Bank of England’s Chief of Financial Stability: Internet Technology Will Break Up Big Bank Monopoly

George Washington's picture

money Bank of Englands Chief of Financial Stability: Internet Technology Will Break Up Big Bank Monopoly


We don’t need giant banks.

As we noted in July, small banks do much more lending than big banks:

Do we need to keep the TBTFs to make sure that loans are made?




USA Today points out:

Banks that received Federal assistance during the financial crisis reduced lending more aggressively and gave bigger pay raises to employees than institutions that didn’t get aid, a USA TODAY/American University review found.




The amount of loans outstanding to businesses and individuals fell 9.1% for the 12 months ending Sept. 30, 2009, at banks that participated in TARP compared with a 6.2% drop at banks that didn’t.

Dennis Santiago – CEO and Managing Director of Institutional Risk Analytics (Chris Whalen’s company) – notes:

The really shocking numbers are in the unused line of credit commitments of banks to U.S. business. This is the canary number I like to look at because it is a direct expression of banking and finance confidence in Main Street industry. It’s gone from $92 billion in Dec -2007 to just $24 billion as of Sep-2010. More importantly, the vast majority of this contraction of credit availability to American industry has been by the larger banks, C&I LOC from $87B down to $18.8B by the institutions with assets over $10B. Poof!

Fortune reports that smaller banks are stepping in to fill the lending void left by the giant banks’ current hesitancy to make loans. Indeed, the article points out that the only reason that smaller banks haven’t been able to expand and thrive is that the too-big-to-fails have decreased competition:

Growth for the nation’s smaller banks represents a reversal of trends from the last twenty years, when the biggest banks got much bigger and many of the smallest players were gobbled up or driven under…


As big banks struggle to find a way forward and rising loan losses threaten to punish poorly run banks of all sizes, smaller but well capitalized institutions have a long-awaited chance to expand.

BusinessWeek notes:

As big banks struggle, community banks are stepping in to offer loans and lines of credit to small business owners…


At a congressional hearing on small business and the economic recovery earlier this month, economist Paul Merski, of the Independent Community Bankers of America, a Washington (D.C.) trade group, told lawmakers that community banks make 20% of all small-business loans, even though they represent only about 12% of all bank assets. Furthermore, he said that about 50% of all small-business loans under $100,000 are made by community banks…


Indeed, for the past two years, small-business lending among community banks has grown at a faster rate than from larger institutions, according to Aite Group, a Boston banking consultancy. “Community banks are quickly taking on more market share not only from the top five banks but from some of the regional banks,” says Christine Barry, Aite’s research director. “They are focusing more attention on small businesses than before. They are seeing revenue opportunities and deploying the right solutions in place to serve these customers.”

Fed Governor Daniel K. Tarullo said:

The importance of traditional financial intermediation services, and hence of the smaller banks that typically specialize in providing those services, tends to increase during times of financial stress. Indeed, the crisis has highlighted the important continuing role of community banks…


For example, while the number of credit unions has declined by 42 percent since 1989, credit union deposits have more than quadrupled, and credit unions have increased their share of national deposits from 4.7 percent to 8.5 percent. In addition, some credit unions have shifted from the traditional membership based on a common interest to membership that encompasses anyone who lives or works within one or more local banking markets. In the last few years, some credit unions have also moved beyond their traditional focus on consumer services to provide services to small businesses, increasing the extent to which they compete with community banks.

Thomas M. Hoenig pointed out in a speech at a U.S. Chamber of Commerce summit in Washington:

During the recent financial crisis, losses quickly depleted the capital of these large, over-leveraged companies. As expected, these firms were rescued using government funds from the Troubled Asset Relief Program (TARP). The result was an immediate reduction in lending to Main Street, as the financial institutions tried to rebuild their capital. Although these institutions have raised substantial amounts of new capital, much of it has been used to repay the TARP funds instead of supporting new lending.

On the other hand, Hoenig pointed out:

In 2009, 45 percent of banks with assets under $1 billion increased their business lending.

45% is about 45% morethan the amount of increased lending by the too big to fails.


Indeed, some very smart people say that the big banks aren’t really focusing as much on the lending business as smaller banks.


Specifically since Glass-Steagall was repealed in 1999, the giant banks have made much of their money in trading assets, securities, derivatives and other speculative bets, the banks’ own paper and securities, and in other money-making activities which have nothing to do with traditional depository functions.


Now that the economy has crashed, the big banks are making very few loans to consumers or small businesses because they still have trillions in bad derivatives gambling debts to pay off, and so they are only loaning to the biggest players and those who don’t really need credit in the first place. See this and this.


So we don’t really need these giant gamblers. We don’t really need JP Morgan, Citi, Bank of America, Goldman Sachs or Morgan Stanley. What we need are dedicated lenders.


The Fortune article discussed above points out that the banking giants are not necessarily more efficient than smaller banks:

The largest banks often don’t show the greatest efficiency. This now seems unsurprising given the deep problems that the biggest institutions have faced over the past year.

“They actually experience diseconomies of scale,” Narter wrote of the biggest banks. “There are so many large autonomous divisions of the bank that the complexity of connecting them overwhelms the advantage of size.”

And Governor Tarullo points out some of the benefits of small community banks over the giant banks:

Many community banks have thrived, in large part because their local presence and personal interactions give them an advantage in meeting the financial needs of many households, small businesses, and agricultural firms. Their business model is based on an important economic explanation of the role of financial intermediaries–to develop and apply expertise that allows a lender to make better judgments about the creditworthiness of potential borrowers than could be made by a potential lender with less information about the borrowers.


A small, but growing, body of research suggests that the financial services provided by large banks are less-than-perfect substitutes for those provided by community banks.

It is simply not true that we need the mega-banks. In fact, as many top economists and financial analysts have said, the “too big to fails” are actually stifling competition from smaller lenders and credit unions, and dragging the entire economy down into a black hole.

