From: mcb@net.bio.net (Michael C. Berch)
Date: Sat, 22 Jan 94 16:46:27 PST
To: cypherpunks@toad.com
Subject: Re: Internet Banking
Message-ID: <9401230043.AA11878@net.bio.net>
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Matthew Bernardini writes:
> I am new to this list, so excuse me if this topic has already been
> discussed,  but I think you need to take a 200 level course in economics
> called Money and Banking.  I think the idea is so obsessed with tax-evasion
> and privacy protection that you have ignored all the economic consequences
> of the ideas you are proposing.

The whole idea of my article was to take a look at the
digital/private/offshore bank concept in the light of economic reality
and the actual capital/financial markets.  My credentials in economics
are informal rather than formal, though I did write my senior paper in
law school on an economic topic (airline regulation).  I am certainly
not a specialist but would like to think that I am not ignorant
regarding banking economics and monetary theory.

> 1) Who will insure your money ?  Can you trust anyone but the US gov't to
> back your funds ?  Even in the S&L scandal the gov't refunded money to
> people that weren't insured by the FDIC.  Do you think they would come to
> the cypher-punk rescue if your money up and flew to Brazil ?

Actually, I would trust practically anyone *but* the U.S. Government to
back my funds!  I am very much opposed to mandatory, monopolistic
governmental deposit insurance, since it gives the illusion that the
government actually knows what is going on inside your bank, and
completely isolates bank customers from ever having to inquire into the
reputation or financial worthiness of a bank.  This distorts the hell
out of the market.  Because of the FSLIC, people just blithely put
their money into random S&Ls, some of which were totally corrupt
organizations, because Uncle Sam would be there to rescue their butts.
(At our expense.)

I could go on about this, but this isn't a libertarian economics
seminar -- suffice it to say that I believe there is a significant
market ot be made in private deposit insurance, and that is what I
would look for to insure my ideal/future bank deposits.

> 2)  A doctoral thesis could be written about this one, but what about the
> Federal Reserve ?  You would wreak havoc on interest rates, inflation,
> international balance of payments, and international trade.  How would this
> electronic bank adjust for inflation or an expanding/shrinking electronic
> money supply ?  Take a look at some historical texts that describe the
> problems that the Early American Revolutionaries had in breaking from the
> British Currency.  It took several failed efforts, and the currency of the
> United States has been constatnly evolving ever since.

Central banks (e.g., the Federal Reserve) are dangerous because they
allow governments to manipulate the money supply for political
purposes.  The power of *individual* central banks has been weakening
steadily in favor of to international currency rate agreements (like
the ERM), and eventually, at least for international purposes, are
likely to be supplanted by a much more stable market-based system of
global currency arbitrage.  This is already taking shape, as major
multinational players presently seek to reduce their currency exchange
risk by complex, software-model-driven hedging programs.  (You might
want to look into the products/services of companies like Capital
Market Technologies or BARRA.)

> 3) Interest Rates and Inflation ...
> 
> 4) Interest Rates and Inflation ....
> 
> 5) You guessed it, Interest Rates and Inflation.

Interest rates (at least the "real" portion that is not ascribable to
inflation) are market-driven.  I don't understand how this is affected
by private/offshore/digital banking.

> What about Capital Markets ?
> What about foreign labor unit exchanges?
> Is mexican labor worth as much as US labor?

Again, how are these specifically related to the issues at hand?  Banks
act as depositaries, transaction processors, and lenders.  Each of
these services are market-based, fee-for-service activities.  As far as
currency, the bank can either avoid the exchange risk entirely (either
by hedging, or by requiring that members/customers use a specified
currency), or alternatively can go into the currency arbitrage business
itself as a profit center.  (Though the nature of the market is such
that the more arbitrageurs there are, the less profit there is in
arbitrage.)

Fundamental questions of labor economics (etc.) do not seem to be
involved at this level, so far as I can tell.

--
Michael C. Berch
mcb@net.bio.net / mcb@postmodern.com