When the financial house of cards started falling, politicians rushed in to hold it up, using your tax dollars as supports.

Their argument was that if the banks fell, the credit market would fall with them, and credit as we know it would disappear.

Well, the old banks are still lumbering around, filled with the lifeblood of public money, money they refuse to lend, in direct opposition to the purpose of public support.

To fill this financing gap, an increasing number of borrowers are turning to “peer to peer” networks that connect individual borrowers directly to lenders, cutting out the banking middleman. These networks have now financed nearly a half a billion dollars in lending. This is still a long way from the $931 billion in loans and leases that Bank of America had on its balance sheet in 2008, but it’s growing rapidly. Peer-to-peer lenders describe themselves as a solution to many of the banking sector’s current weaknesses, from the lack of small-business finance to the evils of payday lending (which now serves as financing of last resort for those shut out of formal banking altogether).

If we had only let the banks fail, we could have moved to this next generation of peer-to-peer financing. The market will eventually move to this more efficient model, just as soon as the government stops bailing out its Most Valuable Constituents under the guise of “saving the global economy.”

If economic history has taught us anything its that where there is demand, there will be a supply, because there is profit to be made.

It honestly infuriates me that this new type of financing is being stifled by government market intervention. Banks had their chance, and they failed.

The infrastructure is already in place to move to this new model, and the benefits of this model are immense.

The wisdom of crowds is a well known phenomenon; betting markets for the presidential election were incredibly accurate at predicting the winner. Our world class stock market depends on the wisdom of crowds, and by cutting out the banks it would work even better.

Right now, just a few investment bankers move around billions of other peoples’ dollars. If one makes a mistake, billions can be lost, putting the economy in jeopardy. By spreading the investors out we can avoid such costly mistakes.

Currently, our government wastes billions to oversee the investment banks. If the power was moved to the individual, much less oversight would be required. It is not necessary to keep track of what one person does with his or her money.

When people are free to make it in the world, they will make things better, not because they are nice, but because it is profitable.

This entry was posted on Wednesday, July 8th, 2009 at 3:33 pm and is filed under Uncategorized. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.