As we pointed out last year in a post entitled “Do We Need Banks, Or Can We Cut Out the Middleman?”, the Internet may render all traditional banks unnecessary:

The big banks do very little traditional banking. Most of their business is from financial speculation. For example, less than 10% of Bank of America’s assets come from traditional banking deposits.

Time Magazine gave some historical perspective in 1993:

What would happen to the U.S. economy if all its commercial banks suddenly closed their doors? Throughout most of American history, the answer would have been a disaster of epic proportions, akin to the Depression wrought by the chain-reaction bank failures in the early 1930s. But [today] the startling answer is that a shutdown by banks might be far from cataclysmic.***

Who really needs banks these days? Hardly anyone, it turns out. While banks once dominated business lending, today nearly 80% of all such loans come from nonbank lenders like life insurers, brokerage firms and finance companies. Banks used to be the only source of money in town. Now businesses and individuals can write checks on their insurance companies, get a loan from a pension fund, and deposit paychecks in a money-market account with a brokerage firm. “It is possible for banks to die and still have a vibrant economy,” says Edward Furash, a Washington banks consultant.

Yahoo Finance says we don’t need banks since we have peer to peer capacity:

There was a time when banks were the obvious place to go if you needed a loan, whether as an individual or business. However, with the economic difficulties of the past few years, they have become increasingly reticent about handing over any of their cash, despite Government intervention.


Thankfully a new way of borrowing money has come to the fore — peer-to-peer lending — and it offers an opportunity for both borrowers and investors alike.

In 2007, Ode provided a great historical perspective of the issue:

Banks’ shortcomings have been recognized for centuries—and for centuries, groups of people have been organizing themselves to take advantage of alternatives. In the mid-19th century, a pair of German economists extended the growing idea of “co-operative societies” to credit. By 1864, a group of farmers had joined together to secure loans for livestock, seeds and farming equipment, forming one of the first credit unions, a co-operative, community-based banking model that still thrives.


More recently, in the last 30 years, the rise of microcredit has brought many small loans to people in poor countries and rural areas who had no access to traditional banks or could not present the kind of bona fides a bank requires. Microcredit has sparked a revolution in the international development community, proving the existence of plenty of credit-worthy people who are simply overlooked by traditional banks.


Combine the principles of microfinance and online social networking, and you get a new phenomenon: peer-to-peer lending, or social lending as it’s sometimes called. In the last two years, more than a dozen websites have been launched to connect borrowers and lenders—no banks required.




Peer-to-peer lending appeals to lots of people. Americans already lend more than $89 billion to friends and family every year, according to Federal Reserve estimates. Nearly 75 percent of Britons said they’d consider using a peer-to-peer website to borrow or lend, and some estimates suggest the global market for peer-to-peer lending will grow to more than $5 billion by 2010.




While cutting out the middleman may be instinctively attractive to many people, it can have an economic advantage too. Compared to credit cards, peer-to-peer lending offers borrowers really attractive interest rates—often half what they might expect to pay Visa or MasterCard.


And peer loans are often structured more fairly. A debt can be paid off in installments, unlike with credit cards, which can trap borrowers under debt that snowballs every month. For lenders too, these loans offer a higher rate of return than what they can earn on savings accounts. Interest is important, say small lenders.




It is that goal—getting capital to people who need it at reasonable rates—that creates a strong sense of purpose and community in social lending. The sites promote personal ties between lenders and borrowers. And with the global reach of the Internet, borrowers no longer need to know someone with money to secure a loan. By the same token, lenders often feel they’re helping a real person get through a bad patch or realize a dream.


Traditional bankers have a hard time seeing it that way. “They’re dumbfounded,” says George Hofheimer, chief research officer for the Filene Research Institute, a Wisconsin firm that studies consumer finance. “Why would anyone lend money to strangers?” The banking establishment, after all, considers itself expert at evaluating the risks involved in lending money. Social lenders concede that point. Lending is risky, and peer-to-peer sites often use the same tools—credit reports, income verification—to judge how stable a borrower is.


But banks also have a vested interest in remaining the middleman, and they’ve never been quick to adapt to change. Industry observers point to the success of the online bank ING Direct, which caught brick-and-mortar banks unprepared, and say peer-to-peer lenders may have a similar effect.

Open Democracy points outs the two main banking functions – which could hypothetically be provided by third parties:

A lot of people are busy trying to figure out how to make banks better. There is anger about what has gone on and puzzlement about the apparent inability of anyone to start doing something about it. [W]e seem to be frozen in a technical discussion of bank separation, capital adequacy, product authorisation, remuneration and incentives, or taxation. All worthwhile subjects in their way, but guaranteed to keep the sans-culottes at home.


So let’s ask another question. Why do we need banks – what are they for?




Loosely speaking, banks [through the Federal Reserve system] make money. Banks are not the only entities that do this, but they are the ones whose purpose it is to do this.




The other thing that banks (but again, not only banks) do, is to record and execute monetary transactions. In return for transaction fees, they hold and manipulate the data relating to people’s accounts with them. We are all either debtors or creditors of banks and we need to have accounts at banks because the trust system that banks represent is the required medium for nearly all financial transactions. When I transfer a sum of money to you, I simply instruct my bank to initiate a sequence of entries in its books and those of your bank.


In 1976 F.A. Hayek published a short book called Denationalisation of Money. It can be downloaded free from the link. Hayek conceived the essay as a response to the endemic debasement of currency by states addicted to inflation. He argued that legal tender laws should be abolished and that private institutions should be allowed to issue currencies in their own name.




Hayek understood that technology existed or would soon exist to price and complete even small everyday transactions real-time in several currencies at once and he expected that data on bank capital and money issuance could be gathered and disseminated without trouble.


