes', then the test is passed. We have an entity which is able to 'create money'.
How does that sound?
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Post by Dan Hoglund on Jan 18, 2019 7:53:58 GMT
It's confusing, perhaps my understanding of banking is too limited for this discussion. What do you mean by called "money"? To me it would be money if it trades on par with the two other tiers of money and could be used for payments, but it could be called whatever, like tokens. Can you explain why you think it is misleading to say that banks buy debt with its own liability or by creating a liability? That's how I understand it to work. And why does it matter that banks also can create money by buying already existing debt? So in my, perhaps simplified view then, before a regular loan is made we can model that as the B/S of the bank and the borrower starting at zero, and after they will have created each others assets because the assets are basically promises.
Like this: (http://brown-blog-5.blogspot.com/2013/03/banking-example-12-loand-deposit.html)
Balance sheets after x takes a $100 loan from A:
Bank A
Assets Liabilities
$100 loan to x $100 deposit for x
Person x
Assets Liabilities
$100 deposit at A $100 borrowing from A
So they both have liabilities and assets created. In the system I suggest the first step would be the same but fractioned as a many to many relationship (buyers and seller are pooled together) and instead of dollars an invented token is used and instead of Bank other persons are the counterparty. So all entities participating would have liabilities created right after the first transaction.
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Post by Antti Jokinen on Jan 20, 2019 9:08:07 GMT
Dan, I said "called money", because there's no agreed definition of what's money and what's not (that's why JP talks about moneyness). Today most of the people consider, and call, demand deposits 'money', but in the 1800s there were many who didn't consider them money. What you are after is 3rd tier credit balances (the term I prefer) that would be called money by many enough people. That stuff will only trade at par with currency at all times if it is considered money, widely used, and thus it is under an explicit or implicit government guarantee. (That's more like a historical than a theoretical fact, I admit. So much here depends on human judgement that you cannot build a waterproof theory to explain it.) We don't need to agree on the above, though, to continue the more technical discussion. Where I think you go wrong is in extending the language used in the case of a bank and a private person to a case with two private persons. What kind of a liability does a buyer of debt have in your system? A depositor has no liability in the traditional system, and the buyer of debt in your system is in a comparable situation. Isn't he? Another issue: The buyer of debt has to come to the table with something to give up. Either he must give up 1st-2nd tier money or real goods. Otherwise he cannot end up with 3rd tier money. It wouldn't make any sense. So what does he bring to the table? Your setup looks in many ways a lot like a LETS system. There, too, the one who provides the infrastructure doesn't have any liabilities. It's between individuals as debtors and creditors. The money (credit balances) is backed by debt of individuals. |
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But I see no reason why it wouldn't trade at par with bank deposits as long as there is an exchange provided by the bank trading at 1-1? But that causes follow up questions, like why would people ever own 3rd tier money if they can become worthless on a per unit basis. Or why would the Bank take over bad backing? Well, perhaps the system is able to provide a better interest rate than regular bank accounts? Why not, some of the work is outsourced. And if the backing is fractioned per unit it would be rare that any total sum of units is all that bad. Maybe on some trades the bank will take a loss but it is still worth it as it provides the exchange mechanism keeping the whole system going. Maybe this is all a bit too far fetched with this unit by unit backing idea, I'm not sure.