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Comment by chaseadam17 | Hacker News Reader

Great post. One lesser known factor that's contributing to this problem is bank consolidation in the US.

* Big banks prefer to lend to big companies because it's more profitable to make one $100M loan than 1,000 $100k loans.

* Banks also prefer to lend for non-productive consumption like mortgages because loans backed by hard assets are less risky than productive loans to small businesses, despite those loans not contributing to growing the economy (but creating money out of thin air to flood the market with mortgages does increase housing prices...).

One way to solve this problem is to break up the big banks and incentivize small regional banks to lend to productive small businesses. Worse for the bankers but better for the economy. Incidentally, this is exactly China's strategy, but as long as big banks are paying politicians millions for luncheon talks, it's unlikely to happen here.

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It’s almost certainly more profitable to make to make 1,000 $100k loans from a banks point of view as the single loan will be much riskier (effectively not benefiting from the law of large numbers). Not to say there are benefits of dealing large loans such as cross selling other financial products to the large business.

Your second point is totally correct, but it is exacerbated as a result of (broadly good) government policy. A bank wouldn’t mind making uncollateralised loans any more than a mortgage, although it might charge more interest for the risk. However the government penalises banks based on (approximately) the sum of their risk weighted assets [0]. Here mortgages, as collateralised loans, are greatly incentivised over uncollateralised loans to business.

It’s hard to say if the situation would be worse without it, it’s possible we might have more risky business loans leading to growth, but also more likely we could see a serious global financial crisis.

[0] I am simplifying here slightly but you can see how the US ranks major banks here, higher is worse from the banks point of view https://www.fsb.org/uploads/P261124.pdf

Yes, one $100M loan in isolation is risky (I was just giving an example), but my point was that a portfolio of a small number of large loans to big businesses is much more profitable than a portfolio of many more smaller loans to small businesses. Large companies are much less likely to go bankrupt and the overhead of making the loan relative to the profit from interest is much lower. 50% of small businesses go bankrupt in the first 5 years. It's simply less profitable to lend to them...

they won't hold the risk for very long at all

because the bank will immediately sell the loan on

(but they will have collected a fee on both sides...)

Surely the interest rates on 1000 100k loans are going to cumulatively exceed the interest on a single 100M loan by a significant amount.

Those 1000 loans are going to result in millions more interest per year than a single 100M prime loan.

Sure small loans have higher rates but they are lower margin and less profitable. They require way more overhead relative to loan size and a drastically higher chance of default (I used to underwrite small biz loans, many times you can’t even get recent and accurate financials - eg for a small plumbing biz). Just look at the market - there’s a reason all the big banks compete to bank Apple but the SBA has to step in to try and stimulate small biz lending.

Isn't this part of why crypto has been so successful — at least outside the U.S. where the fiat currency isn't as stable?

I think it's part of the reason Bitcoin has been successful - it's a store of value that governments/banks can't inflate away, similar to gold.

But crypto has also made US dollar stable coins popular, which are arguably better than holding some hyper inflating currency like the Argentinian Peso, but the holders of those stablecoins are still "taxed" when the US government/banks inflate the currency (and are worse off than US citizens who should at least benefit a small amount from whatever the printed money is spent on).

The holy grail is a new internet-native stable coin that keeps a relatively steady price but can't be easily inflated away by a small group of people (e.g. backed by a basket of assets), but so far most attempts to do that have failed. I bet eventually we'll have a popular one that works, though.

I agree with your first and second sentences completely -- but as to the "holy grail"...

Isn't Bitcoin (or Ethereum, or Solana, or whatever your L1 favorite is) itself the "internet-native stable coin" we want, except for their lack of stability? In other words, if we didn't have a need to exchange into local currency, what remaining need would there be except for lower price volatility?

Yeah, those tokens are not stable enough to use as a medium of exchange and I’m arguing that there are likely new ways to achieve stability that are better than how the US dollar is currently managed.

What ways? I'm curious. Have you written anything about this? I'd be interested in reading more of what you see as possible.

If we think about stability from first principles, then when you're talking about aggregating up billions and trillions of transactions, each of which occurs with some characteristic frequency, then the primary factors are coupling strength (how correlated or uncorrelated are those frequencies?) and bandwidth (how wide is the spread of their characteristic frequencies).

It's very popular right now to look down on the central banks for the inflationary influence of monetary policy. Less well appreciated is their role in damping volatility through decoupling (by calming herding behavior -- e.g., stopping bank runs) and increasing bandwidth (by offering the longest terms of credit and the ultimate put).

I believe you have to look all the way back to how market panics were resolved by J.P. Morgan (the person) to get a sense of how volatility in a internet-native stable coin might be addressed. I love crypto, but I don't see that crypto has fundamentally changed human nature, which means that ultimately some crypto holder will have to serve as the liquidity provider of last resort. This, in turn, raises all the same questions about centralization vs. decentralization and democratic values that we have with respect to the central banks in terms of how they handle monetary policy.

But maybe there's a way I haven't seen yet.

There are lots of ways… you could back it with a basket of real assets (eg gold, commodities, etc) or multiple currencies (eg to reduce the role any one central bank plays) or create a new process for delegating central bank authority (eg with better transparency). I’m not saying I have the answer but I’m quite confident that in the next few hundred years we will have digital and stable mediums of exchange that are better than the US dollar for most holders, in terms of lower inflation, more interoperable, more transparent, more stable, etc.

> ... I’m quite confident that in the next few hundred years ...

Me too! But I was wondering what might be possible more in the next decade. :-D

Have you read Richard Werner?

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