But back in 1976 there was no alternative technical model of how monetary transactions might be carried out, and so whilst Hayek foresaw a world without central banks, it was impossible to conceive of one without banks. Nevertheless, it’s an elegant and in some ways compelling idea that addresses the problem of monetary discipline where states or central banks may be unwilling or unable to exercise control and private credit creators have every incentive to issue as much of this publicly guaranteed money as they can.




Which brings us to Bitcoin. Launched a couple of years ago and still in its infancy, it calls itself a peer-to-peer virtual currency. This means that instead of a bank, the collective network of users maintains a complete encrypted record of bitcoin (“BTC”) transactions and how many BTC each user has. Payments involve a public-private key exchange so that only valid identities can participate and each BTC can only be transmitted once. Because both parties have the complete data set, no external trust system is required. It’s a mechanism that removes the need for us to transact through banks.


At a macro level, the total number of BTCs in issue will approach a known fixed limit at a geometrically reducing rate (as in Zeno’s paradox, never quite reaching it) and expansion of the money supply takes place through the collective computation of the network. The advantages are claimed to be resilience, safety, absence of transaction costs, decentralisation, international acceptance, and no debasement. Because no physical currency is involved, arbitrarily small decimal units of BTC are possible. If convenient, BTC units could be subdivided or consolidated merely by a network-agreed software change. The monetary authority is therefore the network of users and their machines, which once it has reached a reasonable size becomes hard for even a super-computer user to dominate.


Even if we no longer need banks to store and handle our money, the BTC system, like any other currency, allows credit creation through fractional reserve banking. The BTC money supply could therefore exceed the number of BTCs in issue. However, without a BTC central bank, the imprudent lender may well go bust. It will be interesting to see how regulators deal with mainstream banks that acquire significant assets and liabilities in BTC. They might outlaw the BTC operations of regulated entities, but could they really close down an unregulated global user network?


It remains to be seen whether this is an advance of democratic self-determination. At this stage I would be optimistic, especially if Bitcoin’s proof-of-concept encourages others to develop distinct, communicating architectures that would create not just a digital currency but a digital currency exchange. There are some fascinating possibilities here:

  1. We may soon not need banks to carry out monetary transactions or keep our money. The benefit in terms of near-zero transaction costs, nearly immediate confirmation of payment (are you still waiting 4 days for your cheque?), reduced credit risk, security and resilience would be immense.
  2. Credit creation becomes an activity not linked to the transaction-handling franchise. It is also no longer underwritten by taxpayers. Inflationary behaviour requires public consent – not the taxpayer or voter public but the public that uses the particular currency.
  3. Because all transactions are peer-to-peer, people can switch their currency holdings at will and costlessly. How much people trade, if at all, depends only their beliefs about the riskiness of the currencies on offer.
  4. If peer-to-peer currency becomes mainstream, governments will have to decide whether to accept it and put the banks out of business, or refuse it and drive it underground. Either way, the relation of state and citizen in economic management is likely to be radically changed.

[Subsequently, serious allegations have been raised about the reliability and stability of Bitcoin. The question of whether or not Bitcoin is a good system is beyond the scope of this post.]


Venture capitalist Michael Eisenberg wrote in 2009:

Why do we need banks at all? If it sounds crazy – a world without banks – it is not.


We have become so used to storing money in banks and talking to our banks that we have forgotten what they do. Simply put, banks borrow money from you, and lend it out to borrowers at a higher rate than they pay you in interest. That is it: Banks are lenders. They provide credit. Everything else is window dressing.***


You think banks provide safety? Wrong. That is the government and FDIC…. So why do you go to a bank? Because your brain has been trained to believe that you can trust them. [WB: Is that why banks have such big, solid architecture ... to look solid and trustworthy?] Their brand means safety to you. You assume that their risk management is better than yours, and therefore will protect your money and enhance its value.


What if that assumption is wrong? What if we cannot trust banks to protect and enhance our assets? We would be left with one function for banks: lending money or providing credit. If we could replace that credit function, or if we believed that our own risk management was better than the bank’s, then we could do without banks (someone else will give you that free mousepad).


Technology and the internet is going to provide this.


Sound farfetched? It is not. In fact, the financial world has been evolving in this direction for a while. We just chose not to pay attention.


Today, you can open an E*Trade account and do all your brokerage online for less cost than going through a bank. You can transfer money using Paypal. You can trade currencies through endless online options from EasyForex and SaxoBank for experts to eToro for novices. Think you need advice on investments or consumption patterns and fees? Forget your banker and try Seeking Alpha or (full disclosure: Benchmark companies).


Which brings us back to lending. There are numerous efforts around P2P lending from Zopa to Prosper (Benchmark company). There are other nascent efforts around commercial lending (which anyway the banks are not doing now). Essentially, startups can use the web to provide risk management tools and investment opportunities that disintermediate banks and thereby make credit available to borrowers.


One of the things that got banks in trouble with mortgages was that they were divorced from their borrowers. The FDIC has a long procedure around Know Your Customer regulations, but banks do not really know them or their customers’ creditworthiness. They were buying sliced and diced mortgage paper at a distance (which is why some community banks are in better shape – they really knew their customers).


Think ahead, and you can imagine a world where there are local social community lending tools that enable person to person or company to company lending where you can really know the borrower. Banks use technology for risk management and asset allocation. Why can’t we put those tools in consumers’ or business’ hands? Are banks really experts? Are they bigger experts than crowd-sourced wisdom on creditworthiness or risk management?


Here is the kicker: one of the other roles banks play is they intermediate between the government (Treasury) and consumers and businesses to keep liquidity flowing in a risk-managed way. In the age of the internet, why can’t consumers buy currencies directly from governments/central bank or currency trading platforms (answer: they already can) and access that liquidity directly? Businesses could as well. It is just a technology question. As always in creative destruction, it will happen from the bottom. Clunky tools like P2P lending will grow up and become full-fledged lending platforms with appropriate risk management that might disintermediate obsolete banks entirely.


