Oh dear

Jonathan Freedland simply doesn\’t get what it is that banks do. Let\’s replace those nasty banks with Zopa and other peer to peer lending sites.

What if our man in Dundee can\’t or won\’t pay back the loan? Zopa\’s answer is that would-be borrowers undergo the same credit checks as imposed by any bank.

Ah, you see, the bank, as the intermediary, takes the risk of the default. That\’s why they take so much of the interest. Zopa doesn\’t take that risk thus doesn\’t take so much of the interest.

But there\’s something much more important:

The company can\’t envisage peer-to-peer mortgages, for example: how many individual lenders would want to tie up their money for 25 years?

One definition of a bank (first seen at Brad DeLong\’s) is someone who borrows short and lends long. Any system that isn\’t doing that is not going to be able to replace them.

Peer to peer lending is just fine, a useful addition to the marketplace. But it just ain\’t gonna replace the people who move savings and loans inter-temporally.

4 thoughts on “Oh dear”

  1. Hmm,

    Besides, the lady in Peterborough is not really lending all her money to that one chap in Dundee: if she’s lending £500, Zopa will chop that up into 50 parcels of £10 each, spreading her risk across 50 different people.

    That sounds familiar. I thought debt securitisation was considered a “bad” thing on the left, chopping up all those mortgages and spreading the risk…

  2. With Zopa you can’t currently sell-on your debt. I can’t see why not: Zopa could run a very effective auction/trading platform. It’s the one thing stopping me using Zopa seriously: I can’t raise cash quickly.

    Once you could sell your debt, you could indeed start seeing mortgages funded by Zopa. Then we are talking CDOs etc.

    I’m all for it: it’s the power of bottom-up individual choice and brings us back to the essence of finance. Greed, for want of a better word, is good (I think I’ve heard that phrase before).

  3. “But here’s an idea that might be even more radical: why not do away with banks altogether? This is no utopian fantasy from a leftist groupuscule, nor an abstract musing from the academic seminar room. It’s a business model, one that is already up and running.”

    It’s been up and running for two centuries and there’s nothing particularly radical about it. It’s called a building society. They even managed to solve the mortgage issue. What they didn’t do was solve all the problems associated with credit.

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