Credit isn't unethical. There are a lot of good things that would have never happened without credit.
Even employment is a form of credit. "I'll work X hours on this task, and at this time, you will pay me $X" is an incredibly simplified form of credit.
Borrowing a few bucks to make it to payday from your friends isn't unethical for either the lender or the payer.
Usury is what is unethical about lending, specifically unregulated usury. That, and being allowed to refuse service to people or businesses that you don't like or whose legal business your stakeholders find distasteful.
If you're in the banking or finance business, you shouldn't be allowed to choose to not provide service for citizens who are performing legal business, and you should have the amount of profit that you make from a lending transaction regulated and limited by a third party whose goal is to ensure equal treatment.
See Fractional Reserve Banking for the gory details, but the gist of it is, private banks create money out of thin air (within limits) so they can lend it to you. And then they charge interest back for it.
That's not how it should work. First there's the morally questionable interest rates to begin with (not all societies or religions permitted that), but even if we assume it is legitimate, the justification for this is something about investment and risk taking. Which are supposed to involve your own funds, not money you printed out of thin air.
But there is a risk, and there is a service. How should they charge for it? Well, it's simple: risks are supposed to be (and are) handled by insurances. And then there's the paperwork and checking and all that that most likely should involve a flat rate. This should be much more ethical than charging interest over money that didn't even exist to begin with.
(Edit: 3 downvotes in 30 minutes, no rebuttal… guess I hit a nerve. I'll just say this: if you disagree with anything I've said here so strongly that you feel the need to downvote it, at least take the time necessary to articulate to yourself why.)
I'm very familiar with fractional reserve banking, thanks.
>the justification for this is something about investment and risk taking. Which are supposed to involve your own funds, not money you printed out of thin air.
Money is socially constructed. If we agree, societally and legally, that banks can lend out most of the money that their depositors place with them (fractional reserve), then the money the bank lends out is no less real, no more "printed out of thin air," than any other money. And we do agree to that statement, legally and (for the vast majority) societally.
> risks are supposed to be (and are) handled by insurances.
Which is exactly how banks handle interest rates on loans. This is why we have credit scores: so that the underwriter at the bank can assess how risky your proposed loan is, and how much interest (i.e. premium) to charge you. Exactly like an insurance underwriter assesses how risky your proposed insurance policy is and how much premium to charge you. Both insurance and banking largely automate these decisions these days, but there are still human underwriters who can override the automated decisions.
A few years ago I briefly worked in the credit risk department of a bank, and as part of my orientation I spent an afternoon sitting with one of these underwriters watching and listening as they dealt with clients who wanted to appeal the automated credit decisions.
> And then there's the paperwork and checking and all that that most likely should involve a flat rate
This also already exists, it's called an origination fee.
> This should be much more ethical than charging interest over money that didn't even exist to begin with.
In summary, this is completely wrong. The money does exist, just as much as any other money exists, and if it's not repaid the lender is on the hook for it[1], just like any other money. And the way you think lending should work is indistinguishable from the way it already works.
[1] Or, in many cases, the person who bought the loans from the originating bank.
> And the way you think lending should work is indistinguishable from the way it already works.
With one crucial difference: right now the main criterion is whether the bank will get reimbursed or not. Whether it will make money off of the credit. And credits are so important to our lives right now that I don’t believe such an important decision should be left to that kind of invisible hand.
I mean, it’s as important, perhaps more important, than the state’s budget. This suggests, if not a democratic oversight, at the very least a clear set of democratically chosen rules over what kind of loans should be given.
I'd flip that around: whether it will lose money off the credit, not whether it will make money. Based on my time in credit risk this is more accurate to how banks actually think about loans. The upside for each individual loan is much smaller than the downside, so the threat of loss dominates the discussion.
Once you flip it around like that it becomes much less attractive to think of forcing banks to make loans that they expect to lose money on.
> if not a democratic oversight, at the very least a clear set of democratically chosen rules over what kind of loans should be given.
Which, again, we already have. There are many rules and regulations about what information banks may and may not take into account when deciding which loans to approve, and what interest rate to charge. Rules put in place and enforced by the democratically elected government.
> Once you flip it around like that it becomes much less attractive to think of forcing banks to make loans that they expect to lose money on.
That's not what I'm proposing, though. I'm proposing that each loan would come with the creation of central money, such that any that falls through results in nothing more than a little bit of inflation. And the people who issue the loans would effectively be government workers. Or contractors or whatever, but they would do all this on behalf of the state.