[T]he banks have simply become a filter that robs consumers of 90% of their money.

And Reuters argues that prepaid cards can replace checking accounts:

Here’s a little bit of personal finance heresy: Maybe you don’t need a checking account at all.


“For basic monthly financial needs, there’s no difference between a checking account and a reloadable prepaid card,” said Michael Flores, the author of a study released Tuesday by the Network Branded Prepaid Card Association (NBPCA). “We see it as a financial products lifecycle. People in their 20s mainly need a transaction account.” Flores is president of Bretton Woods, Inc., the consulting company that performed the study. He said the average prepaid card holder is 27 years old.


Prepaid cards are reloadable cards similar to debit cards. They may be offered through banks or through independent companies. They are growing in popularity as many government benefits are being paid via prepaid card.


If we cut out the giant banks as financial middleman, we might have a much more efficient economy, pay less in interest, fees and penalties, and restore a functioning political system and the rule of law.

This view has now gained an unlikely ally:  Andy Haldane – Executive Director for Financial Stability at the Bank of England.

The Independent reports:

The days of the banking middlemen may be numbered as a technological revolution in business lending shakes the dominance of the UK’s biggest banks, a senior director of the Bank of England has said.


The rise of peer-to-peer lenders such as Zopa and Funding Circle – which directly match up firms in need of cash with investors – and so-called crowd-funding, where small amounts are raised from a large number of funders, will challenge the nation’s major financial institutions, according to Andrew Haldane, the Bank’s director of financial stability.


He told The Independent: “The mono-banking culture we have had since the 1990s is on its way out. Instead, we are seeing a much more diverse eco-system emerging with the growth of new non-bank groups offering peer-to peer lending and crowd-funding which are operating directly with a wider public.” [We've repeatedly noted that increasing diversity leads to improved financial stability.]


Mr Haldane also held out hopes that the fledgling revolution could tackle the crisis in business lending. This helped trigger the Bank’s “funding for lending” initiative in the summer to kick-start credit markets.


He said: “I see opportunity knocking for finance. Hopefully, the growth of peer-to-peer lenders and those involved in crowd-funding will help solve the problems we have with lending for small and medium enterprises … The banking middlemen may in time become surplus links in the chain.”




Mr Haldane said the rise of such lenders could bring down the costs of financial intermediation, adding: “IT has changed every other industry like film, music and even football clubs so why not finance? With open access to borrower information – which is held centrally and virtually – there is no reason why end-savers and end-investors cannot connect directly.


“Necessity is often the mother of invention. Now that the big banks are retreating from lending after the crash, these new methods of financing could help fill that gap.”

While the American government is hostile to any challenge to the hegemony of the big banks, the Independent notes that the UK is encouraging peer-to-peer lending:

The Government is also keen to encourage alternative finance and last week announced four peer-to-peer lenders will be given a total of £55m in taxpayers’ money, an amount to be matched from private sources. The £110m fund is part of the £1.5bn Business Finance Partnership, part of the Government’s drive to diversify sources of finance to business.




The sector will also have lending and borrowing activities overseen by the UK’s new market regulator, the Financial Conduct Authority, from April 2014. The industry’s trade body, the Peer-to-Peer Finance Association, said regulation will help to bring credibility and stability to the fast-growing industry as there have been concerns that a high-profile failure in an unregulated market would see consumers lose their money and jeopardise growth.

And France has granted Bitcoin permission to act as a real bank.


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Bicycle Repairman's picture

This is a political problem, and not an economic, logistic or technological one.  The internet will not fix this.

Room 101's picture

The endof retail banking for handling consumer banking transactions is already here.  Courtesy of Walmart and American Express.  A little bluebird told me about it:

Web bill pay, ATM access, cash transfer, and debit card. Gratis or close to it.  

The bank lobby that denied Walmart access is going to live to regret it. 

Setarcos's picture

Methinks you are correct in a way, albeit that I use the Commonwealth Bank of Australia for all my free transactions on line 24/7 + plus I get 4.5% on my deposit account.  Whereas I doubt that Walmart and American Express could offer anything like what my bank offers.  So I can't see why you think that these vampire corporations are any better than corporate banksters.

Sometimes I find it hard to get my head around what you inhabitants of the USA (Usans?) go on about, because so much is different elsewhere, including in the rest of the Americas from Argentina to Canada.

Why, I wonder, do the inhabitants of the smallish part of the American Continent, called the USA, call themselves 'Americans' when other inhabitants of the Continent variously call themselves Argentinians, Chileans, Mexicans, Canadians, etc.?

Why is it that, only recently, at least a few Usans realize that they are part of a (now) global Empire?

Why are maybe most still in denial that the mainland Empire was carved from the conquest of the native inhabitants and the former Mexican/Spanish Empire?

Why the effective denial that Hawaii is just one of many occupied territories overseas?

Back on topic:  Why assume that some typical US corporations like Walmart and American Express offer solutions?

Here is an alternative.

Setarcos's picture

On the subject of alternatives to BIG BANKS; I've had some contact with Ellen Brown for a few years and what she proposes is do-able, i.e. public banking, as in N Dakota and at least formerly in Australia (until the 1980s when a wave of 'economic rationalism' privatized everything not nailed down, including the Commonwealth Bank of Australia and the individual state banks).

In any case I've written to Ellen to see if she'd be interested in writing an article for ZH.

Meanwhile I'll paste the intro from her "Web of Debt" blog:



Our money system is not what we have been led to believe. The creation of money has been "privatized," or taken over by private money lenders. Thomas Jefferson called them “bold and bankrupt adventurers just pretending to have money.” Except for coins, all of our money is now created as loans advanced by private banking institutions — including the privately-owned Federal Reserve. Banks create the principal but not the interest to service their loans. To find the interest, new loans must continually be taken out, expanding the money supply, inflating prices — and robbing you of the value of your money.

