Bitcoins interest rates possible?

[qualia8]

Thats what i mean. What is preventing the Bitcoin economy from becoming the shitty and evil thing our dollar economy is right now?

In the current system, you can lend out like 10x your own reserves.  If there's a run on your bank, the central bank will print more dollars and keep you afloat.  That can't happen in bitcoins, because there's no printing new bitcoins (above what mining does).

So, if banks lend out more than they have, they will go bust in periodic bank runs.

This means *far less* lending, because depositors to the bank are far less secure.  Thus, they will demand higher interest rates.  (Yes, even though the currency is deflationary, interest rates would be very high because of this risk.)  So, there wouldn't be so much easy credit.  The housing crisis probably never would have happened, for instance.  If something like that did happen, the fed wouldn't have increased the money supply by trillions, which is why you get .5% on a savings account right now: you are competing as a lender with the Fed, who is giving select big banks basically free money.

But there will always be risk-taking in any economy, always bubbles, always human irrationality.  No currency can stop that.  It's driven by human psychology and the dynamics of exchange.

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[evoorhees]

Lending money for money creates nothing of value. 

Very false. Lending money now, in return for more money in the future, helps individuals who need money now and rewards individuals who would rather have money in the future. Not only is this a "valuable service," it is a fundamental part of an economy.

Consider the most basic example - One man has some money, but no need to spend it. Another man has no money, but a great business idea. Both men can be made better off if the former lends money to the latter at an agreed-upon interest rate. The former man will have more money than he otherwise would, and the latter man will have the opportunity to try his business idea, succeeding or failing in the process.

Without interest, there is no incentive for this exchange to occur, and thus it would not, and thus both men (and the world) are worse off.

Don't demonize interest. Demonize fiat currencies.

[evoorhees]

Personally, I chose to remain debt free at all times, can't stand interest, or bankers for that matter, and I don't want to get caught in that evil downward spiral.  I don't owe anyone jack sh*t and love it that way.

If that's your choice, then good for you. For other people, borrowing money can be immensely helpful. Debt is not intrinsically an "evil downward spiral," just as a hammer is not intrinsically harmful. Irresponsible use of any tool will tend to cause pain, but one shouldn't blame the tool itself for improper usage.

[relative]

Thats what i mean. What is preventing the Bitcoin economy from becoming the shitty and evil thing our dollar economy is right now?

In the current system, you can lend out like 10x your own reserves.  If there's a run on your bank, the central bank will print more dollars and keep you afloat.  That can't happen in bitcoins, because there's no printing new bitcoins (above what mining does).

false. bitcoin banks can lend out 10x, too. if there is no minimum reserve requirement imposed on them, they can lend out 100x or 1000x if they want to - and if they find enough stupid people who deposit coins with them.

there is no "printing" involved when commercial banks create money. look up base money supply and the money multiplier.
money multiplier can be > 1 in a bitcoin economy, too.

factional reserve banking isnt a problem in itself. the problem is that govts insure the risks of it, so noone even cares where his money is deposited and what kind of stupid shit his bank does with it.

[evoorhees]

factional reserve banking isnt a problem in itself. the problem is that govts insure the risks of it, so noone even cares where his money is deposited and what kind of stupid shit his bank does with it.

BINGO

[qualia8]

Thats what i mean. What is preventing the Bitcoin economy from becoming the shitty and evil thing our dollar economy is right now?

In the current system, you can lend out like 10x your own reserves.  If there's a run on your bank, the central bank will print more dollars and keep you afloat.  That can't happen in bitcoins, because there's no printing new bitcoins (above what mining does).

false. bitcoin banks can lend out 10x, too. if there is no minimum reserve requirement imposed on them, they can lend out 100x or 1000x if they want to - and if they find enough stupid people who deposit coins with them.

there is no "printing" involved when commercial banks create money. look up base money supply and the money multiplier.
money multiplier can be > 1 in a bitcoin economy, too.

factional reserve banking isnt a problem in itself. the problem is that govts insure the risks of it, so noone even cares where his money is deposited and what kind of stupid shit his bank does with it.

Right.  We don't desagree here.  They can, in principle, lend 10x reserves, but they have to find depositors who are willing to take that kind of risk.  Who in their right mind would keep a savings account generating .3% APR when the bank is lending 10x their deposit, if there is no FDIC, no Federal Reserve?  Read the rest of my post.  They'd charge exorbitant interest rates for this and still may face bank runs.  (That's why FDIC / Fed came about in the first place, to calm that wild west shit.)

Good luck trying to run an actual bank that lends 10x reserves.  You'll need a hell of a marketing team.

[Funkypala]

How could they lend 10x what they have? At the moment the banks can create digits out of nothing if you lend money from them. But how should that be possible with Bitcoins?

