I’m pulling this one out of the “Ask Cullen” section….it’s a basic, but important question that might help many people better understand the role of banks in our economy. There’s an interesting conflict of interest (no pun intended!) between institutions who issue the social construct that allows us to do many of the most essential things in life while also being motivated by profit generation (in essence, banks issue the social construct designed for public purpose, but do so primarily with private purpose in mind). But banks aren’t inherently evil institutions just because they’re profit motivated. In fact, you could easily argue that a competitive banking system is far superior to a government run banking system where profit is not the primary goal (I’ll leave that up for readers to debate). But it’s a fact that some bankers take advantage of their power for the benefit of themselves and their shareholders over the benefits of society. But as I described in the Understanding the Modern Monteary system paper, banks are a necessary cog in the machine. Monetary Realism thinks of them as the oil that lubricates the system and the entities that disperse the power of money creation away from a centralized government. They are not the driver of growth, but like the government, can be an important facilitator. Obviously, there are a lot of moving parts here….Feel free to discuss as always….
Anyhow, here’s the Q&A:
Mark D Carmichael: Why do we pay interest on money created out of thin air?
CR: “Banks are in the business of giving you access to money before you have obtained it. So, a student can borrow money to pay for an education even though they have not worked to obtain the means by which to pay for this education. The business of giving someone money now with the expectation that they will give it back to you at a later date involves enormous and various risks for the creditor. So they charge you an interest rate on this money. Money is a social construct that must be earned (in most cases though not all public purposes). If you have not earned it then you must essentially rent it. And for renting it, you pay a fee….
That’s an oversimplified answer, but the basic gist of it.”
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.