Not only is virtually the entire money supply created privately by banks, but a mere handful of very big banks is responsible for a massive investment scheme known as "derivatives," which now tallies in at hundreds of trillions of dollars. The banking system has been contrived so that these big banks always get bailed out by the taxpayers from their risky ventures, but the scheme has reached its mathematical limits. There isn't enough money in the entire global economy to bail out the banks from a massive derivatives default today.

Web of Debt unravels the deceptions in our money scheme and presents a crystal clear picture of the financial abyss towards which we are heading. Then it explores a workable alternative, one that was tested in colonial America and is grounded in the best of American economic thought, including the writings of Benjamin Franklin, Thomas Jefferson and Abraham Lincoln. If you care about financial security, your own or the nation's, you should read this book.

Element's picture



Are zombie banks necessary for economic growth ... hmm, let's see ...


Bank Failures in the 1920s and 1930s

US GDP before during and since the Great Depression


Savings and Loan S&L Crisis

US GDP before during and since the S&L Crisis


One could maybe conclude that; massive bank failures, bankruptcy and bad-debt writedowns maybe correlate with economic growth and a steady recovery? Could it be that straight-forward, in principle?

As opposed to Hank Paulson's 2008 post-Lehman clown show of; "It's end-of-the-world folks, this is it, over the top, the sky is falling for real!! Quickly, give us all your money, and you take all our liabilities, it's a murgency donchano!!! We must panic, and do real stupid stuff, break all laws, eliminate restraint and constraints, without recourse. Write lots of new cynical corrupt laws to cement our financial CB-TBTF Coup of US fiscal and monetary policy, and turn all budgets into a mockery, henceforth ... oh, and America, ... you're our bitch!".

You know, that sort of corrupt and depression-inducing, growth-destroying, impoverishment-creating economic and socio-political scenario. Come to think of it,  where is Mr. Hanky Paulson these days? What rock did the poo scurry under? Any one seen him around? Or did he do a, um, 'runner'? Any chance he'll ever be electrocuted to death in full public view on the steps of Wall Street?

We don't need any of the TBTF banks or their bankster scabs. We survived for around 2 million years without them, and I'm quite sure we can do considerably better. Anyone can make up abstractions, it doesn't take a genius.

The only claim to fame of the present banking system is; making nothing look like something, and something look like nothing.

Iocosus's picture

This tidbit is coming from a Central Bank. It's like Exxon saying that cars fueled by water are just years away.

q99x2's picture

Don't need banks and need banksters even less.

Corporations both huge and small can cut out banking services by developing their own system based on bitcoin.

Giant opportunity at this time doing this for corporations.

But I think it is like one of those opportunities that few know how to implement.

Setarcos's picture

Nice idea and a bit(sic) like all of those failed 'social credit' schemes, wherein one could 'trade' baby-sitting for some poor sod repairing your plumbing system, or offering Zen healing (whatever) in exchange for maintaining the car of some silly woman without a clue.

Back in the 70-80s it was mainly women who pushed the ridiculous idea that all activities are created equal, e.g. that face painting = digging a trench, or that 'giving counselling' = fixing a computer.  I've seen it all.

OK "bit coins" as such did not exist, but ledgers of virtual currency were kept by the true believers, so I can't see any essential difference.

Granted that the conventional money system is now in chaos and granted that it was never fair, but it has a track record in which one could bargain for realistic exchange values for labour performed.

Bit coin seems not to perform that function, besides which it is "elite", in that only computer savvy people can use it; thus NOT a replacement for conventional money, nor long-enough tested to prove corruption free.

Assuming that you use bit coin yourself, perhaps you'd like to tell us about your successful transactions using it.

Convince me with practical results, otherwise I remain of the opinion that it is just another fad.

Rustysilver's picture

So you are saying P2P banking. I loan some money to Enron or Jon Corzine. I thing that this is a great concept on paper, sort of like communism and capitalism: Is it going to work out in the real work. Let me know.

q99x2's picture

Money changes need not apply.

Element's picture

But does this new financial system cut social security checks to my HP deskjet? If not, I foresee a lot of people may loose weight, consumption may decrease, but offset by the progressive need to buy smaller and sexier clothing. But more to the point, how do you stop govt completely saddling, whipping, strangling and running it into the ground, then cutting it up for dog meat?

tradewithdave's picture

4 part series on the trend towards prepaid.  It's the negative velocity deflationary offset for all the QE


Grill Boss's picture


The banks love the grid more than anyone else, this is the knew cash cow, the new currency...

Widowmaker's picture

Mark these words Washington.

Neither you, nor anyone else will see P2P lending of any meaningful sort.  The TBTF have insulated themselves with the law, where the only way to deal with them is anti-trust or through the same Congress that sucks their little dicks.

The TBTF and uncle Sam are one and the same broken fucking collusion of fascism and fraud wrapped in a US flag.

Not a chance will they let "the regular guy" have a say in his money, let alone banking.  That was something Congress gave away in the dead of night, 1913 for a reason.

End the Fed and you might have a believer, else pure hope and fiction.  Uncle Sam guarantees it won't happen without devolution of the current Fed monopoly of nonsense.

That's weird, Goldfuck Sacks is still a bank holding company...

Grill Boss's picture

1913 was not nearly as important as 1933  thats when the real creature was born

Half_A_Billion_Hollow_Points's picture

Bitcoin will starve the fucking beast.  Look at all these transactions going on here:

knukles's picture

Anybody believes that crap needs serious professional help.

WTFUD's picture

Knukles ANYONE who understands 1% of the current manipulation, contempt and complete disregard of the masses can believe ANYTHING! Do you have a vested interset in maintaining the status quo? If yes, Fuck You and Fuck Off! If not then lets discuss the Checks & Balances required to put us back on track.