The only way, that i can imagine is that they give you a "electric bill" that says its wort x amount of btc. These "electric bills" could be created out of nothing. But i can t seem to imagine someone would be so stupid to take a "electric bill" instead of the bitcoins.


In former times these debt based bills were more practical, than some gold or silver that lays in a safe. And thats why they were used. But there is no reason to use an "electric bill" instead of a safer electric currency that can not be created out of thin air.

[Bastet]

Thanks to the new bitcoin system, you can't create money out of thin air like the banks do today.  Nor can bitcoins earn interest (unless someone is willing to part with their coins to pay for it.)

Think of it...the banks create money out of thin air, with absolutely no risk to themselves and get paid interest on it.  And when I mean no risk, the contract you sign explicitly says you will pay...or someone else will  They purchase insurance, which YOU PAY so that THEY GET PAID if you can't.  LOL, absolutely no risk whatsoever.

I love bitcoins because they are decentralized.  After securing my bitcoins, I have absolutely no need for a bank.  May they wither and die a horrible painful death, those c*cksucking leeches.

If you have to borrow to get what you want, then you're living beyond your means.  Don't sell your soul to the devil for a short gain.  That burden of debt is gonna weight heavily on your back for a long time.

[relative]

At the moment the banks can create digits out of nothing if you lend money from them.

that's a myth, perpetrated by youtube videos and conspiracy theorists.

they don't just add digits, what is referred to as money creation by commercial bank is that money they lend out usually ends up as deposits at the same or another bank.
bank account balances are considered money, so if you depoit 100$ and they lend out 100$ to someone who puts it in his bank account, there are 200$.

the same thing could happen with bitcoins. bank account balances of a fractional reserve banking are nothing else than claims you have against the bank. but they are considered "money" by most definitions, so the base money supply is multiplied.

[Funkypala]

How could that happen with bitcoins? If the bank lends 100btc to someone, then he hast the btc and the bank has 0 btc. If he then deposits them on a bank, then there are 100btc.  No btc were created. 100btc in the begtinning 100btc in the end.

[JoelKatz]

I've never understood the compulsion to enact a usury system with bitcoin.

Its like insisting a car has to have a harness for an animal to pull it. Get your heads out of the bank-washed system of 'charging for money', just for a second, eh?

Would you rather have $500 next year or $500 today? $500 today includes the right to have $500 next year if you want, but also includes the ability to spend the $500 before that if you should choose to do so. You *have* to charge for money because money tomorrow is worth less than money today. Interest is the mechanism that makes investment possible.

[relative]

How could that happen with bitcoins? If the bank lends 100btc to someone, then he hast the btc and the bank has 0 btc. If he then deposits them on a bank, then there are 100btc.  No btc were created.

there are still also 100 btc in the account of the depositor whose money was used for lending. -> 200 btc in bank deposits.
no BTC were created on the bitcoin network of course. but in the same case with USD no USD were created by the central bank either.

in both cases, it's just two people who have a deposit of 100 each at the bank ( = 200), even though there was only 100 in the beginning.

this is entirely related to the definition of money: not only central bank money (equivalent to "money on the bitcoin network) is money, but bank deposits, too.
even 2 year govt bonds are considered money by some definitions(aggregates). so if you buy a 2 year govt bond for 1000$, you give 1000$ to the govt and you are holding 1000$ worth of bonds - both of which are considered money and the money supply increases by 1000$ to 2000$.

there really is no "printing of money" at commercial banks, neither with bitcoin nor with USD.

this kind of "money multiplying" is encouraged by central banks and the FDIC, so it might be less in a bitcoin economy. but that's another story, and who knows for sure. it could exist though, so this is no difference from the current system.

[JoelKatz]

How could that happen with bitcoins? If the bank lends 100btc to someone, then he hast the btc and the bank has 0 btc. If he then deposits them on a bank, then there are 100btc.  No btc were created. 100btc in the begtinning 100btc in the end.

You deposit 100 bitcoins in my bank. You still have 100 bitcoins, they're just on deposit. I then lend out your 100 bitcoins to Jeff. He now has 100 bitcoins. So the original 100 bitcoins is now 200 bitcoins.

If Jeff owes Jack 20 bitcoins, he can transfer 20 from the 100 he borrowed. If you want to pay Alfred 20 bitcoins, you can transfer 20 bitcoins from your account to Alfred's account. So the bitcoins in your account work just like real bitcoins even though they're not. Of course, when you (or Alfred) withdraw money from the bank or Jeff pays back his loan, the number of bitcoins in circulation is reduced.

Essentially, bitcoins in banks (which are just numbers in a bank's computer) work almost the same as real bitcoins. The effect the supply of bitcoins (for price purposes) almost exactly the same way.

