JACOB GOLDSTEIN, HOST:
There's this big idea floating around right now. It sounds crazy and fringy, but it turns out some non-crazy, non-fringy people are really into it. The idea is this - let's get rid of the banks. Don't make them safer. Don't make them smaller. Just get rid of them. Hello and Welcome to Planet Money. I'm Jacob Goldstein.
DAVID KESTENBAUM, HOST:
And I'm David Kestenbaum.
GOLDSTEIN: That's the show today, a world without banks.
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GOLDSTEIN: There's this weird thing about banks. It's not a secret, but it is weird for me every time I think about it. And it's this - when I put my money in the bank, I think of it is actually being in the bank. Like, it's in a vault or something. That, of course, is not the case. Banks take money I deposit, and they lend a lot of it out to people who want to borrow. This is sort of genius. We collectively leave trillions of dollars sitting in our checking and savings account. We might as well do something useful with it, might as well lend it out so people can start businesses and buy houses.
KESTENBAUM: It's genius but it's also weird because I count the money in my checking account as money that I have, that I can take out at any time. But really it's not there. It's been lent out to somebody who spent it.
MARTIN WOLF: It's this fragility that is at the heart of our financial system because we think the bank has our money, but actually it doesn't.
KESTENBAUM: This is Martin Wolf, longtime columnist at The Financial Times. He's been writing about this recently.
GOLDSTEIN: And to be clear, every bank operates this way. This is hardwired into the system, and he says it's a real problem. Banks take our money, they invest it in what sometimes maybe inevitably end up being risky things, and it can crash the economy. This is what happened during the financial crisis. Basically, all the major banks in the U.S. had to be bailed out.
WOLF: I think of it is capitalism's Faustian bargain. The Faustian bargain is a deal with the devil. The devil is an unstable financial system which nonetheless has in good times given us or helped support growth, but in bad times - and there are lots of them - it generates huge financial crises.
GOLDSTEIN: So there is an idea for how to solve this problem. And it goes like this. Banks do these two really very different things. One, they keep your deposits safe, and, two, they lend money out. So why not separate the two? Why not say places that hold people's money for safekeeping actually have to hold the money for safe keeping? The money you, David, think is in your checking account in this universe, it would not be lent out to someone else. It would actually be sitting there in your checking account.
KESTENBAUM: In this new universe, you would probably have to pay this place to keep your money safe. There'd be no more free-checking accounts. But in a stroke, no more bailouts. There'd be no need. And any time anyone wants their money out of the bank, it is there for them. Right now if everyone wants to yank their money out of the bank at once, you get a bank run. This problem we've had since the beginning of time, a bunch of desperate angry people lined up outside of banks that's shut its doors. In the new world, what does a bank run look like? Looks really boring.
WOLF: Everybody would go to their bank and say I want my money out so they would give you dollar bills. Yes, you could take every last sou out of the banks, and you could take them home in dollar bills and put them in your basement. Bank runs would simply disappear.
GOLDSTEIN: In this post-bank universe, you've solved this huge problem, the bailouts, the bank runs, this whole weirdness at the core of our financial system, but, unfortunately, if you just do this, you have also destroyed the economy.
KESTENBAUM: Because it turns out that other thing that banks do lending out money, that is really important. In this new world, how does anyone get a loan? How does anyone buy a house or start a business? You need some kind of new way for people to get loans.
GOLDSTEIN: And this frankly has been one of the big problems with this idea all along. It turns out, though, just now in the past few years, this new way to borrow money has emerged.
KESTENBAUM: Fong Trinh (ph) stumbled across this accidentally he had just moved from Seattle to Utah. And in the process, he racked up a bunch of credit card debt, $15,000. So he wanted to do what he heard people did in this situation - he wanted to take out a loan to pay off his credit cards, and as it happens around this time, he goes out to his mailbox and he sees this flyer.
FONG TRINH: It looks like it was one of those, you know, advertising, sell you a loan, like, that you see that's just junk mail that you see all the time. So I was like, OK, whatever.
KESTENBAUM: But, hey, you know, he needed a loan, So he went online. It was a place called Lending Club, and he applied.