Element's picture



fiat created from nothing

debt liabilities called 'assets'

derivatives of nothing called 'collateral', covering 'losses' on other nothings

price-discovery that doesn't exist or matter

mark to model

accounting that isn't

private debts transferred to tax payer liabilities

real material asset-stripping justified by mental abstractions


I agree, anybody believes that crap needs serious professional help.






... obviously unbridled MMT is the real answer in such a situation ... it should slot right in there ... seems like, you know, kinda purpose-built for it ... miraculous how the 'solution' pops-up just when the 'problem' seemed so insoluble! ... clever little monkeys those central banksters!

Cathartes Aura's picture

always keep it local, always keep it small, community based.

as soon as the pot is noticeable by size, the predator-sociopaths always pile on to suck things dry. . . even local should have competing pools of resources, never allocating larger amounts, growth needs to be organic, so as to keep all profits, harvests, etc. benefiting the community, turning over the soil after each harvest (paying back the advances keeps the cycle operating) - builds stronger communities.

and know that the "bigger is best" model is exactly the bait that has lured people into the same traps, throughout history. it feeds the greed, and this always destroys the community. . .

flattrader's picture

I participated in a localized system like this that was decades old.  One had to be vetted and then invited to join.  It was fairly extensive and provided a variety of goods and services.  It was a thing of beauty and virtually no one but the participants knew about it.

delivered's picture

GW, I agree with your general facts and assessment of the banking environment related to big banks (now only focused on trading assets to make money or being a proxy of the Fed to funds soverign debt requirements) and smaller banks attempting to fill the gap with the lending needs of Main Street. But I would like to point out some critical issues related to your article that will impact the flow of capital (debt or equity) in the market for years to come:

1.) Banking in the US, for both large and small banks, is without question "nationalized". Lending standards have been set and are enforced by the regulators that basically make any deal that is not "A" quality not bankable. Doesn't matter if a loan is needed for a home, auto, business, etc., the rules are set by government with little creativity and flexibility available.

2.) To fill this void, a number of alternative lending/capital sources have entered the market ranging from ABL's (asset based lenders) to Pirate Funds (more politically correct than referring to these for what they are, rape, pillage, and plunder). For B, C, an some D quality deals, these are the only alternatives available and tend to be extremely expensive and overly restrictive. If you want to witness legalized loan sharking, just visit some of the pricing offered by the pirate funds.

3.) As to your point on P2P lending and crowd funding, no doubt these are capturing market share but come with enormous risks and challenges (to both the borrower and lender). These environments are ripe for fraud, deception, theft, losses, etc., for both the well meaning and criminals alike. Forget about the crooks and criminals for a moment and let's just focus on the inexperienced, business owners and investors/lenders that will utilize these tools to secure capital and deploy capital. Most business owners don't have a clue about presenting their information and providing adequate disclosures to secure capital. The risks of misleanding capital sources, allowing competitors to access/steal ideas, etc. are extreme. On the investor/lender side of life, most of these parties don't have a clue about how to assess an opportunity let alone complete proper due diligence. So from this side of life, the risks of loss are also extreme. Now throw in the criminal element, let the losses and fraud mount, and just like that, the government is going to step in to these markets and regulate the hell out of them. Trust me when I say that getting into this space, whether it's crowd funding, sponsering pre-paid cards, and/or anything else to do with managing electronic funds flow through the WWW is extremely challenging and requires vast experience and patient when dealing with all of the third parties that will be involved (including the government).

GW, I really appreciate your articles and input but when you begin to dabble in a topic as critical as capital deployment to the world economies, you should really evaluate the entire subject matter thoroughly and provide the most objective information as possible. I have written numerous books on small business finances and work with small businesses every day on developing business plans, securing capital, supporting exit strategies, and liquidating companies when needed.

My point is that the variety of new and creative financing alternatives, while interesting and potentially game changing, also carry extreme risks to both the parties looking for capital and parties providing capital that are going to generate significant losses to the ill-prepared and poorly informed.


LawsofPhysics's picture

What utter garbarge.  Tell me, do the "peer-to-peer" lending folks have a military behind them?  Do they have any nukes?  What mechanisms of insurance of payment or imprisonment do they wield?   Local folks make deals with one another all the time, no need for some bullshit electronic internet.  That hasn't changed since the dawn of time.

S.N.A.F.U.'s picture


What mechanisms of insurance of payment or imprisonment do they wield?

If you go sign up for, you'll see that part of that is selecting which collection agency you wish to use in the case of a non-performing loan.

Anyways, you miss the biggest current problem with peer-to-peer lending:  It's not really competitive with banks.  The reason for that is if you loan someone your money, you are giving up the time-value of the principal and suffering inflation losses on that principal during the term of the loan, and those costs to you tend to be reflected in the higher interest rate you charge for a loan.  When a bank loans someone money, they just create (most of) the principal out of thin air, and therefore do not have to take either the time value nor the inflation losses of "their" money into account when setting the interest rate of the loan.  (That's not to say peer-to-peer loans aren't being made at all -- there are certainly plenty of people who can't do the math and/or are more interested in helping someone out than making a buck or even avoiding a loss.)

And of course, if you screw up, neither the US gov nor the Federal Reserve will be bailing out your ass, so you can't take the same kinds of risks as banks.

Local folks make deals with one another all the time, no need for some bullshit electronic internet.

And what if you need a loan and the locals in your area don't want (or aren't able) to lend to you but a thousand people on the internet are willing to do so?  It's pretty stupid to not see the (potential) utilty of the internet in this situation.  Also one of the benefits of peer-to-peer lending is that instead of getting a big loan from one person [placing all of the risk on a single lender] they can fairly conventiently bust up a loan into whatever chunk-sizes lenders are comfortable with -- a big loan may be "filled" by dozens of lenders.  You could in theory do that locally (if you can find that many people willing to lend you money), but that's a lot of leg-work that is handled automatically by at least some of the peer-to-peer lending services.  (But as stated above, the unlevel playing field between individuals and banks is a real damper on peer-to-peer lending.)

