Re: Why emoney? Why not a web of debt?

>> Date: Sat, 21 Jan 1995 15:18:48 +1300
>> From: davidm@iconz.co.nz (David Murray)

>> The best way to underpin the value of ecash is for the issuer to (credibly)
>> undertake to convert it into real money.
>
>  And since I would only make the promise to the few people that I am
>connected to in the debt-trust web, this is doable.  I doubt I could
>convince all of you that I was good for $10, but I bet there are a few
>readers on this list that I *could* convince.  They would be able to
>convince a few others that _they_ are worth $10, etc.

But this, I suggest, is thinking too small, as well as (or, as a consequence)
compromising anonymity somewhat. Which is not to say a central ebank is
necessary -- just that (legally enforceable, audited) IOUs from a corporation
that I knew could pay (because it makes it's living from being able to pay)
would be preferred by me, even if I (my computer) knew that Alice's IOU is
backed by Bob's which is backed by ... Zane's, who I would trust with my
life (since he saved me in a boating accident 7 years ago...).

Of course, the two systems can/should coexist. In fact, they're probably the
same thing at different granularities. An ordinary bank takes deposits
(issues IOU's to depositors) and lends the money out (collects IOU's from
debtors). [The flow of credit is just the flow of debt backwards -- like
current and electrons :-)] People trust bank IOUs because of the portfolio
of IOUs it has collected (a certain mandated number from the Government, 
a certain proportion backed by property etc), and, probably, because it
has received more IOUs than it has issued (so that the IOUs from Donald
Trump and Orange County don't bring the system down...).

On this analysis, the web of debt-trust is just an ultimately distributed
bank. Instead of the bank collecting the ten dollars everyone is good for
(in return for IOUs) and then lending it back out to the system (in return
for IOUs), everyone's individual IOU underpins the system. This seems to
leave the portfolio problem to the distributedness and interlinkicity of 
the e-economy (everyone essentially holds the market portfolio), or up to
the individual to balance. Personally, I would be unhappy to hold my
e-wealth in such a way that it was ultimately underpinned by the IOUs of a
group of people living in California...

>  This system might even dodge the laws governing banking in various
>jurisdictions ... though I doubt it.  It quacks, waddles, and water
>runs off its back...

I don't think the banking laws are such a big problem. [Feel free to 
enlighten me.] The ordinary business of banking involves borrowing money
from people in a special way (deposits) and lending to people, again in
a characteristic way. But it is not simply borrowing and lending -- every
business does that (borrows from banks, and, increasingly, in markets;
lends (extends credit to) customers).

Imagine a corporation that issued bearer bonds, and invested the proceeds
in t-bills (or term deposits, or call accounts). Imagine that the bonds 
(IOUs) were issued at face value, carried no interest, and could be cashed
in by the holder at any time. Imagine further that the bonds were repres-
ented by bytes, and transferable anonymously. That is, the bonds are 
ecash, and the corporation is an ebank.

But it is not a bank-bank. It is not borrowing money in a characteris-
tically bankish way, and it is not lending the money in a characteris-
tically bankish way. It doesn't raise the regulatory/consumer protection/
handholding or multiplier effect/credit expansion problems that
(supposedly) underlie banking supervision regulations. In short, ladies
and gentlemen, it is my submission that it is not, in fact, in the final
analysis, when looked at from all angles in the correct way, at all, a
duck.

Cheers.

D

[Although this doesn't entirely answer your point. I don't think the 
distributed/web of debt-trust system would be a bank, either, although
it might be a credit union. And you would have to pay tax on all those 
IOUs you collected ;-) ]

Many companies are already founded on "a web of debt".
"Sallie Mae (Student Loans), Ginnie Mae (General Loans), and Freddie Mac
(Real Estate Loans)," all come to mind at the moment. They're nicely
formatted, processed and make even more money for investors as the
interest rates change.

So maybe the remailer IOU's, could be traded for the data haven IOU's,
and so forth. I think someone does have a credit card IOU situation.
The systems, and precedence for debt trading are there (and interest
rates are going up again soon, indicated the Fed last week!).

I just wonder who wants to play "collection agency"?

Love Always,

Carol Anne

Registered<BETSI>BEllcore Trusted Software Integrity system programmer
***********************************************************************
Carol Anne Braddock   "Give me your Tired, your Poor, your old PC's..."
The TS NET                                  REVOKED PGP KEY NO.0C91594D     
carolb@spring.com                                       carolann@mm.com
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Date: Sun, 22 Jan 1995 09:46:26 -0600 (CST)
    From: Censored Girls Anonymous <carolb@barton.spring.com>
    
    Many companies are already founded on "a web of debt".
    "Sallie Mae (Student Loans), Ginnie Mae (General Loans), and Freddie Mac
    (Real Estate Loans)," all come to mind at the moment. They're nicely
    formatted, processed and make even more money for investors as the
    interest rates change.

Student Loans (at least GSLs) and GNMA loans are backed by ``the full
faith and credit'' of the US federal government.  As far as an
investor is concerned, loan default looks the same as if the loanee
paid their debt off early.  The `web of debt' suggestion posted here
doesn't seem to follow the same model unless you count virtually every
form of financial transaction -- including buying a cup of coffe with
a dollar bill -- as fitting the model.

