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12 sats \ 9 replies \ @HardRich 26 Nov 2022 \ on: 21 Rules of a Bitcoin Maxi bitcoin
Curious how people will buy houses or start businesses without someone to loan them money? Is that not a bank? I generally dislike banks and bankers but how else do loans get made?
Very complex question. Its like saying "who will give bread to all the people standing in the breadlines" when you're living in soviet Russia.
The banks aren't simply giving loans, they are issuing new fiduciary media after checking your credit to assess the likelihood that you will pay them back. The actual currency they give you is created by your promise to repay and the bank's ability to collect the debt and cover the depositor's funds if a percentage of the loans they issue aren't collectable.
A loan granted by a non-fractional reserve lender must have a high level of secure collateral and/or a very high interest rate since the capital, once lent, can't be simply "written off" but the lender is out 100% of the principal on the loan.
Absent a fiat currency, lending will return to old pre-fractional reserve banking rates and practices, when hard assets were the actual media being lent. Collecting on those loans, particularly unsecured loans, will likely need to be collected by force.
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Why would there be no (or less) fractional reserve lending with Bitcoin?
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Fractional reserve is how fiduciary media (Fiat currency a.k.a. "the dollar") is created. It is the practice of lending out more than is on deposit. At first paper money comes into existence by banks trading transferable deposit slips for hard money on deposit. As soon as people accept these deposit slips in place of the hard money, the banks can issue as much currency as they can tolerate the risk of a bank run. Central banking and "deposit insurance" eliminates the risk of domestic bank runs, but it doesn't eliminate the risk of international demands for redemption of hard money.
The US headed off this international run on its central bank by being the global hegemon with an enormous navy and a nuclear arsenal. It has gone 51 years this way where the dollar is no longer redeemable for bullion both domestically and internationally. The dollar truly is the world currency and has been for decades. As a country, the US can literally import anything it wants on a loan that doesn't ever need to be paid because the dollars themselves are accepted as payment. So long as the world continues to demand dollars, the US inflation rate will remain suppressed and even potentially deflationary.
With bitcoin as the only domestically and globally accepted currency, there is no opportunity to loan out more bitcoin than there is on deposit. That's not to say that a bank can't misrepresent what its doing with your deposit, but so long as what a bank is lending out is bitcoin itself, it can only lend what it actually once had in its possession.
There already exists a business model that is active today similar to this old full-reserve lending absent a fractional reserve bank. For example; A person in the business of fixing up homes has a surplus of labor and material built up from managing property. He wants to buy a distressed property such as from an estate. If he has a $300k private loan, he can buy a property, send in his crew to clean and fix it up for sale and potentially turn a 40% profit. He is willing to share this profit for liquidity, and only take 30% profit by flipping the property within 6 months with the home leveraged on a secured 20% APR low origination fee loan. For the lender (or investor) he perceives this as low risk because he holds the title during this time as collateral and the property manager looks like a hired-gun on paper. The risk the investor has is if the property has unexpected problems, and the manager can't turn a profit on it, now the investor is holding the house and he has to flip it himself possibly at a loss. A bank is not willing to take this risk because its a short term loan, they don't want to be the owner of the property, and they charge much lower interest rates for long term loans to homeowners at a much lower risk. Here is a case where you can earn a high interest rate by being a full-reserve lender, but at high risk.
If fractional reserve lending were impossible under a bitcoin standard, then these low-risk long-term home loans would be open to a free market of full-reserve lending, and absent inflation or deflation, there would be lenders willing to loan their reserves out at a lower rate. There would still be a role for lending institutions, but they would look more like bond funds than checking accounts.
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The typical borrower will hardly use religious dogma to decide where to borrow, they'll borrow where the interest is lowest.
If a traditional bank can get customers to deposit Bitcoin in checking accounts for 5% interest and loan out at 6% with fractional reserve, they will. You can't stop them.
You seem to envision a world where ALL the customers refuse to lend to that bank. And you don't explain WHY they would be so radical. If the majority of democratic citizens so despised fractional reserve lending, they could have made it illegal long before Bitcoin was invented. They didn't.
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You may not fully understand bitcoin or fractional reserve lending. For lending, think of bitcoin as silver coins. If people only accept silver coins as payment, and the bank only lends out pure silver coins, how will the bank lend out more silver coins than they ever had on deposit? If the bank is collecting 6% interest and they have no business expenses, they certainly can lend out their own profits, but that's still not fractional reserve banking.
This has nothing to do with religious fervor or idealism. It has to do with generalized distrust of any fiduciary media other than the hard asset itself; in this case bitcoin.
People won't reject fractional reserve banking per-se, they will reject the fiduciary media that is being lent out because its an insolvent imposter of a hard asset.
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With fiduciary media you mean the checking balance (denominated in Bitcoin) in the bank's database?
It's funny, we seem to be accepting the sats paid on this site in form of fiduciary media. As long as we trust they can be withdrawn over LN we use them as checking balance, because it's easier to just click on an arrow than to make an LN payment every time.
I don't see why the majority of people will no longer accept fiduciary media (denominated in Bitcoin) in the future. I agree it's possible, but I don't see it as an intrinsic attribute of Bitcoin that must have that effect.
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A ledger balance at a bank is not fiduciary media. The medium by which you transfer these balances between accounts and banks is fiduciary media. You can transfer balances between accounts at banks by wire, money order, check, ACH, electronic transfer between internal accounts or BANK NOTES (a.k.a. US dollar bills). To get the dollar bills out of your account, you go to a teller and they give you bank notes.
Never did they give you silver or gold money from their vaults.
Yes, SN is a custodial wallet. It is possible that SN spends the bitcoin out from under the balances represented in our accounts. Yes, we could be sending sats back and forth without us ever knowing that @k00b is operating his service at fractional reserve.... That is until one day his balance goes so low that SN can't satisfy a request to pay an external lightning invoice. Then someone screams, "hey where is my bitcoin?" To everyone, and there is a bank run on SN.
This is the difference between fiduciary media and money. All are IOUs, but money is a hard asset. Bitcoin is a hard asset.
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Like in the context of something like https://www.khanacademy.org/economics-finance-domain/ap-macroeconomics/ap-financial-sector/definition-measurement-and-functions-of-money-ap/v/money-supply-m0-m1-and-m2
If Bitcoin were to replace the Dollar, M0 would be limited to 21 million. But banks and the Fed would still be able to inflate M1 and do their usual operations, no?
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No. M0 subtracted from M1 is an artifact of fiat. Its the M1 demand deposits of fiduciary media that allows M3 to grow beyond hard assets.
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