> Which, again, we already have.
I have to confess ignorance here. Do we have rules that forbid specific industries from contracting loans? (Industries that are otherwise legal, I mean.)
>>See Fractional Reserve Banking for the gory details, but the gist of it is, private banks create money out of thin air (within limits) so they can lend it to you. And then they charge interest back for it.
So I've googled and read upon it every time I hear this almost exact same sentence (and I see it every now and then), and I don't get it at a basic level. I have little to none awareness of high level finance, but my understanding of 'fractional reserve banking' is thus:
1. 100 people deposit $1 each to a bank. It has $100 of deposits
2. Without fractional reserve banking, bank would basically have to keep $100 in its vaults. It would be useless money going nowhere doing nothing.
3. With fractional reserve banking, bank basically has to (say) keep $10 in its vaults (digital as they may be), but can loan $90 to other entities (and do more complicated things with it). There are risks and benefits to this, and it is basically a full time job of many people at the bank and regulator to find various balances of risk and benefit, to bank and society, based on the policy and goal.
I don't understand where, in this simple math, does a regular bank "create money out of thin air". I'd love to understand when and how this may be the case (but NOT via angry youtubers, please:).
I do understand that central banks and/or the government control circulation and "create money" through various mechanisms, but I never get the feeling that is what we're talking about when people say "fractional reserve banking means private banks get to make money up".
> I don't understand where, in this simple math, does a regular bank "create money out of thin air".
Through rinse & repeat.
When the bank has loaned those $90, the deposits still show $100, and are still available to their respective owners. Just not all at once, but we don’t care as long as the illusion is maintained — and it is.
Where those $90 go? to other deposits. So where we had $100, we now have $190. Only $100 of those are central money, but again, as long as the illusion is maintained (and it is), everything works exactly as if we had $190. And since money is but a convention, a good enough illusion is actually real. $90 really have been created.
And those $90 that have been added to deposits can also be used to lend money. $81 in the current example. So now we have $271. Rinse & repeat indefinitely, eventually you end up with up to $1000 total, with $900 created out of thin air. As long as the illusion works at least. And it does.
Sure, sometimes it breaks down. Sometimes we get a bank run. But in practice the illusion is so important that the state steps it an make it real: by creating actual central money to compensate for the bank run. Heck, often just the promise of doing so is enough to prevent the bank run in the first place, and maintain the illusion.
Strictly speaking money hasn’t been created. It’s just an accounting trick. But the trick works. Those $900 may be fake money, but if people are using it (and they are), it’s also real money. It’s not real real money, but it’s close enough.
> but we don’t care as long as the illusion is maintained — and it is.
> as long as the illusion is maintained (and it is)
> a good enough illusion is actually real.
> As long as the illusion works at least.
> But in practice the illusion
> maintain the illusion.
You sure like that word.
It's not an illusion. The money is real. It's real real. It's real real. There is nothing fake or illusory about it. It is just as equally real as a $100 bill straight from the Bureau of Engraving and Printing.
Stop pretending that it's not.
> But in practice the illusion is so important that the state steps it an make it real: by creating actual central money to compensate for the bank run. Heck, often just the promise of doing so is enough to prevent the bank run in the first place, and maintain the illusion.
This is false. FDIC is insurance. The money that is used to step in and rescue a bank is real money that comes from banks that pay insurance premiums to have their depositors' money insured. It's not "central money" created by the state. It's exactly the same kind of money that banks lend out to you and me. Banks pay insurance premiums to the FDIC and when a bank fails the FDIC uses those insurance premiums to step in and insure the deposits.
> Strictly speaking money hasn’t been created.
This is also false. Money really is created when banks give out loans based on fractional reserves. This is called the money multiplier effect, and it's a really important economic factor. But it's not fake money, it's real money. Real real money.
Yeah, the money is real. Yeah the money has been created. But you can't start from there when explaining it to a sceptic.
And there's still is one way the money isn't real: if everyone runs to the bank to retrieve their money they can't. Not all at the same time. But they never do, so the money is real.
> This is false. FDIC is insurance. The money that is used to step in and rescue a bank is real money that comes from banks that pay insurance premiums to have their depositors' money insured.
Oh, I see. A tad more complicated than I though, but the effect is the same, so my central point remains.
