Are banks needed?

purchasing power of the dollarYou don’t need the current banks.

If they won’t lend, let them go under.

Banks exist to be intermediaries between central banks and those who need credit. They are given the ability to create money through fractional reserve money (yes, create) and they also have the right to borrow money at rates that no one else can receive. If you could take your money, multiply it by 10 (that’s not the exact number, but as an example) and lend it out, think you could make a profit? If you could borrow money at 1 to 5% and then lend it out for more than that, in some cases 15% more, think you could make money?

Banks thus are given by governments an incredibly valuable privilege. It’s really hard to overstate how easy it is to make steady returns as a bank as long as you don’t get greedy. In exchange for the right to create money and borrow it at rates no one else gets, banks are expected to add some value to the equation. Specifically, they are expected to figure out who is a good credit risk, and where money should best be loaned and used.

There are two sides of this – money should be loaned where it has a high return. It should also be loaned to folks who can pay it back. It should be invested in the same way—return averaged with risk. Banks haven’t been doing this.

They have been seeking out the highest return, but they haven’t been taking into account risk. Instead they have been seeking out high risk for high returns.

They haven’t been adding value. They also haven’t been performing the tasks of getting money to the people who can use it best.