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Tuesday, February 21, 2012

Imagine if you will...

...a financial world designed like this:

1. Banking services are reduced to a commodity, and every person has only one loan account.  They can borrow as much money as they want up to a certain amount which is based on several factors
     -Down payment multiplied by a loan amount factor <xSkinFactor>
     -Payback time frame of a set number of years <numYears>
     -Loan insurance fee <loanFeePercent>
     -Zero interest

For example, if a person or business makes a down payment of 100 units then they would be able to borrow 100 times <xSkinFactor> units.   <xSkinFactor> would be a variable that would be managed as needed to provide a stable economy.  Let's say <xSkinFactor> = 10, then 1000 units would be the available credit units yielding a down payment of 10%.

The payback time frame is also adjustable as needed to provide a stable economy.   If the person or company falls behind on payments, they would be barred from additional borrowing until they catch up, pay off the loan, or proceed through appropriate bankruptcy.   There is no other penalty for falling behind as it could result from a reduction in the payback time frame.   So, if <numYears> = 10, then the person would have to make payments totaling 100 units per year or more in order to maintain the ability to place another down payment and borrow more money.  If <numYears> were changed to 6 after the person had been paying on the loan for 2 years, then the person would have to pay 200 units per year or more in order to maintain the ability to place another down payment and borrow more money.

The loan insurance fee would be continually updated like any other insurance system.  It would be charged as a percentage of the loan amount, but unlike interest, it would be a 1 time fixed fee.   It would be set as needed to cover losses from bankruptcies.   If <loanFeePercent> = 5% then on a 1000 unit loan, 50 units would go into the insurance fund.  So, the person would only actually walk out with 950 units.

NO legal protection for personal or any other "off grid" loans!!!

2.  Investment services are completely separate and based on equity in a particular person, trust, or business.  In case of bankruptcy, claims on assets are secondary to the loan account, if any exists.  Only an individual may have a loan account.  Businesses must always raise funds by selling a stake in the entity's equity to an individual.  No margin allowed.  The amount of stock they are allowed to sell would be based on several factors:
     -Base equity (A down payment gathered by the initial investors)
     -BondFactor (A multiplier set as needed to provide some safety for secondary investors)
     -Business operating profit factor <OPF> (Another multiplier based on the proven profitability)  = 1 if no profits yet
     -BondBuyBackTime (Set number of years)

For example,

    Venture Capitalists get together and put 1000 units into a business, the BondFactor is 20, no profitability yet, so they can sell 20,000 units of bonds.  If <OPF> = 1.5 then they could sell 30,000.

3. Regular banking services like savings, checking, and debit cards would be charged a nominal transaction fee for these services.   Anyone could start a bank, but each account must be fully vested at all times.   A bank would be a custodian of funds and a transaction clearing house only.   With zero interest rates, money in accounts is of no value to the bank.  Banks would derive all profits from service fees.  High degree of competition is needed to keep fees low.

4.  To prevent fraud, bio-metric authorization of transactions is a must.  There would also be a system wide fraud insurance fee on all transactions that would be set as needed to refund losses and maintain user trust in the banking services.

The goal here is to reduce the ridiculous cost structure associated with our current system of Central Banking and Financial Services.   Bitcoin, or some other form of digital currency would be particularly handy for this system as well.