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My step dad used to work in banks, and you, he, and I agree on how this all works. Interestingly though he didn't want to see it as "creating" money. He didn't quite accept the connotation, and I suspect the full consequences of fractional reserve. His exact word was that banks are authorised to transform money (which I suspect is a legal term in France).
> Well, it's simple: risks are supposed to be (and are) handled by insurances.
So the banks charge a 5.75% “risk premium” and we’re back where we started.
And just because some cultures and religions are anti-usuary doesn’t invalidate it’s value. All interest does is price the value of money (ignoring all the shenanigans the central banks get up to). Money today is worth more than money tomorrow so you have to pay a premium to both access it and compensate the owner for the lost utility.
Yeah, fractional reserve lending is fraud but it’s legal fraud so what are you going to do?
I don't understand how it's fraud. Banks could not lend at all if they must retain 100% of deposits.
On the lending side, it would hurt everyday people and the economy if banks could not lend. Loans are important for homeowners (mortgages) and for businesses of all sizes (research and development).
On the savings side, your community bank provides incredible guarantees with your deposit that are difficult to find elsewhere: deposits are very liquid, principle is virtually guaranteed, and convenience in routing the money wherever you direct it.
Yes, banks couldn’t lend as much money if they couldn’t create it, and the way we’re making the economy work needs money to be created for those loans. So they definitely fill a need. However they are printing money and decide who can borrow and who cannot, without democratic oversight.
We tend to reduce democracy down to restrictive laws & regulations. Whether we want guns or not. Whether we want to allow abortion or not. How heavy the penalties are for murder or theft. How a given industry should be regulated. But resource allocation is arguably even more important.
How we allocate our resources determine pretty much everything in our lives. It’s the choice between more roads or new train tracks, which industry should be prioritised, basically what direction our whole economy should take. And that, instead of being subjected to democratic oversight, is currently left to private interests, with a vague hope that it will somehow be okay, because "invisible hand" or something.
Damn, I’m just asking for more democracy, and there we are, way outside the Overton window.
>>banks couldn’t lend as much money if they couldn’t create it
I feel there's shifty language and moving posts all the time.
Fractional reserve banking, to my limited understanding and your previous post, is lending some of the money that got deposited to. Where is this "creating money" (for non central banks) coming from? The phrase comes in and out of various conversations about banking system and it's the most slippery thing I've ever seen. Can you please elaborate on your understanding of how "banks create money" so we can have a discussion from same basic understanding and principles?
And it's not "banks couldn't lend as much money". If we didn't have fractional reserve banking, it feels banks could not lend AT ALL. This is not shades of gray, it feels like a basic principle. If a bank gets deposits, and can't do anything with deposits, and has to keep all the deposits in a vault, then it cannot do any loans. SImplified and all, but again, I want to see if our basic understanding is in line.
Also, what does "more democracy" concretely mean here, as nice as the phrase is? Aren't regulations by government the spear of the democracy, in practical sense?
> banks couldn’t lend as much money if they couldn’t create it
How could a bank lend _any_ money if it must reserve 100% of deposits as cash?
> they are printing money and decide who can borrow and who cannot, without democratic oversight
I do not understand how regulations are equivalent to democracy. Either way, banks are heavily regulated in the G7 countries. Such regulation was thought to exacerbate the mortgage crisis of 2008 because regulations created incentives to offer mortgages to people who should not have qualified.
Supply and demand of deposits and loans creates a competitive market - banks operate with razor thin margins.
I still do not know how you would improve upon the current system.
> Yeah, fractional reserve lending is fraud but it’s legal fraud so what are you going to do?
Isn’t that obvious? We’re living in an increasingly oppressive regime, and fractional reserve banking is but one of its many symptoms. So we’re going to do whatever people do under oppressive regimes.
Even employment is a form of credit. "I'll work X hours on this task, and at this time, you will pay me $X" is an incredibly simplified form of credit.
Borrowing a few bucks to make it to payday from your friends isn't unethical for either the lender or the payer.
Usury is what is unethical about lending, specifically unregulated usury. That, and being allowed to refuse service to people or businesses that you don't like or whose legal business your stakeholders find distasteful.
If you're in the banking or finance business, you shouldn't be allowed to choose to not provide service for citizens who are performing legal business, and you should have the amount of profit that you make from a lending transaction regulated and limited by a third party whose goal is to ensure equal treatment.