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Musings Report 2019-47 11-23-19 Could a New Model of Banking Pay Our Taxes for Us?
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Could a New Model of Banking Pay Our Taxes for Us?
We all know what would happen if credit disappeared and the only purchases that could be transacted were those paid in cash: the global economy would promptly collapse. Credit is the lifeblood of the current economy.
You probably know how the current model of credit creation works: in our fractional reserve banking system, private banks only need to maintain 5% (or less) of their outstanding loans in cash deposits. The bank doesn't loan out depositors' cash, it creates "money" by originating the loan.
While the Federal Reserve (the U.S. central bank) also creates money out of thin air, most of the new "money" in the economy is created by private banks when they issue auto loans, student loans, home mortgages, etc.
So when a home buyer purchases a house for $250,000 and gets a $200,000 mortgage, that $200,000 is created out of thin air by the bank. If the mortgage interest rate is 4%, the bank collects 4% of the mortgage balance.
Over the life of a 4% 30-year mortgage, this comes to $140,000 in total interest payments. Some significant percentage of this sum is profit, i.e. what's left after the bank's operating expenses have been paid. These profits go to the bank's top managers and its owners, i.e. its shareholders.
Since roughly 40% of all stocks are owned by the top 1%, 70% are owned by the top 5% and 93% by the top 20%, most of these credit-created profits flow to the already-wealthy: credit enriches the rich. (Note that the top 10% own roughly 70% of all wealth: real estate, businesses, stocks, bonds, cash, etc.)
Let's imagine an alternative system of private credit, one in which the bank used the profits from each mortgage to pay the taxes of the homeowner who paid the interest.
Let's say this alternative bank cut operating costs to the bone by being online only (no costly real-world branches) and automating all underwriting. Given that the cost of the "money" is low (since it's created out of thin air), if the homeowner is paying $12,000 a year in interest on the $200,000 mortgage, is it unreasonable to reckon total expenses at $6,000 and profits at $6,000?
If the bank paid these profits directly to local government to the credit of the homeowner, that would amount to a significant tax cut to the homeowner, while maintaining local tax revenues. In effect, the bank would be transferring profits from private hands to public uses, at no cost to the homeowner/debtor or the government.
There are many details to work through in this model, for example: would the payment from the bank to the local tax agency be a donation, or a form of income such as a dividend, or merely a refund?
Setting these issues aside, the general model is clearly just an extension of the existing system for creating credit.
This model is the brainchild of correspondent Patrick Sullivan, and to my knowledge, the idea is unique to him.
In Patrick's view, this bank would operate just as other banks do, but with the one variation that profits are used to pay the taxes of the people making the loan payments.
Why would anyone keep a loan at a conventional bank when this other option was available? Of course this bank would quickly dominate the entire sector.
Just as obviously, the incredibly profitable baking sector would lobby the government to crush this new bank, since it would eradicate their profits and thus their political power.
Here are several of Patrick's comments about his model (I've edited slightly for clarity):
"Credit is the modern method of enabling economic activity. The problem with modern credit is that its control is private: the profits of credit are private, siphoned off into private pockets.
My idea of creating credit from thin air, enabling local economic activity, and using the loan payments as tax revenue (at the state level?) is a way of wresting control of money creation from private to public hands."
"This loan payments as tax revenue also:
1. Can conceivably give the plebes a 100% tax cut. Instead of paying both tax and debt interest, you pay only debt.
2. Will cost NOTHING to implement. Why? Because banks create money from nothing and have ignorant people pay it back with “real” money. Once the bank is established it will fund itself by skimming a % of this “money from nothing” that is being created to fund these basic human rights economic activity. Housing. Education. Energy. Health care. Transportation. Hmmmm. Everything?
This is a stealth operation. You set up a new bank. Ostensibly as part of this system. AFTER the bank is legal, sanctioned, and in operation THEN a new bargain is proposed. Loan payments will be used as tax payments. The powers that be will scramble to illegalize this bank but it will be too popular with the people to do so."
I've been exchanging emails with Patrick about this model for six months, and I see no reason why it couldn't be launched in the real world by a deep-pockets idealist or group of deep-pockets idealists who realize they have more money than they can possibly use and want to use their wealth to disrupt an extortionist, exploitive system of private credit creation.
This revolutionary model is food for thought; the existing model of the rich getting ever richer at the expense of everyone else thanks to the way private banks create credit is not the only possible model.
Highlights of the Blog
The Hollowing Out of America 11/22/19
What's Been Normalized? Nothing Good or Positive 11/21/19
Political and Social Conflict Is Accelerating: Here's Why 11/19/19
If Not-QE Is QE, then is Not-a-Blowoff-Top a Blowoff Top? 11/18/19
Best Thing That Happened To Me This Week
I know this is trivial, but I was delighted that all four of my hibiscus cuttings have sprouted leaves. These will add white, red and an apricot-colored hibiscus to the double-petal pink we currently enjoy. Gardening is basically a series of small victories and keen disappointments...
From Left Field
A World We Built to Burn-- most insightful essay on California wildfires I've found to date...
30 years after the Berlin Wall came down, East and West Germany are still divided
Let Them Eat Tech-- is a revolt against Big Tech brewing?
The U.S. Shale Industry Hit A Brick Wall In 2019
Why We Need Less Elite Philanthropy and More Democracy: Many people in Silicon Valley and San Francisco tech circles might not like Anand Giridharadas' vision.
"The problem with outsourcing change to these economic winners is that you end up with fake change. Real change happens in the arena of politics and policy, and if you aren’t working to reform our common life in this era of extreme inequality and social fracture and democratic unraveling, you’re probably not 'changing the world.'"
How does health spending in the U.S. compare to other countries?-- healthcare alone will bankrupt the nation....
Google's Secret 'Project Nightingale' Gathers Personal Health Data on Millions of Americans Search giant is amassing health records from Ascension facilities in 21 states; patients not yet informed. -- completely "legal," of course....
From Singapore to Sweden, China’s overbearing campaign for influence is forcing countries to resist and recalibrate relations with Beijing -- alienating potential allies is not the way to assemble a cohesive empire....
Child Abusers Run Rampant as Tech Companies Look the Other Way (via Ben Evans)
The good internet is history (via GFB)
The End of the Awl and the Vanishing of Freedom and Fun from the Internet (via GFB)
My Advice To Young People (2015) -- truly insightful advice: "If you want to succeed, find a field in its infancy, one with no particular promise, where the pay is non-existent and the opportunity for eventual reward so theoretical as to seem absurd. Look for a space so raw and undefined that anyone with intelligence, credentials or contacts gives it a wide berth because they see no future in its pursuit and anyway they are too busy climbing the well-defined ladders of the moment. Immerse yourself in this arena and make as much of it as you can. It won’t be very hard, because the only people sharing the stage will be much like you: misfits, difficult types without degrees and the otherwise unemployable."
"The urge to save humanity is almost always a false front for the urge to rule." H. L. Mencken
Thanks for reading--
charles |
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