Tilted Forum Project Discussion Community - View Single Post - The money and banking system

Yakk · 04-02-2007, 08:52 AM

How do you decide how much money should be created and loaned out, on a second-by-second basis?

What happens when the government lends money to people who can't afford it, and too many of them default?

How does the government choose who gets to borrow the money from the government?

Do you want to make it a crime to create an "IOU" of any kind?

You can create your own money right now. Write up a bunch of IOUs that say "I will pay you 5$ on __DATE__." Figure out how much people will pay you for them. Use that money you get to make a profit -- maybe lend it out to people. If your credit is good enough, you can lend people IOUs instead of cash, because 3rd parties will accept your IOUs in exchange for goods and services.

To give an example of something like this happening in the real world, Canadian Tire corperation in Canada gives out "canadian tire money", which are paper bills that can be exchanged for goods from Canadian Tire.

There are businesses that accept this money at face value on some special occasions: a local burger joint chain that lets you pay for one particular kind of burger with canadian tire money, a drycleaners that accepts canadian tire money on tuesdays, etc.

Those IOUs from Canadian Tire can be exchanged for goods and services with 3rd parties. Canadian Tire sometimes objects to this, and sends cease and desist orders.

...

So, what do the banks do? They solve the second-by-second problem, and generate incentive for people to figure out who should have the newly created money. If they are wrong and they lend the newly created money to someone who can't pay it back, they lose money. Even though they created that cash, the debts that they don't collect on cut into their profits.

And if they find someone who is more creditworthy than other lenders think they are, they can make a good profit lending money to them.

If their profit is too large, the person borrowing can possibly find a better rate from some other bank: the banks compete over what rates they charge individuals. Doing so is profitable to the other bank -- because if the rate from bank #1 is too high, it means that bank #2 can make a profit by stealing the customer and charging the customer less interest.

These problems that the banks are solving are not easy problems. The profits the banks get from this process are, effectively, their incentive to solve these problems.

If you had a centrally regulated money creating and doling out process, you'd have to solve these problems in any case: to do so, you would have to provide an incentive for people to solve the problems.

It has been shown in history that when solving the microeconimic "pricing problem" in any reasonably complex situation, using the market works pretty damn good. You have to watch out for macroeconomic market failures and tweak the system, but trying to beat the market on the moment-by-moment and solution-by-solution level tends to be pretty damn inefficient.

04-02-2007, 08:52 AM	#55 (permalink)
Yakk Wehret Den Anfängen! Location: Ontario, Canada	How do you decide how much money should be created and loaned out, on a second-by-second basis? What happens when the government lends money to people who can't afford it, and too many of them default? How does the government choose who gets to borrow the money from the government? Do you want to make it a crime to create an "IOU" of any kind? You can create your own money right now. Write up a bunch of IOUs that say "I will pay you 5$ on __DATE__." Figure out how much people will pay you for them. Use that money you get to make a profit -- maybe lend it out to people. If your credit is good enough, you can lend people IOUs instead of cash, because 3rd parties will accept your IOUs in exchange for goods and services. To give an example of something like this happening in the real world, Canadian Tire corperation in Canada gives out "canadian tire money", which are paper bills that can be exchanged for goods from Canadian Tire. There are businesses that accept this money at face value on some special occasions: a local burger joint chain that lets you pay for one particular kind of burger with canadian tire money, a drycleaners that accepts canadian tire money on tuesdays, etc. Those IOUs from Canadian Tire can be exchanged for goods and services with 3rd parties. Canadian Tire sometimes objects to this, and sends cease and desist orders. ... So, what do the banks do? They solve the second-by-second problem, and generate incentive for people to figure out who should have the newly created money. If they are wrong and they lend the newly created money to someone who can't pay it back, they lose money. Even though they created that cash, the debts that they don't collect on cut into their profits. And if they find someone who is more creditworthy than other lenders think they are, they can make a good profit lending money to them. If their profit is too large, the person borrowing can possibly find a better rate from some other bank: the banks compete over what rates they charge individuals. Doing so is profitable to the other bank -- because if the rate from bank #1 is too high, it means that bank #2 can make a profit by stealing the customer and charging the customer less interest. These problems that the banks are solving are not easy problems. The profits the banks get from this process are, effectively, their incentive to solve these problems. If you had a centrally regulated money creating and doling out process, you'd have to solve these problems in any case: to do so, you would have to provide an incentive for people to solve the problems. It has been shown in history that when solving the microeconimic "pricing problem" in any reasonably complex situation, using the market works pretty damn good. You have to watch out for macroeconomic market failures and tweak the system, but trying to beat the market on the moment-by-moment and solution-by-solution level tends to be pretty damn inefficient. __________________ Last edited by JHVH : 10-29-4004 BC at 09:00 PM. Reason: Time for a rest.