One tendency of bitcoins that may reduce this is that they are easily transferable without help from a bank. One of the main reasons people keep money in banks even for short term use is to make it easily transferable (checking accounts). If this doesn't happen with bitcoins, then the ability of banks to create bitcoins will be much less than it is for dollars. If banks lay their own storage and transfer system on top of bitcoins, to the extent people use that system, banks will be able to create bitcoins.

And, of course, if the currency is unstable (as bitcoins are now) banking won't be possible (except with offsetting shorts, which is very hard to do). So that stops banks from creating bitcoins. But that hopefully will change in the future.

[truthcracker]

Is it evil to rent a house?
Is it evil to rent a car?
...
Is it evil to rent a sum of money?

When you take out a loan, you're just renting, and paying rent to a 'landlord' (the owner of the coins).

That rent can be in any form; If no BTC are available, then pay your rent in massages if that's something you and the owner can agree on.

Is it good to rent a house, when most houses are owned by a tiny percentage of people?  Even though they were built by a majority of people with minerals that are billions of years old?

When you take out a loan, you are just borrowing back from people who did real work that have had their work funnelled to a coke smoking banker who doesn't know how to hammer in a nail.

The exploitation can be in any form, if there are no BTC available you might need to pimp your girl to the fat man, something you can agree on.

Have you considered thinking outside the ridiculous assumptions that hold your paradim together?

PS

I can't spell, its outside my paradise

[dennis_sweden]

At the moment the banks can create digits out of nothing if you lend money from them.

that's a myth, perpetrated by youtube videos and conspiracy theorists.

they don't just add digits, what is referred to as money creation by commercial bank is that money they lend out usually ends up as deposits at the same or another bank.
bank account balances are considered money, so if you depoit 100$ and they lend out 100$ to someone who puts it in his bank account, there are 200$.

the same thing could happen with bitcoins. bank account balances of a fractional reserve banking are nothing else than claims you have against the bank. but they are considered "money" by most definitions, so the base money supply is multiplied.

How could a "Bitcoin" bank run a fractional scheme? Person A deposits 100 Btc in Bank X; Bank X loans 95 Btc (5 Btc held as a reserve) to person B, person B buys computer hardware for 50 Btc who puts the proceeds in bank Y, and places the remaining 45 Btc in bank Z. Banks Y and Z can only circulate 95 Btc. As a Btc cannot be used several times simualtaneously the amount of Btc is still 100.

Whereas in a fractional reserve system a bank that recieves 100 USD can loan 950 USD to person B (50 USD held as a reserve), by issuing a check/digital loan, person B buys computer hardware for 500 USD and who put the proceeds in bank Y (either by "checking" or "digitally" - it is only a bookkeeping excersice, no banknotes are transferred) and places the remaining 450 USD in bank Z (maybe he will use the USD to pay wages a his IT firm) By these actions the money supply has increased despite the money base remaining at 100 USD. Fractional reserve cannot exist if the banknotes are transferred with each transaction.

The example you post does not increase the money supply; if person A deposits 100 USD in bank A and it is lent to person B who deposits in is bank B, the money supply is still only 100 USD, and bank A would only earn the interest difference between interest charged to person B subtracted by interest paid to person A. This is not fractional reserve banking.

[JoelKatz]

The example you post does not increase the money supply; if person A deposits 100 USD in bank A and it is lent to person B who deposits in is bank B, the money supply is still only 100 USD, and bank A would only earn the interest difference between interest charged to person B subtracted by interest paid to person A. This is not fraction reserve banking.

That is incorrect. The money supply now includes the 100 USD, which is still circulating, the 100 USD in person A's account and the 100 USD in person B's account. Person A can now pay for their groceries by writing a check, transferring money from their account to the grocery store's account, just as they can pay for their groceries with cash. Bank accounts function like cash, until someone withdraws, at which point money is destroyed.

This "created money" affects the supply of currency just like real hard cash does.

[dennis_sweden]

The example you post does not increase the money supply; if person A deposits 100 USD in bank A and it is lent to person B who deposits in is bank B, the money supply is still only 100 USD, and bank A would only earn the interest difference between interest charged to person B subtracted by interest paid to person A. This is not fraction reserve banking.

That is incorrect. The money supply now includes the 100 USD, which is still circulating, the 100 USD in person A's account and the 100 USD in person B's account. Person A can now pay for their groceries by writing a check, transferring money from their account to the grocery store's account, just as they can pay for their groceries with cash. Bank accounts function like cash, until someone withdraws, at which point money is destroyed.

This "created money" affects the supply of currency just like real hard cash does.

