A ruthless [financial system] of all that exists...
fiatluxemburg offers up this rejoinder to my pessimism about what I called “the trajectory that [financial/economic] things are on right now, although it could be [different]”:
Well, yes. But consider something like peer-to-peer lending … it’s doing pretty well:
In 2005, there were $118 million of outstanding peer-to-peer loans. In 2006, there were $269 million, and, in 2007, a total of $647 million. The projected amount for 2010 is $5.8 billion.
I recognize this is a pretty minor phenomenon in the grand scheme of things. …
Not to be a jerk, but here are those numbers in graph form:
The first three points represent data; the last is the projection. Looks pretty optimistic, no? (If the vertical axis were logarithmic, the line would look straight, because basically the projection implies that the loans outstanding continue to grow at a constant rate of like 110% a year for three more years, in the midst of a global recession.)
And it may be worthwhile to point out just how “minor [this] phenomenon [is] in the grand scheme of things.” According to the FDIC, the aggregate balance of all loans held by U.S. banks at June 30 was $8 trillion. (I can’t link directly to the number; you have to go to the FDIC site, hit “next”, and look at the “Assets and Liabilities” report.) The optimistic-looking 2010 peer-to-peer lending projection of $5.8 billion would represent 0.07% of this total.
This doesn’t make the peer-to-peer vision stupid or pointless; I’m all for the idea that we have to cobble together fragments of a better future from the flawed, limited materials we have at hand today. (Where else would we get them from?) I must register a bit of discomfort with this part, though:
Person-to-Person Lending models attempt to reintroduce the social components that are lost in traditional centralized banking models, while maintaining a mixed quantitative/qualitative balance of diversification - as opposed to the purely quantitative diversification available through institutional lending.
I don’t really have any clue what’s being said here, but it reminds me of something from Bowles and Gintis’s “Walrasian Economics in Retrospect”:
[E]conomic analysis must become more social and psychological in its treatment of the human actor, more institutional in its description of the exchange process, yet no less analytical in its model-building…
In the same vein, I’m skeptical of a “less quantitative” financial system. Doesn’t this just mean that people won’t think as hard about their decisions?
But my crankiness has more to do with the sense that time for a meaningful alternative may already be running out. Lux asks:
Musn’t that ever growing behemoth eventually collapse under its own weight, even if it is too big to fail? Won’t the more resilient and effective arrangements win out? And if not, why not?
Also, would that imply we are all doomed?
Do you really want to be around when the behemoth collapses under its own weight? Is something like peer-to-peer lending really ready for prime-time, ready to fill the vacuum that will have been created by the next disaster? It’s far from clear to me that this next disaster won’t happen in a matter of months. In that case, maybe we are all doomed.
I mean, look: when PNC acquired National City, an Ohio-based bank with lots of terrible loans on its balance sheet, it published a little presentation showing its estimates of the future losses expected from different loan categories. While there were tax reasons for PNC to be quite conservative with its estimates — that is, to assume quite high future losses — the fact of the matter is that if those loss estimates are correct and pretty much applicable to other banks in the country, pretty much every bank in the United States is insolvent right now. The stuff they own is worth less than the amounts they owe. Whoops. We call this “bankruptcy”. The only real salvation is the mismatch in timing between the cash generated by the assets and the cash depleted by the liabilities. The TARP money doesn’t really change the picture that much.
The point isn’t so much that this is definitely the correct analysis, but that it’s not at all difficult to come to these kinds of conclusions without being a crazy person, using only public information. That’s the situation today. How much time do we really have to work out new stuff?
And incidentally, a productive midpoint between the innovation of peer-to-peer lending and the bankruptcy of the existing banking system would be the chartering of a bunch of new banks, not burdened by a backlog of terrible loans, perhaps subject to a different regulatory regime, armed with fresh capital and ready to invest. Do you hear anyone talk about this? No, even though it’s arguably the most obvious response. I guess that’s what Karl called ideology.
