Hey guys I recently watched a movie called “Maxed out”. It was pretty interesting. However it really shook my faith in markets. My question is without fiat currency and central banking, would shadow banking arise? Or are they a result of easy credit from the fed? Also predatory lending can take a great deal of fraud. Some people aren’t completly aware of what they are getting themselves into with mortages on apr, and credit card debt. Also should people still be able to declare bankrupcy? This would add more risk to lenders and prevent them from lax lending as much.
One movie shook your faith in markets? That is sad. Did you ever trust in them to begin with?
It is really hard to say what our financial system would look like in a free market.
As such, in a free market, the institutions that would do best would be those that were up front with their customers, if customers really cared.
Probably. http://mises.org/daily/3154
It does not really add that much risk. Declaring bankruptcy makes it extremely difficult for the person declaring it to get more funding.
In the free market, bankers who pyramided loans on top of hard currency would be quickly confronted by a bunch of angry depositors. And probably hung from utility poles while their houses were looted.
There will always be high time-preference individuals who get in over their heads, but credit would be far more scarce in a free market. As one commentator I read has pointed out, Mises himself would not have foreseen the scale of the current devaluation since in his time, bank credit was typically reserved for business expansion. Working schleps used layaway or pawned a watch. Most people rented; most mortgages were for 50% or less of home value.
In the event of default, the debt would be discounted via multiple sellers until the price reflected an amount that could be repaid without disincentivizing the debtor’s repayment efforts.