A Radical Way To Make Banking Safer: Get Rid Of Banks Entirely

Banks lend our money out, and that money can be lost if the bank collapses. One radical solution to this problem is to get rid of the banks. Peer-to-peer lending outfits offer a preview of what a world might look like without banks. The lending outfits match potential borrowers and lenders, cutting banks out of the process entirely.

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Here's a big idea, one that sounds crazy and fringy, but it's getting support from some very mainstream people. The idea is this - make our financial system safer by getting rid of banks. Here's Jacob Goldstein of NPR's Planet Money.

JACOB GOLSTEIN, BYLINE: There is this weird thing about banks - it's not a secret, it's been going on for hundreds of years - but it is strange. The money in your bank account is not actually in the bank. The bank takes your money and lends it out to someone else.

MARTIN WOLF: This fragility that is at the heart of our financial system - 'cause we think the bank has our money but actually it doesn't.

GOLSTEIN: This is Martin Wolf, a columnist at the Financial Times. In good times, he says, it helps the economy when the bank lends your money out - money that would otherwise be sitting idle lets people buy houses or start businesses.

WOLF: But in bad times, and there are lots of them, it generates huge financial crisis.

GOLSTEIN: Loans go bad, banks get bailed out - it's a familiar story at this point.

WOLF: I think of it as capitalism's Faustian bargain - Faustian bargain is a deal with the devil.

GOLSTEIN: And so Martin Wolf says, what if we did things completely differently? What if we got rid of banks and replaced them basically with virtual vaults? When you put a dollar in the bank, it would stay there. You'd pay a fee to use the virtual vault, but no bank would ever go bust.

One downside - if you made just this change, you would destroy the entire economy because banks do this essential thing - they lend out all that money in our accounts. In a post-bank world, you'd need some new way for people to get loans. As it happens, in just the past few years, the Internet has created a new option.

FONG TRINH: So I go online and I just literally type in - I think maybe less than ten pieces of information.

GOLSTEIN: This is Fong Trinh (ph), he recently applied for a $15,000 loan. He did not use a bank. He borrowed through a company called Lending Club. Lending Club and similar companies are like dating websites, but instead of matching people who are looking for a date, they match people who have money to invest with people who are looking for a loan. It's called peer to peer lending.

Fong entered that basic information online - his income, his debts, how much he wanted to borrow - someone from the company called him to confirm a few details, and soon after that he got an e-mail saying the loan came through.

TRINH: It was super-duper fast, like literally I could've just done that whole thing in my bathrobe, you know, instead of getting in a pants and shirt and walking down to a bank.

GOLSTEIN: Remember, Fong didn't get this loan from a bank, he got a loan from someone who had extra money and chose to lend it out.

Do you know who loaned you the money?

TRINH: I do not, that's anonymous.

GOLSTEIN: Do you want to know?

TRINH: Eh.

GOLSTEIN: So in a world without banks, who would be lending to people like Fong?

CHRIS WINTERS: My name is Chris Winters (ph).

GOLSTEIN: In 2010, Chris took a few thousand dollars out of his savings account and lent it out through Lending Club. He got more interest than he was getting at the bank, but he took a lot more risk.

WINTERS: There were some loans that went bad on me, and I kind of took it personally. Like, you know, Lending Club sent them an email and they didn't respond, or they called them and the person said they were going to pay and then they didn't. Like who is this unreliable person that I've lent the money to and why they lying to the collections people?

GOLSTEIN: In the world we live in now, all this risk and stress is hidden in the banks. If you get rid of banks, people like Chris are going to have to deal with it. Peer to peer lending is growing fast. Retirement funds and hedge funds are starting to get in on it, but it's still insignificant compared to the banking system. A few billion in loans versus trillions lent out by the banks.

Peer to peer lending is not going to replace banks anytime soon. And Martin Wolf, the Financial Times columnist says, yeah, ending banks as we know them would be complicated. It would create lots of new problems.

WOLF: It's clearly a bold experiment and it would have knock-on consequences. And there are real issues about how this would be structured. It is indeed radical.

GOLSTEIN: Still, a recent IMF paper said, at least in theory, it could work. And for decades, some economists, including a few Nobel laureates, have suggested different versions of this plan.

WOLF: We have to ask ourselves very seriously, do we want to live with these sorts of massive blowups every 10, 15, 20 years or so - which is quite possible. The costs are absolutely enormous. So having a more stable financial system than the one we have inherited from the past, given the scale of the crisis we've been experiencing, seems to be rather desirable.

GOLSTEIN: Wolf says this big idea is not going to happen now. But he says if there's another financial crisis in the next several years, people might consider it.

Jacob Goldstein, NPR News.

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