#0 Banks Are Obsolete - Charles Hugh Smith

Banks Are Obsolete: 

The Entire Parasitic Sector Can Be Eliminated

Source

Charles Hugh Smith [with comments by David Burton] 

What else can we do with the $1.25 trillion we'll save by eliminating these obsolete financial middleman parasites? [His words, not mine] A lot.

Technology has leapfrogged the banking sector, rendering it as obsolete as buggy whips. So why are we devoting 9% of our economy to an obsolete parasite? [His words, not mine]

chart courtesy of Market Daily Briefing

Software and existing non-Wall Street / too-big-to-fail institutions could replace the entire Wall Street / banking sector and drop costs to .5% of GDP.

[All your software, etc. the internet, etc. could also go up in smoke tomorrow and then what would you really have? The weakest pencil is stronger than the sharpest memory. Perhaps the ancients did their business on some other material that has long since passed away, but they left pretty good records on clay tablets and anything they really wanted remembered they chizelled into stone. I assure everyone, having tasted first hand of the computer programming game, that there are quite a few of these people who have grandiose ideas and no common sense.]

The pull of habit and propaganda is so strong that most people haven't even recognized that software and the Web can replace the entire financial / banking sector for a fraction of the cost of the current parasitic system.

[The risks are also astounding, as are the further casual throwing to the wind of real responsibility, which is one reason things do not work as well as they used to. Once a pattern of blithe irresponsibility sets in, what happens when it all suddenly ... just doesn't work, for technical reasons, and maybe there's a big deal involved? You know what? I'd trust an old Fezziwig with his room of counters, his pen and his books before I'd trust any programmer. And so will you when this wild fantasy we've been on called the electronic age comes to a screeching halt. What will you do then? Idiots!]

The benefits of eliminating the financial / banking sector are immense and far-reaching.

[No doubt. But a great streamlining, such as we're advocating on this blog, is quite different from total elimination of functions.]

What exactly do banks do?

1. They hold depositors' money. [IE's would do this.]
2. They act as a clearing house for payments, transferring funds from payor to payee. [IE's would do this.]
3. They issue loans on a fractional reserve basis, i.e. a few dollars in cash deposits supports $100 in loans. [IE's would NOT do this.]
4. They originate and trade derivatives, run high-speed trading desks, operate various money-laundering and embezzlement schemes, influence elected officials with lobbying and campaign contributions and subvert both free market capitalism and democracy at every turn. [and obviously no IE would ever be involved with any of this.]

This entire parasitic middleman sector could be replaced with automated digital clearing houses and crowdfunded or non-bank loans.

[This financing concept is largely possible through the present proposed VEN design and could be promoted on the ground as well as on the internet, probably even better.]

Why do we need banks when loans can be crowdfunded?

[We don't. But totally automating all credit clearing, without at least some technical and physical backup and oversight responsibility is risky as glitches happen all the time. There is also of course a tendency to cast all privacy to the wind and anonymity in sales goes right out the window. People don't care now, but what happens when the lights go out, the grid collapses or who knows what cause of “too big to fail” will strike us next?]

The web and software now enable the elimination of the entire middleman skimming operation of banking.

[If eliminating it (the entire middleman skimming operation of banking) couldn't have been done before, what makes you think that they wont adapt to new technologies and still be in charge? It could have been done before, but few knew anything about the subject that was always near the centre of everything they did in life – money – and so it was allowed to continue.]

The entire notion that 100 savers put their money in a bank which then buys a mortgage with their savings and sells it as a security that supports a pyramid of derivatives is obsolete. All that goes away with the banking sector.

[Right. Well, we can see how well crowdfunding may or may not work when it comes to real projects where there is no instant return or yield on their money. That's what real honest investment requires. We know how best to do that on the ground person to person rather than through the impersonality of a computer screen.]

But what about holding deposits? We already have two institutions that could serve this role: credit unions and the post office.

[Credit unions are creatures of banks, just as savings and loan associations were. The post office is a private corporation operated under government sanction like Amtrak. Post offices could perhaps do more amazing things than they do now, but of course they're Federal and that means they have the say, not you or I. No, we need private people (private institutions) to handle things that are essentially private. Again, all governments and the present banking structure have totally blown their credibility with the public on privacy matters.]

