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338 sats \ 18 replies \ @elvismercury OP 18 Oct 2023 \ on: _Broken Money_ book club, part 2 bitcoin
Part 2 of Broken Money describes many ways in which banks have historically been important and powerful. Bitcoiners often focus on abuses of this power (which are usually easier to see), but what if we flip it the other way, and ask: what kind of institutions and functions could be similarly important and useful to the bitcoin ecosystem as banks are to fiat?
Functioning credit markets are generally considered to be extremely important for facilitating consumption smoothing over a person's lifetime. Basically, not having to wait until you're 50 to own a home, even if you have a good job.
I also think most people are not going to want the responsibility of handling their own keys and there will be demand for banks that hold people's savings for them.
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If there's one thing I'm sure of -- and I'm sure of almost nothing -- it's that your latter point is spot on. There's never been a course of human events where most people were like "Hey, you know what, I'd like to do a bunch more work and manage a lot of complexity that I don't understand."
At best, the complexity just sort of diffuses and gets absorbed into other things. But more often it's irreducible, and now someone else owns that complexity. And with btc, in fact, there's this foundational issue of what constitutes ownership and sovereignty. So there's a tension between where all of human endeavor wants to go, and what the more hardcore btc folks advocate for.
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Functioning credit markets are generally considered to be extremely important for facilitating consumption smoothing over a person's lifetime.
Credit as consumption smoothing is a lovely framing. tbh it blew my mind a bit.
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Did you listen to the What Bitcoin Did episode with Jeff Booth and George Gammon? A big part of the discussion involves whether an inevitable fractional reserve system would emerge under a bitcoin standard.
https://fountain.fm/episode/LsJM0bmcjFAiElUzUlH1
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I didn't, but I have pretty much always been in the camp that believes fractional reserve banking is inevitable (on any monetary standard). The incentive to cheat is just too high, as is the ability to get away with it for awhile.
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Do you think fractional reserve can only emerge as a result of cheating, and has no actual utility?
This is something I'm wrestling with, drawing inspiration from the history of free banking, and from Selgin's book Good Money which probably was the single-biggest influence in getting me to think about btc seriously, which is ironic.
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I haven't done a deep dive into this debate. I know much ink has been spilled on the question.
However, I think even in a framework of contract based fractional reserve banking, the temptation to cheat would prove irresistible. If the contractual arrangement specifies a 10% reserve, some lenders are going to push it to 9.9% and hope they get away with it.
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Agreed, that has historically been the temptation. In the brave new world of blockchains, though, I think we have a means to put an end to that -- define the fractional reserve limit in advance, and make it visible to all. I suspect this is inevitable, and we'll see in practice how it shakes out.
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People thought gold was safe, too. Then bankers invented paper gold certificates.
You're right that this new verification technology makes it possible for people who really care to have high confidence in the integrity of the reserves. However, there will be bad actors who obfuscate what they're actually doing and lure in customers with the promise of higher returns.
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I agree. I know this is heretical to some, but a fractional reserve system could be much less susceptible to fraud and manipulation with bitcoin as the asset. Gold is notoriously difficult to audit, even with good intentions. Bitcoin's ease of custody and transparent ledger could foster a whole new credit system.
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I'm with you on this one -- fractional reserve is a tool that affords certain things, and you pay for those affordances w/ certain failure modes. If you make a drastic change to some underlying aspect of how it works, you should expect different outcomes to ensue.
Given the (what seems to me) genuine utility in institutions that do a good job in assessing something akin to credit-worthiness, deploying capital, etc., I can see an explosion of new types of fractional-reserve constructs and institutions made possible because of btc.
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Where bitcoin strikes me as particularly interesting in this regard, is that the free market remedy for fractional reserve banking is bank runs and those can occur very rapidly with digital money.
That means you're probably right that bitcoin will greatly reign in the amount of fractional reserve banking that occurs.
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Yeah, this is one of those really interesting cases where velocity would seem to unlock some new possibilities -- kind of like the financial analogue of more is different.
It's hard (for me) to reason about what this will actually mean, but also obvious (to me) that it will mean something.
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Functioning credit markets are generally considered to be extremely important for facilitating consumption smoothing over a person's lifetime. Basically, not having to wait until you're 50 to own a home, even if you have a good job.
I thought the causal relationship is the other way around: Because we have functioning credit markets, it's actually hard to own a home without credit?
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I think where that shows up is in the types of homes that get produced. Absent credit markets, more cheap starter homes would be produced, because young people can't afford to buy the kind of house they ultimately want to live in.
The consumption smoothing allowed by credit markets let's people live closer to the conditions justified by their lifetime earnings for more of their lifetime.
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It's interesting to think about how this is bound up, at least in my mind, with environmental predictability. For instance, once upon a time you were a plumber, and people had a good idea (or what they did) about the prospects of a plumber. And now, if you were trying to predict a person's prospects, wtf would you even guess?
If credit is super important to function in society, and yet the basis for estimating it is fraught and getting more fraught, what happens downstream of that? Does btc change this calculus at all?
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Forecasting lifetime earnings for particular professions might be getting more difficult, but earnings are somewhat reliably forecastable based just on factors like parental education and earnings, so there are lots of adjustments people can make to continue earning a living.
We are really bad at understanding non-linear trends, like technological advancement, though. That will likely cause people to underestimate their real lifetime earnings.
Bitcoin at least removes all the volatility from our unstable monetary regime, so it should improve consumption smoothing.
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We are really bad at understanding non-linear trends, like technological advancement, though. That will likely cause people to underestimate their real lifetime earnings.
Or perhaps to over-estimate them. I think generative AI is going to be a profound change in how work gets done, and what work there is to do. I think it will bring civilization to face a hard truth about who is capable of doing what.
Related to this comment in its implications.
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