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Free money

Should money be as free as speech? After all, it is also a form of communication.

In the past year, the internet has spawned a few companies aimed at helping individuals borrow and lend without bothering to involve a bank or credit agency. Zopa, based in the UK, aggregates individuals into groups for the purpose of making small loans, with a socially conscious slant. In the US, Prosper just launched a sleek, well-designed person-to-person lending site. Borrowers can also form groups on Prosper, for the sake of leveraging better interest rates. I also know of at least one nascent project, Bruce Boston’s Quid St., which aims to aggregate individuals for the purpose of making capital investments (as opposed to loans). I met Bruce recently, and he mentioned what an influence gaming had on his view of how to build an online marketplace. Which put me in mind of the Park Paradigm, a blog about digital markets whose authors think future finacial markets may evolve out of sports book and gambling sites. And not entirely unrelated note, Paypal made it possible just this week for people to send each other money anywhere, via cell phone.

What we are witnessing here, I think, is the creation of a new international capital market.

But we already have an international capital market, you say. Well, yes and no. When it comes to lending and investing and otherwise redistributing capital, we make do with a rudimentary, feudal system that has never really caught up with our momentum toward the free flow of other types of currency–cash, ideas, information, energy, goods and services, even political will. We have developed extremely liberal mechanisms for exchanging these forms of dynamic and stored energy, but capital remains over-managed, its governance, distribution and oversight resting in the hands of a select few.

The invention of a truly open and free capital market will be as significant a development as the invention of the printing press, affecting the free flow of wealth and opportunity much the way that invention affected the free flow of intellectual capital. 500 years after Gutenberg, it’s hard to imagine a world without cheap, plentiful and ungovernable words. One hundred years from today, it will be just as hard to remember a world where capital flowed through banks and currencies were government-issued.

Capital, and as a consequence personal wealth, will exist in a much more fluid and dynamic state than it now does, and all our discussions about wealth, wages and income will take place in an entirely new financial language. We may not end up solving poverty, so much as rendering it obsolete, all because of the technology-driven privatization of capital that is just now beginning.

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11 comments to Free money

  • The Wobbly Guy

    Reminds me of the tontine system, except now supercharged by modern communications.

    The sticking problem is, of course, what happens when a person defaults, or when unscrupulous individuals try to game the system through illegal means.

  • TWG- this is why we have intermediaries and Exchanges. The Exchange has traders who are all members and take on the risk of default…for a commission. Thus, the trader need only worry about their ‘own’ risks, not the imagined risks of the rest of the world. I believe this is a sound, logical and very efficient model. If it were not, I think we would have already seen significant changes, as electronic trading has been going on for a long time. I belive it will not be disintermediation, but reintermediation – a change of intermediaries.

    All this begun in earnest from the precursor to the Internet, Reuter Monitor Dealing Service which by 1981 had blogs, chat rooms, personal pages alongside the ability to make electronic transactions.

  • steve Bowles

    I wouldnt get too carried away with the hype. Financial markets have always been incredibly innovative and constantly evolving. Collective investments have been around for decades in various forms. It also will be interesting to see how PayPal reacts/survives when anti money laundering legislation starts being applied to it.

  • Raw Data Complex

    Have you looked at that “Prosper” site? I don’t get it. Take a look at the very first loan request for $16,750 to renovate an office which they “own” and is worth $74,500. Yet they need the loan to pay off $2000 Credit Card debt which they used to “start the business.” What’s going on — including the web format — seems so muddled.

    How could one loan funds when the story is so unclear?

    I am puzzled by your enthusiasm for such a strange process.

  • Some of those rates are enough to make a borrower bleed from every orifice. Good luck under local usury laws. Others are laughably low by any measure (an unsecured loan to a Ukrainian borrower @7%? Most eBay sellers wouldn’t even ship there). The whole thing is organized as a sort of Dutch auction, but it looks like the borrower sets the rate, term, and principal. Lenders subscribe to small parts of the principal, in what bankers call a loan participation. If the rate is too low, it will be undersubscribed, so a borrower must try to set a market-clearing rate.

    It’s not a bad idea, but the implementation is open to abuse. I can immediately think of half a dozen ways to rip people off under this system, and I am not burdened with an overactive imagination.

  • Hi Hillary!

    This is a great article, and I think it points out a few key questions. Personally, i think Prosper is way ahead of the pack here, but I think there is plenty of room to do many different things in this same space. (of course I’m a bit bias, but for what its worth)

    Here is a quick comparison of Prosper vs QuidSt, and I would love to hear people’s opinion on which they would recommend and why.

    Investment Vehicle-
    Prosper: Loans
    QuidSt: Market Capital

    Funding Target-
    Prosper: Person
    QuidSt: Start-up Company

    Funding Size-Prosper: US$50 – US$25,000
    QuidSt: US$250,000 – $5,000,000

    Liquidity-
    Prosper: Fixed Term
    QuidSt: Full Liquidty via Secondary Market

    While admitidly QuidSt is a few laps behind in the game, this is a long-term deal and I would love to hear if people think we are on the right track, or what they would change if they could.

    -bruce
    QuidStreet.net

  • Many of my libertarian compatriots cling to the antiquated ideal of a commodity (principally, gold) based monetary system. But the information age is increasingly making the old central bank model, and with it the gold standard, obsolete.

  • Johnathan

    One hundred years from today, it will be just as hard to remember a world where capital flowed through banks and currencies were government-issued.

    I hope you are right. Hayek’s idea on how a commodity-backed currency system could work has not really got the mainstream economics profession excited, which is kind of odd.

    Simple inertia explains much of the problem. People use a currency, even a government fiat one, because they trust it (naively, maybe). To get folk to embrace a private, non-state currency requires quite a mental leap for people. Perhaps it would only really take off at a time of great financial stress, as in Russia after the debt default of 1998, when dollars and gold were preferred units of exchange to the ruble.

    Nice article. Welcome to the blog!

  • Thomas Barker

    I managed to get a hold of Hayek’s Denationalisation of Money some time ago. Always wondered why the ideas never really took off… You’d at least expect long dated commercial bonds to be commodity indexed by now. The value of the GBP or USD in 30 years time is a lottery. But X amount/value of oil will at least be useful to somebody in a roughly predictable way. (Robert Shilling has had very similar ideas.)

  • rosignol

    People use a currency, even a government fiat one, because they trust it (naively, maybe).

    So long as the government will accept it’s (fiat) currency as payment for taxes, it has some usefulness, and therefore value. The instant the government stops accepting it as payment for taxes, nobody else will want the stuff.

    Commodity-backed currencies are interesting, but ultimately unwieldy- too much depends on if enough people need the relevant commodity.

  • Mrs Theresa Kate

    Compliments of the day to you all,

    I want to use this medium to advertise my business to you, in case you may be interested in getting or having what i offer, well my name is Mrs Theresa Kate am a well known and certified lender i give out loans and capitals to any one in-need of a loan or capitals expecially an urgent ones, at a low interest rate of 4% per year and the range of my loan and capitals are from $100usd to 100,000,000usd, pls if trully you are in-need of a loan pls contact me through this email address reesekateloan_org@tuckercapitals.com or reesekateloan_org@yahoo.com