TRINH: And I just literally typed in I think maybe less than 10 pieces of information - my name, the amount of loan that I was looking for. That's about it.
GOLDSTEIN: He thought he was applying for a loan from a bank, but it was something entirely different. It was this new thing called peer-to-peer lending. Lending Club is one of the companies that's doing it. There's another one called Prosper. And you can think of them like online dating services, but instead of matching people who are looking for a date, they match people like Fong who are looking to borrow with other people who are looking to lend.
KESTENBAUM: And for Fong it worked surprisingly well. He entered that information online. Someone from the company called to confirm a few details, and that was it.
TRINH: And then all of a sudden the next day, I get an email update that says your loan has been approved fully funded 100 percent. Just make sure you sign a couple of documents electronically. So I signed a couple of documents and literally within 48 hours I had funds in my account. Super duper fast, like literally I could just done that whole thing in my bathrobe. You know instead of getting in a pants and shirt and walking down to a bank.
KESTENBAUM: On his credit cards, Fong was paying about 14 percent interest. Those payments, of course, we're going to a bank that issued the card. The new loan was a much better deal. Instead of 14 percent, he was paying 7.5 percent.
And do you know who loaned you the money?
TRINH: I do not. That's anonymous.
KESTENBAUM: Do you want to know?
GOLDSTEIN: We did.
KESTENBAUM: So can you just introduce yourself?
CHRIS WINTERS: Yes. My name is Chris Winters.
GOLDSTEIN: Tell us one other thing.
KESTENBAUM: One other fact.
WINTERS: Oh, one other fact. Yeah, well, I'm a lawyer, so I answer questions precisely.
GOLDSTEIN: Chris, did not lend to Fong, but he lent to people just like him. Chris lives in Virginia and a few years back, he had a couple of thousand dollars and he decided he didn't want it sitting around in a savings account.
WINTERS: Interest rates on CDs and savings accounts were just, you know, abominable and they're still abominable. It's like, you know, 0.01 percent. So I was looking for a place to kind of put my money where I could get a little bit better return.
GOLDSTEIN: So this is money that you might have put in a savings account at a bank.
WINTERS: Oh, absolutely. This was money that was in a savings account in a bank.
KESTENBAUM: So we decided instead to lend it out. We signed up through Lending Club. And, for him, it really did feel a lot like a dating service. Lending Club gathers all this information from the people who want to borrow.
GOLDSTEIN: It checks their credit scores and their incomes, and it puts together these mini profiles that you can go through online. There's a whole page for each borrower. It doesn't show the person's name, but it tells you basically everything else you'd want to know - their credit score, their income, how much debt they have, even why they want to borrow the money.
KESTENBAUM: The idea is you end up loaning a bit to lots of people. So if one of them can't pay you back, you're not totally screwed. Chris had this choice but how he could do it. You could either say just lend my money to a bunch of people who match a certain profile or he could go through and pick exactly who he wanted to lend to. Contribute 25 bucks to this loan, 50 bucks to another and so on. And that's the route he chose. He found himself looking through these miniature profiles obsessing over them, really, trying to decide who he should lend to.
WINTERS: It was it was a ton of work. I spent a lot of time looking through each individual loan looking for like red flags of, boy, this person looks shady. You know, their income is low or do I really want to take a risk loaning to this person? I was like, you know, I was an underwriting desk at a bank, but doing it like 25 times at a time.
GOLDSTEIN: It was a hassle, but he liked the idea of it.
WINTERS: Hey, you know, we're cutting out the middleman here. I guess I probably never saw the bank as a middleman before. But we're cutting out the middle man. You know, I'm giving you some money. I'm getting a better return. We're all better off.
GOLDSTEIN: For Fong borrowing the money felt just like kind of more convenient version of borrowing from a bank. But on this other end for Chris, this was nothing like having money in a savings account. Savings accounts are boring. You know, the bank sends you statements, you throw them out without even opening them up. Sure, the bank is lending your money out, but that's the bank's problem. In this case, it was Chris's problem. He loaned his money out for three years, and it was a stressful three years.
