A Credit Utility

Introduction:

Here is a long blog that I have been working on for a while. It is remarkably poorly researched and mostly involves my random thoughts about a new way to organize the distribution of credit within society...I have looked for books/articles on this subject. But other than one book(from 1982 and out of print) and a article/public access interview with Leo Panich I have had little luck. I hope to read that book one day but until then enjoy these ramblings.

How Banks Work Now! (Sorta)

Thanks to Planet Money, I now have a basic understanding of how banks work, or at least how they work in their simplest form. Basically, they operate of the principle of leverage. Banks take money in from customers, pay them interest on their money, and in turn lend it out to others at a higher interest rate. Profit is made in the difference between these two interest rates.

In the words of Liz Lemon - its that thing that rich people do to turn money into more money.

At its most base form this is how banks work. Obviously it is much more complicated than this, with extremely complicated financial models to allocate risk, determine proper interest rates, as well as a number of other financial products that attempt to mitigate this risk, or maximize the total leverage/profit made by the banks.

An alternative approach.

A "credit utility" would treat credit as a public good. The utility would distribute credit in the same way that a Water Utility distributes water. In the same way, that water is deemed as too fundamental to be placed in private hands (at least some in some places), so to would the distribution of credit be treated as to important to be done for profit/private gain.

A "Credit Utility" would allocate credit, on a cost of service model. Costs to run the utility would be recovered through interest on the money lent. Models could easily be developed that apportioned the interest rates in different ways to create incentives for certain behaviors. (Paying loans back quickly, encourage smaller loads, means tested interest rates, etc). This looks great to me, no crazy financial instruments, no profiteering, just banks providing a service(credit) that is necessary in a capitalist system.

However, there are two large problems that need to be addressed for this to really work:

- How are decisions about lending reached (who gets the money)?
- How much money is lent in a given time frame?

Currently these questions are answered by market forces. With the argument being that profit motive, determines how best to allocate credit. This clearly has not worked.
The current crisis represent a fundamental failure of the market to allocate wealth properly. If a trillion dollars can get lent to people to purchase fictional pieces of paper that are in reality worth nothing, I would argue that the system is not particularly efficient. Arguing for the efficiency of markets that can erase ten years of wealth creation in a single day is ludicrous.

Establishing a "Credit Utility" would enable public control of the banking sector. Credit/Wealth could be distributed in a way that was for the benefit of people rather than for profit and "market forces". These decisions would be made in the political arena rather than behind closed doors, and in the public interest, rather than for the maximization or profit.

The mechanics of these decisions would be difficult to set up. However, would they be any more difficult than the thousands (millions?) of accountants, banking executives, wall street types currently required to run the current system. Would this be more efficient than the market allocating credit. I would argue that the bar on efficiency by the market has been set pretty low...so probably. If efficiency was lost the gains made by having public control of credit would far out way the costs of lost efficiency.

Hopefully, you will notice that I have been using the term public control and not government control. Simply transferring the allocation of credit in society from banks to government as it currently stands, while likely an improvement, would not mean true public control of credit. True public control, would require a fundamental re-ordering of society. :)

Conclusions

This idea is exciting to me because it is tangible, and no so far out from the current operations of society to seem unrealistic but at the same time leads to discussion about the fundamental problems with the banking sector, profit motive and private control of credit. If credit is necessary for the functioning of society as it is, it should be under public control.

Anyway, I plan to keep thinking about this idea...I like to think it provides a good spring board to other more exciting questions, most notably, if the efficiency point is moot (which I believe it is) Why should credit be distributed for profit/private good rather than in the public interest?

Neat Article on Housing Policy Choices

Here is a really neat analysis of housing/development in policy in B.C.

Create Housing Policies...

In particular, I enjoyed the discussion about how developer contributions act as a subsidy to rich established homeowners at the expense of first time buyers and renters.

(For those of you who don’t know what developer contribution (DCCs) are. A DCC is donation extracted by a municipality as a condition of new development; these funds are usually used for infrastructure upgrades, sustainability initiatives, or parks and other amenities.)

This seems like a good idea to me, however as the article explains it has the potential to work at cross purposes.

In short; if developers pay for amenities and other services property taxes remain low as these services do not need to be funded from general revenue. Low property taxes are of greatest benefit to established homeowners and people with larger more expensive homes. Additionally, these costs while paid for initially by the developer are ultimately reflected in the base price of new homes. This pushes up property values, a further benefit to established property owners and ironically the developer – who makes more profit the more expensive the home is.

This is a great example of trickle up economics at work.

Ultimately, despite the good intentions of policies like developer contributions the most powerful interests will benefit the most. In this situation, a policy intended to force developers to fund municipal services/amenities serves to subsidise rich homeowners and push up property values (And developer profits).