Topic: Banks are fundamentally unnecessary and actually dangerous for bitcoin - page 2. (Read 4939 times)

But Joel, you're thinking is clouded by the system we have in place today which pays interest.

First of all, the banks pay way less interest than they should given the enormous risks they take with our money.  in fact the FDIC has made way more guarantees than it can possibly handle and only maintain the facade thru the taxpayers guarantee.

and none of what you say applies with a deflationary currency which may increase in value with time more than compensating for the small amt of interest paid by a bank along with the risk.

i stopped reading right there.

the real question is to whose benefit and to whose risk?

While it's true that an inflationary currency must be invested or loaned just to maintain its value, the benefit to investing or loaning is the same with a deflationary currency.

If the currency would drop 2% a year and you can make 4% interest with an inflationary currency, all other things being roughly equal, an deflationary currency that would go up 3% a year will offer you about 9% interest. You still lose the same 9% by not investing.

You can easily see why this has to be true. If it wasn't, inflation would be harmless since you could just loan your money to offset it. That would mean the government could print and spend all it wanted without hurting anyone. That's obviously not true.

The problem with this thread is that it instantly turned to "loans"  .. it's possible to pay people interest on their banking accounts without having to loan bitcoins out.

We charge 1/2 of 1% for external transactions (flexcoin to bitcoin) and this INCLUDES the miners fee.  All other transfers are free (flexcoin to flexcoin,  bitcoin to flexcoin).. etc.

we take that 1/2 of 1% ... give about half of it to the miner.   Then the quater of a percent that is left is 70% allocated to the account holders as an interest payment.    we keep the tiny 30% of the 1/2 of 1/2 of 1%.

are people going to get rich off interest allocated like that?  No.

But are we doing fractional reserve lending?  No ...  are we loaning out bitcoins?  No...   

Now the other issues ARE valid...  security for example (mtgox)... the threat of some idiot collecting 100,000 coins and vanishing due to hardware failure, hacking or theft (mybitcoin)  ...

But those issues exist as well for your desktop client...  like the guy that lost 25,000 bitcoins from his desktop.

The answer to this is simple,  do whatever you feel is proper.    I can't force you guys to use flexcoin...  All I can say is we made the most secure online bitcoin bank that we can think of.  We don't loan out bitcoins,  and you get interest based on a 100% transparent formula. 

Make your own decisions if you are going to use an online wallet /  bank / whatever..   personally I think we're doing the community a service by allowing people to  pay for their cup of coffee at the coffeshop with no fees from their cell phone and just use flexcoin ID: coffeshop as compared to the harder to use process now that involves remoting to your desktop and trying to pay that way... or lugging around a laptop.

Again it's your call... 

I agree that IOU's are created but not necessarily money created.

Person A: owns $100
Person B: owns $100
Person C: owns $0 and a nice hat

Person C decides to borrow $100 from Person A and promises to repay $110. This doesn't necessarily have to create any money, if this person can just sell his hat to person B, and we end up with:

Person A: owns $110
Person B: owns $90 and a nice hat
Person C: owns nil

A loan was made and repaid (with interest), and no money was created.

Also, that 'nice hat' doesn't even need to be tangible... it could just be Person C's personal labour or time for example.

ten dollars tomorrow are worth more tomorrow because i know i will have them tomorrow while todays dollars have a likelyhood <1 to ever make to tomorrow plus i have to invest time to secure them so that likelyhood stays close to 1 


in an inflationary currency you mostly just give your money to someone who can invest it into something that doesnt lose value. so a big part of the profit you share is just avoiding inflation. in a deflationary or stable currency the interest rate has to be significantly lower and might not justify the risk of not getting your money back.

Every loan creates money. If you have a problem with money creation, you have a problem with lending.

If I borrow money to buy a house, the money I borrowed is still in circulation because I gave it to the person who sold me the house. However, now there is an IOU in circulation as well -- the future money I will earn to pay that mortgage is now already in circulation.

The idea that there's money that "does not really exist" makes me respond "as opposed to what?" Money is just a marker. Money, as money, never really exists any more than a number. Pieces of paper with big numbers on them aren't much more real or less real than numbers in a computer. People do things that way because it makes sense, not because there's some massive global conspiracy.

People work. People buy things. People sell things. Try, for a second, to imagine everyone doing exactly the same things just without moving all the money. The money is just a communications mechanism. It tells a person to work at Burger King, to open a saw mill, or to make me a plasma TV. That's all.

If I'm choosing between being an actor or a pilot, money tells me which my society needs more. If I'm choosing between buying a plasma TV and a burger, money tells me which takes more resources to produce. That's all it does.