WINTERS: There were some loans that went bad on me in terms of people who were late. And I kind of took it personally. Like, why is this person late? You could see like the little tracking system of, 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 are they lying to the collections people?
KESTENBAUM: So emotionally you didn't just treat it like another investment.
WINTERS: No, I guess I didn't. I should have, but I didn't.
KESTENBAUM: Chris is not sure he'd do this again. It was just too stressful. It's possible these are just growing pains that this whole thing is such a new idea. We don't really even know how to think about it or feel about it.
GOLDSTEIN: We talked to the CEOs of both Lending Club and Prosper. Both say their businesses are growing really fast, lots of people are borrowing money this way, and they're borrowing for all kinds of things. They're paying for vacations, for home improvement, for dental work, small businesses are starting to borrow this way.
KESTENBAUM: This method of peer-to-peer lending. It had like these Occupy Wall Street beginnings. You know, one person lending to their neighbor helping them out. But now it is way more than neighbors lending. It's big money now. There are retirement funds that are lending, through these things, hedge funds are lending money to people to pay for dental work.
GOLDSTEIN: So just to recap, this is what the world might look like without banks. You get banks replaced by these two different things. One is a place that serves as your personal vault and hold your money for you.
KESTENBAUM: And two are these new online marketplaces that match up people who need a loan with people who have got some extra money to lend.
GOLDSTEIN: Different versions of this idea have actually been floating around for decades, and this really striking combination of people have got behind it. Some of those people were way, way outside the mainstream. But at least a few of them were famous economists, people who won Nobel Prizes. A couple of years ago, the IMF put out a report on this idea and just a few weeks ago, Paul Krugman mentioned it in his New York Times column. Uncharacteristically for Krugman, he wrote, quote, "I'm not even sure where I stand."
KESTENBAUM: And there are some big problems to figure out about how or really even whether this can work. For one thing, Lending Club and Prosper are tiny compared to the banking system. The total amount loaned out through both companies is around $5 billion.
For comparison that is the size of, say, the bank of the Ozarks. It's this insignificant speck when you compare it to Citibank or Bank of America or Chase or one of the big banks. If you tried to switch to the system right now, you would kill the economy. All that money in checking and savings accounts - it would really be locked up in a vault. It would not be lent out anymore.
GOLDSTEIN: And even if you were able to get rid of the banks in a slow cautious way, and let this new universe of lending grow, there's still a danger that this problem you're trying to solve, this instability at the heart of banks would just shift somewhere else, shift to things that aren't called banks but that operate in a similar way, like, say, money market mutual funds. They take your money and loan it out, but still let you write checks and withdraw your money at any time. In this new universe, you'd have to figure out what to do about things like money markets, too.
KESTENBAUM: Martin Wolf the Financial Times columnist says, yes, these are real problems, but think how nice it would be if the financial system stopped blowing up at regular intervals.
WOLF: If we wanted a system whose call was crisis-free, this is the only way to do it.
GOLDSTEIN: And do you want a system whose core is crisis-free?
WOLF: Yeah, I would like somebody to try and do this. I'm not sure I would like the U.S. to start first. I think maybe we in the U.K. should start first because it's clearly a bold experiment and it would have knock-on consequences. And there are real issues about how this will be structured. It is indeed radical. But I think we have to ask ourselves very seriously do we want to live with these sorts of massive blow-ups?
I think quite possibly more massive blow-ups in future because of the complexity of banks. Every 10, 15, 20 years or so which is quite possible, the costs are absolutely enormous, having a more stable financial system than the one we have inherited from the past given the scale of the crises we've been experiencing seems to be rather desirable.
GOLDSTEIN: Martin Wolf says he knows this big change is not going to happen now, but he says after there's another financial crisis, people might consider it.
KESTENBAUM: Let us know what you think. You can send us email firstname.lastname@example.org.
GOLDSTEIN: Our show today was produced by Robert Smith and Damiano Marchetti.
KESTENBAUM: If looking for other things to listen to, NPR recommends Snap Judgment. You can find it on iTunes. I'm David Kestenbaum.
GOLDSTEIN: And I'm Jacob Goldstein. Thanks for listening.
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