There are two reasons not to let commercial banks handle your savings. First, you can’t be sure that the bank will manage your money for your advantage rather than the banks’ (ie, the bank might take your savings to Monte Carlo, or, worse, the CDS market). Second, even if the bank manager doesn’t take depositors' savings out on the lash, he’s systematically unlikely to allocate them as well as the depositors themselves would, given the chance.
Commercial banks were a decent compromise solution to a very 17th century set of economic problems. First problem: the costs of collecting and distributing information were very high. Second problem: the costs of (and dangers of) transporting gold up and down England’s highways were also very high. It made sense to spread these costs as widely and thinly as possible, hence savings were agglomerated into commercial banks. For that economic benefit, though, savers accepted two opacities, two risks. First, they trusted the bank manager to look after their money carefully, even though they could have no direct oversight of what he did with it. Second, they trusted that in completing this task the bank manager would actually have better information than them on which to make credit decisions.
I think we all understand how things can go wrong with that first risk, and I’m not going to elaborate here. But if we are now really quite leery about what kind of gambles banks might be taking with our savings, the weight of justification falls ever-more heavily on the second opacity – ie, the idea that perhaps these experts really will do a better job than we could.
Trouble is, that argument has never looked more anachronistic. Now the costs of collection and distribution of information have fallen to near-zero, it is absurd to believe or expect that a bank manager will have any significant informational edge on credit decisions over any given intelligent and interested observer. But more, when you open up that credit decision to a mass of intelligent/interested observers, the betting would be that the bank manager’s decisions would be worse than the group’s.
(This is why investment clubs tend to beat the market, whilst fund managers don’t).
Hayek's crucial insight is that whatever else economics may be, it is a subset of information theory. Free competition, he said, is justifiable only because it uncovers information which cannot be discovered in any other way. (That's my precis of his life's work).
That's a statement not just, or even primarily, about economics. Rather, it is the practical justification for liberty, and the rationale every barbarian needs to start beseiging the walls of entrenched belief, buttressed as they usually are, by a credentialed elite. If you doubt how vigorous this truth turns out to be, take a look at this detailed account of how the market for ideas self-organized to overwhelm the most ambitious credentialist gatekeepers of our day. I think the writer is correct to identify that what matters in this debate is less the truth about climate change (which no-one knows), than the way in which the credentialist gate-keepers essentially brought into being their own self-organizing nemesis. The writer thinks it's an important moment in the history of ideas, and I think he's right.
Quakers have default-setting about their trusteeship of the world that correctly makes them vibrate to worries about the future of the planet. Despite that, Quakers should embrace this development with every fibre of their beings. The origins of Quakerism were, precisely, a revolution against the credentialism of the established Church, and the practice of meetings recapitulates this revolution every time someone gets to their feet to speak.
Back to economics and finance. The claim being that the banks experts (bank managers, the wedding cake structure of credit committees) can make better judgements about credit than depositors can is not only untrue a priori (cf Hayek) but it is also spectacularly untrue in practice, as we have discovered to our own and our children's loss.
The crisis of Western financial institutions is not just about the personal irresponsibility/ loss of understanding of what trusteeship entails, built into the structure of our financial institutions, but also about the epic stupidity its credentialist claims embody.
There used to be no alternative, but now there is. A friend in New York started a fund investing in Chinese companies in association with the #1 Chinese search website Alibaba.com. The point was to use the information received via Alibaba's collection of websites to determine how the fund's resources should be allocated. Want to do a credit check? Ask the customers, ask the wider world. It's like including Ebay’s recommendation system as part of your credit checking system. What, you mean you don’t?
When designing a post-bank financial system, this is one source of transparency you'd want - a system whereby major credit decisions are transparent to the saver (or indeed anyone else), and so open to challenge by the widest possible group of people.
At what point would you have been worried enough about your savings going to buy sub-prime mortgage paper to register an online query (what are you doing?). At what point would you have even contemplated your savings being played in the CDS market? Or look at it more positively: at what point do you consider that your savings might be better (in whatever sense you want to give to it) deployed in developing economies than in subsidising consumption in the West?
I don't pretend to know the answers to these questions. Which is precisely the point. What's needed is a structure that doesn't pretend it knows best.
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