Granted, this is incorrect, however my intention was to show that:

Quote from: Funkypala on June 27, 2011, 10:14:13 pm
At the moment the banks can create digits out of nothing if you lend money from them.

that's a myth, perpetrated by youtube videos and conspiracy theorists.

is incorrect, as digits/checks are created out of nothing. As you say, person A can write a check to the grocery store, despite the funds in his account having been transferred to another bank, which means that the check/digits are created "out of nothing". Fractional reserve works in both of these two ways.

[barrymac]

Discussion about the evils of interest or usury aside, it seems that just for the system to scale we need to have supernodes in the network. I can see that people could see these as providing some of the equivalent facilities of banks, such as itermediating large transactions. Naturally the source code for a supernode would have to be open and tamper proofed with cryptography.

I really don't think banking is going to dissapear from existence due to bitcoin. This would appear to be a very naive and highly unlikely prediction IMHO. There will always be have and have nots, and some kind of credit hierarchy. However, this could be seen as a great opportunity to forge a future in open and transparent banking that everyone can understand.

In many of the countries in crisis today the banks themselves are still not capable of balancing their own books!! They leveraged things so far out they literally don't know what they have done anymore. http://ftalphaville.ft.com/blog/2010/12/21/444026/anglo-irish-indigestion-off-balance-sheet/

[relative]

The example you post does not increase the money supply; if person A deposits 100 USD in bank A and it is lent to person B who deposits in is bank B, the money supply is still only 100 USD, and bank A would only earn the interest difference between interest charged to person B subtracted by interest paid to person A. This is not fractional reserve banking.

this is fractional reserve banking with a reserve rate of 0 %, so in a strict sense you're right, it is "no reserve banking".

the are many different measurements of money supply. the money supply you're thinking about is the 21 million coins, aka the "monetary base". you're right that bank lending does not increase the monetary base.
but bank lending doesnt increase the monetary base of current fiat monetary systems either.

so if someone says "banks create/print money" he is talking about a definition of money supply that includes bank deposits (usually M1 - M3 definitions).
the answer to that is: bitcoin banks would, too.

no difference.

[dennis_sweden]

The example you post does not increase the money supply; if person A deposits 100 USD in bank A and it is lent to person B who deposits in is bank B, the money supply is still only 100 USD, and bank A would only earn the interest difference between interest charged to person B subtracted by interest paid to person A. This is not fractional reserve banking.

this is fractional reserve banking with a reserve rate of 0 %, so in a strict sense you're right, it is "no reserve banking".

the are many different measurements of money supply. the money supply you're thinking about is the 21 million coins, aka the "monetary base". you're right that bank lending does not increase the monetary base.
but bank lending doesnt increase the monetary base of current fiat monetary systems either.

so if someone says "banks create/print money" he is talking about a definition of money supply that includes bank deposits (usually M1 - M3 definitions).
the answer to that is: bitcoin banks would, too.

no difference.

I am not quite sure that I understand how a Bitcoin bank would operate. I am under the assumption that banks would lend Bitcoins and not USD; if this assuption is wrong, the following excercise is not valid.

Let us say that: a bank accepts deposits and receive 1000 Btc from various depositors. They give loans, but owing to the fact that they do not have Btc or rather the codes that Btc are made up from, they can never lend more than 1000 Btc. If the bank lends 1000 Btc no depositor can withdraw any Btc; which means that 1000 Btc equals 1000 Btc and not 2000 Btc.

Let us say that the depositors did recieve checks amounting to 900 Btc (100 Btc kept as a reserve). Business A receives a check of the sum 200 Btc. Naturally, Business A wants to withdraw the amount from the bank with immediate effect; business A has many liabilties in USD. If the bank has already lent 1000 Btc 900 Btc it cannot pay out the sum of 200 Btc which the check holder is claiming.

A more "sound" business model would be to loan 700 Btc which leaves 300 Btc for immediate withdrawal. In this case the bank could earn e.g. 6% on loans, equalling 42 Btc, while paying e.g. 3% on deposits, equalling 30 Btc, and earn 12 Btc. However, at no point would the monetary supply deviate from the monetary base.

Even with a reserve (not fractional) of 300 USD, it would not be possible to write checks amounting to 1000 USD with the depositors (which would in effect render the reserves "fractional") as business A would wipe out 67% of its reserves with a 200 Btc withdrawal, after which only a very small amount of depositors or other holders of checks could withdraw Btc.

If the Bank instead makes loans in USD, although being extremely risky due to fluctuating Btc value, the bank could lend 1700 USD (today's Btc price being 17 USD), or even 5000 USD, and any depositor could still withdraw Bitcoins. However, no sane person would operate such a bank as if Btc value were to rise to 25 USD, and all depositors wanted to withdraw the 1000 Btc deposited, the bank must purchase Btc for a sum of 2500 USD (or more), whereas the interest on the 1700 USD would only amount to 102 USD (with a lendning rate at 6%).