Interbank Market News Scan: Banks need a new philosophy.

The takeaway … Banking on a new philosophy.

Is it time to make consumer lending by banks illegal? Yes. Consumers should raise cash from private individuals and households to the extent that the activities of these private individuals and households have no impact on the money supply. The focus of nationally chartered banks should be to retail the US currency primarily by lending to merchants, traders, and brokers, the entities that hire consumer-taxpayers.

Private individuals and households as a community are best at vetting borrowers of consumer loans. Private individuals and households have more information on their friends, families, and neighbors’ ability to pay back a loan versus a bank. Their social agencies provide a better tool of assessment as to an individual’s character and income capacity versus the typical bank’s loan application tools.

Imagine if lending during the period prior to the Great Financial Crisis was limited to the exchange of promises to pay between private individuals. These promises to pay (contracts) would have had higher values because they would have been intimately vetted.

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The pushback on this view is that consumer-taxpayers should be able to enter the loanable funds (credit) market to obtain what they wish to purchase today by betting on the uncertainty of a future income stream. Also, if the banks are not allowed to sell money in the consumer loanable funds market, the mission of the banks, which is to resell the king’s currency, would be severely impeded. Circulating the currency, making it available in the transactions markets, validates the currency as legal tender and buttresses the Government’s assertion that it should be in charge of the political economy.

The failure of individuals to pay back bank loans reflects a mismatch between the cost of borrowing money and the consumer-taxpayer’s opportunity to make sufficient income to pay the principle and interest. These stresses create the impression that the Government that charters and regulates these banks is not a valid steward of the economy. The consumer-taxpayer not only endures the growing perception that the banks are being unfair, but that the Government is endorsing the ban’s inequitable behavior.

I would recommend that Government defer to private markets for consumer loans where private individuals and households make loans to other private individuals and households. With the exception of providing the powers of the Judiciary to resolve conflicts between private lender and private borrower, the Government should prohibit nationally chartered banks from participating in the consumer loanable funds market.

Alton Drew

8 May 2023

The stats ….

30-day Fed Funds Options: 95.15

Effective federal funds rate: 5.08%

Federal funds target range: 5.00-5.25%

Interest on reserve balances: 5.15%

Discount window: 5.25%

Two-year Treasury note: 3.75%

Ten-year Treasury note: 3.37%

Sources: CME Group, Board of Governors-Federal Reserve System, Federal Reserve Bank of New York.