This is another one of those arguments where you focus on just one side of a transaction to come up with a skewed view of the transaction as a whole. For every such an argument, you can do the same thing for the other side of the transaction and come up with an equally bogus argument that makes the opposite point. For example: Loans are such a great deal for the poor, they get to spend rich people's money.

Nice points, I am totally with you!!
But I am not fine with the fractional reserve banking yet. Isn't it nonsence to pay interest on money that does not really exist? Or creating money in general? There would be not enough money in the world to pay back all debt plus interest!

and how is that a downside? that's all i'm asking.

seems to me if you're rich that's an upside.

I don't exactly know what you mean?!
What I am saying: the rich get richer, the poor get poorer. The poor pay the interest the rich receive...

From the opportunity value. Ten dollars today is worth more than ten dollars tomorrow because everything you can do with ten dollars tomorrow you can do with ten dollars today plus you can spend it before tomorrow. When you loan money, you transfer the money from someone who has no way to extract the opportunity value to someone who can and they split the surplus.

You could also ask why it would be fair that one person produces more value than another and gets the same pay.

No, not at all.

Say you work as a laborer. Your work sucks, it's hard work in the hot Sun. You get offered a job as a pizza delivery driver. You have air conditioning, you get paid more. But you don't have a car and you need one to work as a driver. You could spend the next few months living on even less to save up enough money to buy a car, but that makes no sense. Instead, you borrow the money to buy the car. You pay the interest out of the value of the car which enables you to get a better job.

No, it doesn't mean they have to work more hours a day to pay the interest on money unless they take unwise loans. If, for example, you borrow money that allows you to get a better job, you may work fewer hours. Don't blame wasteful consumption on bankers.

i don't see how you can call that a downside unless you are at the same time claiming to be poor.

Poor man: That's a downside!
Rich man: That's an upside!

seems quite neutral to me.

I like your points JoelKatz and qwk,

now I just see a problem in the thematic of charging interest, which is quite a twist...:-/

Generally it is an economic and reasonable method for me to participate in growth (opportunity savings) when my bank offers credits for people or businesses willing to pay back interest.

But where does the money to pay the interst come from?
In the end it is all about the time someone spends in earning the same amount of money someone else earnes.
One could ask how fair is it to have one person working 10 h a day, while an other one needs 8 h only to earn the same amount of money? But that is another question... So far this is how it works and i think it is a good way, as probably one had to do some effort to achieve that balance.

I am getting to the sens and the right to charge interest. So to work out the interest someone has to pay he works more hours a day.

But the big problem is the money creation; fractional reserve banking!!
http://en.wikipedia.org/wiki/Fractional_reserve_banking
Which means credit users have to work more hours a day to pay the interest on money, that does not even exist!! Also the paid interest receive the banks, not the peoble putting money on their bank account! So here I see the potenial in a fair currency in bitcoins.

But, well, on the other side, without that created money we would not have been able to grow that fast in the past years...

And again a downside of interest: the poor pay the rich!! Only rich people can gain opportunity savings, as to receive at least 2% you need to have quite an amount of money these says;) And how needs that money? The poor people ask for credits and therefore pay the interest to the rich. Also companies goning in debt do their costcalculation inlcuding the interest they have to pay back. So in the end everyone buying that companies products also pays his interest debt.

Depending on your need, you might actually gain a lot. Online wallets or banks could offer a lot of services, the regular bitcoin client doesn't offer.

• instant transfers between users of the same service
  
  • zero fees or low fees for internal transfers
  • micropayments which are too expensive over the bitcoin network
  • possibility of chargebacks (yes, some people may actually want that)
• insurance against theft / technical failure
• portability across devices
• interest (which could require fractional reserve, but some people may be willing to accept that)
• merchant services
• currency exchange
• etc. etc.

I don't say you should use a bitcoin bank, but i see a lot of good reasons to do so. Whether or not these additional services are valuable enough for you to accept the downsides of banking, is totally up to you.



100% agreed on the "level of trust", but that doesn't necessarily mean small amounts. With a secure bank including insurance, i see no reason not to actually store almost all my bitcoins with them.

I agree with that. However, see my post above. If you don't loan your money out and someone else does, you will turn 100 bitcoins into 100 bitcoins while someone else turns 100 bitcoins into 108 bitcoins.

You are entirely correct in the case of, say, a government printing money. However, this is not correct in the case of loans. The people who get the money pay it back with interest. They get purchasing power today (presumably when they need it more) in exchange for foregoing purchasing power in the future when they expect to need it less.

If people are willing to pay interest, it will typically be because they can make better use of the purchasing power today. Loans help people to efficiently time-shift consumption and production in cases where the most efficient pattern isn't produce-consume.