LawsofPhysics's picture

"And what if you need a loan and the locals in your area don't want (or aren't able) to lend to you but a thousand people on the internet are willing to do so?  "


Then there is no fucking demand for whatever bullshit you wanted to sell/build.

There too many errrors/lies in your post to address now.  The fact that you believe internet companies did't get bailouts is but one among many.

Grow the fuck up.  NOTHING changes until there are real consequences for bad behavior. You really think people will do business over the internet with no face to face negotiating.  You really think the internet/texting has made people more honest or more polite?   Bah ha ha ha ha ha ha!

Thanks for the laugh. 

S.N.A.F.U.'s picture


Then there is no fucking demand for whatever bullshit you wanted to sell/build.

Non sequitur.

Say you want the loan to start a business producing goods or providing a service which you will sell via the internet.  Demand for that doesn't have anything to do with the local economy.

And not all loans are for funding business investments.  Maybe you just want a loan to fix your leaky roof.  You have an income but inadequate savings, and it's going to rain soon.

NOTHING changes until there are real consequences for bad behavior.

Real consequences for bad behavior is a damn good idea, but things will change without out that (mostly for the worse though).  Some of the bad behavior that needs fixing is fractional reserve banking, and I've already pointed out that that is what is really hosing up peer-to-peer lending.

You really think people will do business over the internet with no face to face negotiating.

Have you been living in a cave?  It already goes on all the time.  I've done "business over the internet with no face to face negotiating" many times in just the past month.  With respect to peer-to-peer lending in particular, even with it being massively supressed by the fractional reserve banking system and the fed dumping money into the system, alone states that they have processed $442 million in such loans.  (Yes, that is chump-change, but that's to be expected when the interest rates are so broken.)

You really think the internet/texting has made people more honest or more polite?

Another non sequitur.  Someone making a loan (to make money rather than just to be nice) doesn't give a rat's ass if the borrower is polite -- they just care if the loan will perform.  And you don't just take the random word of a would-be-borrower, you look at their credit history, you know, like what banks do.  So it doesn't really require people to be "more honest".

LawsofPhysics's picture

Only an unemployed graduate student would be so good at avoiding addressing any real issues. When fraud is the status quo, possession quickly becomes the law. Good luck with your paper/electronic promises.

Half_A_Billion_Hollow_Points's picture

Laws of Physics is quite a character; he's some sort of cavemen for whom the

flattrader's picture

...and he either has a 20+ acre organic farms or thousands of acres of soybeans? under his control depending on what "story" he's pushing.

Stuck on Zero's picture

The USSR had all those good things: nukes, military might, insurance.  They are gone.  The little banks are still there.


LawsofPhysics's picture

Yes, and the mafia has done great.  Where are those honest "peer-to-peer" folks?   That is the fucking point.  This is exactly what I have been saying for several years.  The collapse of America will be very similar to the collapse of the Soviet Union.  Just like the USSR, the union will break up.  New, independent countries will arise eventually.  When the creditors come a knocking for debt repayment, there won't be anybody to collect shit from.

FYI, the very same power brokers that were behind the previous banks are behind the same banks now.  And gee, look Putin (a product of the soviet era) is still in power.  Imagine fucking that.

The bitch is that it won't happen quick enough for most.

sitenine's picture

Here's something to think about. P2P lending does not facilitate creation of new 'money' via the miracle of fractional reserve lending, but it does charge interest. Anyone familiar with how the current debt ponzi works will recognize immediately that such a system, if allowed to compete with our current system, will result in a 'money' shortage in very quick order because it does not create new 'money' to pay the interest charged; it simply demands interest from the existing system to be paid to investors. The idea has merit,  but is certainly no panecia to our monetary problems. The competition is welcome IMHO because where it fails to provide a lasting solution, at least it can help to accelerate the collapse of the currently untenable ponzi system that requires perpetual growth.

As a side note, if society can grasp the fact the growth is no longer a sustainable model, and if it can rationalize the need to replace the current system, then this new mode of lending has enormous power to at least keep monetary supplies constant. A scheme could also be imployed to add or remove money supplies in the overall system. That's all just a little hypothetical, but at least we're starting to think outside the box here.

S.N.A.F.U.'s picture


will result in a 'money' shortage in very quick order because it does not create new 'money' to pay the interest charged; it simply demands interest from the existing system to be paid to investors

I'm tired of this fucking retarded meme.  The interest paid to lenders doesn't go into some black hole never to be seen again.  The lenders buy stuff with it.  That's the whole point of charging interest -- to have more money with which you can buy stuff.

If you want to be slightly less retarded (but still retarded), try blaming savers for creating a shortage of money -- they at least act as a "temporary black hole" for money.

Bunga Bunga's picture

I agree, interest payments are somebody else income.

Interest payments are a distribution problem, not a inherent problem of money. When interest payments cannot be funneled into the pockets of a few, but are widely distributed and used for consumption, there is no need to create new money to prevent the system from a deflationary collapse.

P2P & CF could be part of a solution. The technology is there and we don't need overpaid banksters to run such a simple business.

sitenine's picture

"If you want to be slightly less retarded (but still retarded), try blaming savers for creating a shortage of money" - wow. OK. You, Sir, are a very special kind of idiot. For future reference: As a rule, when one knows not jack shit about what one is spewing frome one's keyboard, one is advised to STFU.

S.N.A.F.U.'s picture

So which is it?  Do believe that the interest paid goes into a black hole never to be seen again?  Or do you acknowledge that the lenders at some point (depending on their savings preferences) spend that interest back into the economy?

sitenine's picture

I'm sorry, did I say idiot? I meant fucking idiot. It's not about spending,  it's about money creation. Now, kindly, STFU. Thanks.

