Imagining a World Without Banks

PIMCO's Bill Gross has remarked that our nation became a superpower because "we were getting richer by making things, not paper." Unfortunately, for the last few decades, our nation has primarily grown weaker by making worthless paper in a variety of ways -- junk bonds, subprime mortgages, and countless types of derivatives -- through banks. If we step back and ask ourselves what banks were originally designed to do, it was simply a depository where people with savings can store their wealth, and borrowers could access capital to pursue investment opportunities.

Today those simple functions can be easily replaced by software. After all, from a savings perspective, are there material differences between a checking account at Citicorp versus one at Bank of America? Do we really need thousands of banks and bank branches spread around the country when we have the internet to make distance of banks irrelevant? If these banks are essentially backed by the government because they are too big to fail, why not just buy U.S. Treasury bonds to park your savings? It would be easy enough to use Google as the banking interface and park your money with the U.S. Treasury or the Federal Reserve in lieu of a bank.

From a lending perspective, the banks clearly have failed to allocate their resources to investment opportunities that would power economic growth into the 21st century. Their cash has primarily been used for short-term profit opportunities such as speculating in the capital markets for quick profits, leaving many small and medium sized businesses cash-strapped. Instead, if we engage in this thought experiment, wouldn't it make more sense to leave the lending, and/or investing to the savers themselves? In this hypothetical world, individuals can save by stashing their cash directly with the Treasury or Federal Reserve. But if they want to invest in promising companies and potentially earn a return higher than they can through T-bills, they could do so by investing their cash in other financial institutions or companies not backed by the U.S. government such as mutual funds. By eliminating banks with captive capital, investors do not have to worry about moral hazard and uneven playing fields that develop when banks have too much power. If companies need loans, they can apply through some central marketplace like eBay and attract the funds from savers and investors who have larger risk appetites. In short, all the basic functions that a bank does today can be easily replaced by software that enables individuals and companies to achieve their savings and investment outcomes much more inexpensively, efficiently, and productively.