The obvious example is the guy who gets a job that pays 20% more than he's making, but he needs a car. He can't produce the value he needs to consume in the form of a car without the job. A loan allows how to consume the car now when he needs it, and produce the value of the car later when he will most likely be able to.

Certainly banks do some bad things and certainly people take bad loans. But the fundamental logic of banking and loans is completely sound.

No, I am saying that if you simply hold onto your money, the opportunity value is lost. Whereas, if you deposit the money in a bank, you can extract the opportunity value.

True. That is the downside of a bank. However, the upside is that you don't waste the opportunity value of the money.

No, that's not what I'm saying. If you hold onto the money, you cannot use it unless you find some way to extract the opportunity value. If you cannot do that, and in general you cannot, that value is wasted. A banker is an expert at extracting the opportunity value of money.

I would say that if you have it, you can only use it when you want. But if you don't want to use it, the opportunity value is wasted. This is value to which you are entitled that you are simply giving up for nothing if you hold the money.

No, it is increased. That's how the bank pays you interest.

Look, say you have 100 bitcoins and you don't need them until next week. Say someone else needs 100 bitcoins right now, badly enough that he's willing to pay back 110 bitcoins next week. If you hold your 100 bitcoins, you lose the 10 bitcoins of opportunity value you could have made by loaning those bitcoins out. Even if you say "well, then you risk losing the whole 100", you can easily imagine a situation where you could also obtain insurance against loss of your principle for, say, 2 bitcoins. So you still waste 8 bitcoins of opportunity value by holding your bitcoins, and the guy who could have done something with the bitcoins today doesn't get to do that either. Lose/lose. (But then the fewer bitcoins in circulation do benefit some people, so they win.)

Actually, more likely someone else will lend the guy the 100 bitcoins. So he'll have 110 bitcoins less 2 for insurance and you'll have 100. You're playing the sucker.

First of all, to store bitcoins safely you need to educate yourself on how to do it. This takes a lot of effort for people who aren't tech-savvy so there is obviously a need for companies providing this service (safe storage).

Second, banks today aren't primarily about safe storage. You lend your money to the bank. They pay you some interest because they can use the money to earn more money (e.g. by lending it to someone else at a higher interest). This service makes just as much sense with Bitcoin as with central bank money and will naturally also exist in a Bitcoin economy.

Mods: Move this to Economics?

Perhaps that's what he meant. However, I believe this economic analysis is incorrect. You're saying that by keeping the money in the bank, and having the bank loan it out, that this was good for the economy. There was some positive contribution of wealth that would not have happened without loaning that money out. I believe this is wrong because the total quantity of money is irrelevant. You're not going to improve things by adding money into the system (and I'm well aware that Ben Bernanke disagrees, but he's wrong). So long as the money is sufficiently divisible, the sum total of it is an irrelevant quantity.

Your analysis assumes that money behaves like, say, oil. Suppose there is an economy that is energy starved. If you double the amount of oil they have, then they will be able to do more stuff. Adding oil adds wealth. But money is not like this. If you double the amount of money they have, it will change nothing. Adding money does not add wealth.

In practice, inflating a money supply does not increase the wealth. It merely redistributes the purchasing power of the money to the people who get the new money. It is a way of taking wealth from everyone who uses the money and giving it to the people who get the new money. It's equivalent to counterfeiting. For some reason, everyone understands that when a non-banker counterfeits a dollar, it is wrong. But when bankers do it, they think it is right and good, when in fact it is equally as bad.

No, that's not what he's talking about.  It only takes a few minutes to turn your computer on if you had to spend Bitcoins.  Heck, you'd wait on average longer than that just for the transaction to confirm, and I guarantee you'd wait much, much longer for something like a check to clear.  Heck, even a credit card transaction takes up to a few days.  It's not an issue of your PC not being on at that very moment at all.

What it is an issue of is the economic use of that money.  Let's say you get some Bitcoins, you hold onto them for a year, and then you spend them.  In that interim period they had precisely zero economic activity.  They didn't contribute to any economy, they didn't help anyone make money, etc.  Now, let's say you get some dollars in your bank account, you hold onto them for a year, and then you spend them.

Well, see, those dollars actually did have an economic impact, because your bank turned around and lent them out to people buying homes, new businesses starting up, and other economic activities.  Those dollars may have been exchanged many times from person to person, business to business, all while you just "thought" you had a static balance in your bank account.  So that amount of money "sitting" in your bank account actually had many times its value in effect on GDP.  Your Bitcoins, however, had precisely zero impact.

That is the fundamental difference between using a bank and stuffing money under your mattress that we are talking about here, and in the absence of trustworthy Bitcoin banks, the only thing you can do with your Bitcoins is the equivalent of stuffing them under your mattress.