S.N.A.F.U.'s picture

No, it's about you (and a lot of other retards who buy into this meme) not understanding basic economics (or simple math for that matter).  You think new money needs to be created to cover interest -- it does not.  Interest works just fine in a closed system where not a single penny of new money is ever created.

sitenine's picture

You seriously don't know when to quit. Let me keep this simple so that a fucking idiot like yourself can follow. Imagine this: $1.00 exists in all the universe, and I own it. I lend it to you at 5% interest. I demand $1.05 when the note matures. Where did you get the nickle in your magical little closed loop system to pay me back?

S.N.A.F.U.'s picture

Option #1:  I default on the loan.  (Serves you right for being stupid enough to lend me every penny in the known universe.  Now I can own the world's military and bomb you into submission!)

Option #2: Now this would just blow your mind if it weren't already shot -- I work to pay off the loan.  How can that be?  Easy.  I didn't just borrow all the money in the universe for nothing, I had something I wanted to buy with that money.  So I spent it.  So now other people have money.  I work for them to earn that money back, and use it to pay you.  But, you say, I owe $1.05 and there's only $1.00 in the whole universe.  Doesn't fucking matter.  You spend money too.  Maybe I work for you, maybe I work for someone who you spend money on, maybe I work for someone who sells stuff to someone who works for someone who sells to you.  As long as you spend at least $0.05 of the money I already paid back, then I can work for that money and pay it back to you again.  Money is recycled, not consumed.  You got your $1.05.  (And if you don't spend at least $0.05 before the loan is due?  See option #1.)

sitenine's picture

Good. I'll upgrade you from fucking idiot to idiot. You seem to at least grasp that money is used as capital, and is not a thing of value unto itself. I'll also concede the fact, theoretically, that your little scenario could work without interest. Get beyond the interest problem and we might actually have something to talk about.

Let me explain what I mean by interest problem. Let's consider the same scenario, but interest is 5% APR, and you take 20 years to pay it off - this means that your payoff is roughly $2.65 at maturity. Let's go further, and assume that you also lend some of that money out, so there are other obligations incurring simultaneously in your closed system. The total debt might reach $20.00 or $30.00 pretty quick. The only way to satisfy all these obligations in the end is if that $1.00 is circulating through the system at an infinite velocity. Please do yourself a favor by considering not only quantity, but realistic velocities of that quantity as well.

S.N.A.F.U.'s picture

I'll also concede the fact, theoretically, that your little scenario could work without interest.

No, the scenario works with interest.  What it works without is money creation.  That paying interest doesn't require money creation is the whole fucking point.

And it was your fucking stupid scenario, not mine.  You were the one that said it was "simple so that a fucking idiot" could understand it.  You were the one that made the claim that the only solution would have to be a ficticious "magical" one.  And you are the fucking retard that DIDN'T EVEN NOTICE I ALREADY GAVE YOU THE FUCKING SOLUTION TO YOUR SCENARIO BEFORE YOU PROPOSED IT!  In my very first post I stated:

The interest paid to lenders doesn't go into some black hole never to be seen again.

That was the solution to the "impossible" scenario you proposed 5 posts later.  By your own statements, you don't even qualify as a "fucking idiot" because you failed to understand your own scenario which you said a "fucking idiot" could understand.

Get beyond the interest problem and we might actually have something to talk about.

There's no interest problem to "get beyond".  There's only economic retards that think money creation is a necessity (and/or that money has to be lent without interest).

The only way to satisfy all these obligations in the end is if that $1.00 is circulating through the system at an infinite velocity.

No, not infinite.  Finite.  Either learn some math or stop exaggerating (lying by another name).

Please do yourself a favor by considering not only quantity, but realistic velocities of that quantity as well.

You are the one trying to set up more and more unrealistic scenarios.  And you've got the whole fucking thing backwards.  You don't set the amount of $ loaned out and interest rates and then say "gee, how can we make that work?".  What you do is start with sound money (little/no new money creation), and then people (savers, lenders, borrowers, etc.) operate in a fashion that can be reallistically expected to work.  (Not borrowing too much, not making loans that can never be repaid, etc.)  If lenders would actually lose their money when a loan went bad, they would be a lot more careful about making loans, and if/when loans did go bad it wouldn't impact everyone else so much.  If you instead encourage bad lending practicies by pumping money into the system, you are going to get exactly what you asked for -- unsound lending, and lots of it.  And you are now impacting everyone by driving down the value of the money in their pocket and the value of their wages.  (In other words, to do that you would have to be a total fucking asshole of epic proportions, just like Ben Bernanke.)

sitenine's picture're downgraded back to fucking idiot.

FinalCollapse's picture

You don't need to create new money to pay the interest: micro and macro. You are still stuck in the fractional model. The bitcoin money supply will increase proportionally with the expanding economy. 

You pay interest out of your savings - what a novel concept!!!!

LawsofPhysics's picture

Yes, "savings" that dissappear when the power goes out. - "winning"  

SpykerSpeed's picture

Bzzt, wrong.  Because the Bitcoin blockchain is backed up all over the world by millions of people, the power would have to go out simultaneously all over the world AND everybody's hard drives would have to explode.  The odds of this happening are about the same as all the gold and silver in the world suddenly becoming sentient and flying into orbit.

Bitcoin will starve Leviathan.  It is an untaxable, unstealable currency.

Element's picture

that sounds like a job for the clouded ones! ... (banksters will become hackers lol)

S.N.A.F.U.'s picture

If your hard drive loses all of your data every time the power goes out, you might want to consider getting one (and/or an OS with a file system) that actually works.

FinalCollapse's picture

P2P is definitely the future. We have all technology available. The real owners of this country will object. Expect DHS and the real asshole King to attack this new technology as tools of terrorists. Remember - they hate us for our freedoms /sarc.

Cast Iron Skillet's picture

the DHS hates us for our freedoms,  you mean.