Many other advanced nations have long combined postal and simple banking services: France and Japan come to mind.

[So what? Are we supposed to play “follow the leader” every time some other state uses some statist solution to solve a problem they caused?]

US Post Office Could Rack Up Billions By Offering Money Services--NPR (via Joel M.)

[A statist solution, advocated and advertised by statists over a state sponsored network that the public is supposed to feel guilty for not supporting, etc. You know what? Lysander Spooner tried to open a competitive postal service during the last half of the 19^th century and the state shut him down. Look into it.]

Please note that what I am suggesting is a transparent open market for these services provided by a range of enterprises and institutions. Assemble a marketplace of local credit unions, the post office, enterprises that handle payor-payee transactions such as Dwolla and PayPal, and you have a wide spectrum of choices to suit every need.

[So when do I get one of those machines in my house attached to my computer that sucks cash and what happens to that cash and what if it jams and ...]

As for business loans: you can get small-business loans on PayPal right now. It's called Working Capital, and the borrower is given the total amount due right up front.

[No doubt, but they use the usual credit scores from the usual places -that doesn't go away- and whatever you suppose to the contrary, none of it is ever your money. Of course, nothing is private anymore except what those way above our heads are doing from one minute to the next, that we should even bother to care.]

As for the commercial paper market: there is no technical reason why a transparent exchange couldn't enable borrowers and owners of capital to set short-term loan rates via transparent bidding with automated software.

[So, since this is speculation pure and simple, and tied to their banking and corporate models, we don't care how they decide to do any of it since we don't see how we would be doing any of this.]

The obsolescence of banking includes the Federal Reserve--the ultimate middleman skimming operation. [His words, not mine] But what about providing liquidity in credit panics? Well, to start with, once the banking sector is gone then the concentrations of risk and the obscuring of risk that go hand in hand with banking also disappear-- the forces that generate panics will have been dispersed. Those forces will have vanished along with the middleman financial sector that created all the risks, speculative excesses and panics. If there were a liquidity crisis, the Treasury could create and lend whatever funds were needed.

[LOL, once again the US Treasury becomes the phantom “bank of last resort” since people cannot wrap their minds around anything better. Mommy, I have a liquidity crisis!]

But what about manipulating interest rates and other forms of financial repression? [His words, not mine] Interest rates would be set by millions of borrowers and owners of capital in transparent transactions.

[Great! You know what I always laugh at? Ideas to “democratize” something bad, expecting that it will then be good, because everyone gets to do it. Usury is asking something that wasn't created in the first place to be paid back as a price for borrowing what is already in existence. Usury only occurs with money, nothing else, because everything else has value and money strictly speaking is only a means to measure value. Therefore in every single case involving genuine usury, the actual amount of money is diminished, artificially creating a built in scarcity that eventually allows the usurer to own everything. There are ways to finance legitimate business without usury. Speculation in nine tenths of the cases is illegitimate.]

What about all those great investing services offered by big banks and Wall Street? As many have observed, automated index funds outperform 99% of fund managers over 10 year time frames. So Wall Street is also obsolete.

[If there are no humans involved in trading “securities” then the market becomes a game entirely run by computer programs. That's what it is now. Are you paying attention? Is your IRA or 401K involved with any of this stuff now? Aren't you getting a little nervous about any of it, or are you just going to “let nature take its course” and all your retirement money with it, assuming that you haven't reached the point where you are now aware that none of the money you've ever used is actually yours ... unless you made a trade with a piece of precious metals you had. Some will say, “but you agree with Greenspan that gold isn't real money.” It's the closest thing to actually having paid something with money that was actually yours. Perhaps THAT is the point with precious metals barter.]

Once we get rid of these obsolete middleman parasites--Wall Street, the banking sector and the Federal Reserve-- [His words, not mine] we have a delightful question to answer: what else can we do with the $1.25 trillion we'll save every year by eliminating these obsolete financial middleman parasites? A lot.

[The author makes the capital error of assuming that any of the money people use is ever theirs to begin with. That pleading for liquidity, borrowed or otherwise, from some central authority, oh my yes, the US Treasury, for godsakes! There are better ways of doing everything without ditching responsibility for doing them correctly.]