Last Saturday we marked the 10th anniversary of the Lehman Brothers closing their doors for good on September 15th 2008. I think most of us on this forum are aware of the level of market manipulation that took place by bundling up all kinds of non-paying mortgages and credit card debts just to give them triple A ratings to be sold off as an investment option. Collateralized Debt Obligations (CDOs) tied thousands of mostly subprime loans into a neat and tidy looking bundle creating a new type of financial instrument - one with nothing to back up its value.
Creditors were incentivized for giving out loans to people who clearly weren’t in a position to pay them back, because they would get paid for such low performing debt obligations. There had to be a fundamental flaw in the equation for this absurd behavior to gain a foothold, which happened to be the legislators responsible for rating the CDOs. As the iconic movie “The Big Short” describes the legislators, they had no choice but to give the CDOs inflated ratings or else the banks chose their competitors to do the dirty work driving them of business. As ironic as it may sound, when the FED started bailing out financial institutions in the midst of the crisis, it favored those that could pony up sufficient collateral for the bailout. This only further strengthens the adage that lenders like to give collateralized loans if the true purpose of the credit transaction is to get the money back. If lending only serves the purpose of making quick money without any long term perspective of how it will affect the economy, then issuing undercollateralized loans and repackaging them for a selloff is certainly the way to go. However, If one wants to return to the non-fractional way of banking, having sufficient collateral to back up loans is an absolute must.
Why are we talking about all the mishaps and cruelties of fractional reserve banking? It helps us see how awfully bad it can go if we spend beyond our means, especially on a large scale as a nation. Although it was the government that allowed such mayhem to break out, we must learn from past mistakes, whether we had anything to do with them or not. Loans are the primary propellant of our modern economy, so we must find better, more reliable ways of lending. Bitcoin, an asset with money-like liquidity an a Global price consensus, a completely borderless currency with an immutable ledger might be the perfect collateral for a loan. Having an appreciating currency incentivizes people to put some of their money away for the future and live off less, but what should we do when we need to touch those coins we carefully tucked away? We could sell them, of course, but expecting it to rise in value would leave us feeling we just made a bad decision, and nobody likes the feeling of regret. Using our existing cryptocurrencies we should be able to take out a loan in fiat allowing us to access the purchasing power of the crypto while preserving future profit potential. Calling this lending isn’t even necessarily the best description, since the loan is already fully paid back with interest at the time of contract formulation. I’m interested in what you guys think, is crypto the way to go when it comes to non-fractional lending?
Hm... that is interesting actually, another aspect to that: if less and less people would have to sell cryptos for whatever reason to get cash, than that will narrow the supply side don't you think? That should eventually increase crypto prices isn't it?
