the current system
the current banking system
Solution: Banking 2.0
Under Banking 2.0, the Fed would be an agency under the control of the U.S. government, and banks would work as intermediaries for the Fed (the Federal Reserve was created through an act of congress with the goal of serving the public but is not a part of the federal government). Banks would be providing the same services that they do now, like accepting deposits and writing loans. If banks operate as intermediaries for the Fed, there would be no need for lending limits, as large and small banks would both lend on behalf of the fed and have the same capacity. When banks lend and invest the money that they pay for, they charge interest as a means to make that lending and investing worthwhile for themselves. But, when operating as intermediaries for the Fed, the private drive for profit is eliminated, eliminating the need for interest.
A crucial part of Banking 2.0 is that when money is deposited into an account, the Fed registers that credit to the depositor, but the money is deleted from the money supply. Because the Fed has the ability to create and delete money, it will simply recreate the money when the depositor wants it back. Likewise, the Fed can create a theoretically unlimited supply money to lend, limited only by the number of people that qualify for loans. In this way, the money supply is dictated by the actual economy.
Potentially the biggest benefit of Banking 2.0 is the end of interest. When money in a bank account earns interest, the money in that account grows. But, when everyone has their money in accounts that are earning interest, the money supply expands, and the real value of that money stagnates. In fact, the purchasing power of that dollar actually declines if it is not earning interest, due to inflation.
Eliminating interest also eliminates the high cost of getting a loan. A loan receiver would still need to pay back the loan, but would not need to pay back the interest on the loan. The money saved would go back into the economy and bolster growth. This would translate into more affordable lending for big-ticket purchases like homes and cars, and more reasonable repayment plans for student debt. For instance, monthly payments on a $400,000 mortgage would drop from $2,147 to $1,111, saving $372,960 (30 year fixed 5% interest).
When banks work as intermediaries for the Fed, it eliminates bank failures and subsequent loss of consumer deposits. Consumer deposits would be held as a credit with the Fed itself, thus the customer would be relying on the Fed’s ability to return their deposit, not the bank’s balance sheet.
international lending opportunities are also opened up. Banks’ lending capacity to foreign projects is essentially unlimited, and foreign lending creates an expansion of the dollar. If a foreign project can provide a return on investment, the U.S. dollar would strengthen, and ultimately the return on foreign investments would benefit the U.S. It is conceivable that these dividends could even be passed on to U.S. citizens in the form of “Fed dividends.”
The last recession exemplified just how punishing the financial sector can be. Not only did millions of people lose their homes, but the U.S. spent hundreds of billions of dollars bailing out banks. The U.S. could have stopped the landslide of foreclosures if it could have rolled back interest rates on home loans. A primary cause of the recession was that the financial sector was costing too much. The last recession would have never occurred with Banking 2.0.