As a side note, GNMA (Ginnie Mae) is not for `general loans', but
rather VA and FHA primary residence mortgages with various
restrictions.  GNMA, FNMA (Fannie Mae), and FHLMC (Freddie Mac) all
exist to provide secondary markets for various kinds of real estate
debt.

--
Rick Busdiecker <rfb@lehman.com>      Please do not send electronic junk mail!
  Lehman Brothers Inc.
  3 World Financial Center  "The more laws and order are made prominent, the
  New York, NY  10285-1100   more thieves and robbers there will be." --Lao Tzu

Sallie Mae's commercial paper is NOT backed by the full 
faith and credit of the US government.  They carry a specific disclaimer 
to that effect.  It is true that many personal student loans (GSLs) from 
banks are guaranteed by the government.  The system was recently reformed 
to remove the riskless subsidy to Sallie Mae, which is 100% privately 
owned, and very profitable.

Similarly Fannie Mae and all other priavetly held GSE's are only backed 
by an "implicit" federal guarantee.  Although the only time one of these 
got into trouble the feds did bail it out.

See my forthcoming article "Reinventing Government Corporations" in the 
Illinois Law Review.  Due out in about three months.

OBCrypto: How big a risk premium would YOU want to lend to an anonymous
borrower?  In practice, for the forseeable future any such lending will
almost certainly be intermediated through a very small number (near zero)
of specialists ready, willing and able to measure and minimize the risks. 
Or there will be ferocious requirements for collateral. 

A.Michael Froomkin          | +1 (305) 284-4285; +1 (305) 284-6506 (fax)
U.Miami Law School          | MFROOMKI@UMIAMI.IR.MIAMI.EDU
PO Box 248087               | 
Coral Gables, FL 33146 USA  | It's warmish here.

On Mon, 23 Jan 1995, Rick Busdiecker wrote:
[...]
> Student Loans (at least GSLs) and GNMA loans are backed by ``the full
> faith and credit'' of the US federal government.  As far as an
> investor is concerned, loan default looks the same as if the loanee
> paid their debt off early.  The `web of debt' suggestion posted here
> doesn't seem to follow the same model unless you count virtually every
> form of financial transaction -- including buying a cup of coffe with
> a dollar bill -- as fitting the model.
> 
> As a side note, GNMA (Ginnie Mae) is not for `general loans', but
> rather VA and FHA primary residence mortgages with various
> restrictions.  GNMA, FNMA (Fannie Mae), and FHLMC (Freddie Mac) all
> exist to provide secondary markets for various kinds of real estate
> debt.
[...]

Date: Mon, 23 Jan 1995 12:05:22 -0500 (EST)
    From: Michael Froomkin <MFROOMKI@umiami.ir.miami.edu>
    
    Sallie Mae's commercial paper is NOT backed by the full 
    faith and credit of the US government.  They carry a specific disclaimer 
    to that effect.  It is true that many personal student loans (GSLs) from 
    banks are guaranteed by the government.  The system was recently reformed 
    to remove the riskless subsidy to Sallie Mae, which is 100% privately 
    owned, and very profitable.
    
    Similarly Fannie Mae and all other priavetly held GSE's are only backed 
    by an "implicit" federal guarantee.  Although the only time one of these 
    got into trouble the feds did bail it out.

I inferred (perhaps erroneously) a tone of correction in your message.
For the record, GSLs and GNMA loans were the only loans which I
explicitly claimed were backed by the full faith and credit of the US
government.  Thank you for your clarification wrt Sallie Mae.

    On Mon, 23 Jan 1995, Rick Busdiecker wrote:
    [...]
    > Student Loans (at least GSLs) and GNMA loans are backed by ``the full
    > faith and credit'' of the US federal government.  As far as an
    > investor is concerned, loan default looks the same as if the loanee
    > paid their debt off early.  The `web of debt' suggestion posted here
    > doesn't seem to follow the same model unless you count virtually every
    > form of financial transaction -- including buying a cup of coffe with
    > a dollar bill -- as fitting the model.
    > 
    > As a side note, GNMA (Ginnie Mae) is not for `general loans', but
    > rather VA and FHA primary residence mortgages with various
    > restrictions.  GNMA, FNMA (Fannie Mae), and FHLMC (Freddie Mac) all
    > exist to provide secondary markets for various kinds of real estate
    > debt.
    [...]

> Many companies are already founded on "a web of debt".
> "Sallie Mae (Student Loans), Ginnie Mae (General Loans), and Freddie Mac
> (Real Estate Loans)," all come to mind at the moment. They're nicely
> formatted, processed and make even more money for investors as the
> interest rates change.

You are talking about trading mortgage-backed (and other debt-backed)
securities, and what you say can be generalized to bonds and certain
FX contracts as well.  Certainly derivatives often use debt instruments
in their formulation.
 
> So maybe the remailer IOU's, could be traded for the data haven IOU's,
> and so forth. I think someone does have a credit card IOU situation.
> The systems, and precedence for debt trading are there (and interest
> rates are going up again soon, indicated the Fed last week!).

This could work, but you are talking about securities markets, which
do this already.  Selling securities over remailers would be sure to
bring down the wrath of moneyed establishment types... :-)
 
> I just wonder who wants to play "collection agency"?

This is the problem.  Government always ends up playing this role,
and so it reserves the right to decide what it is willing to enforce...
classifying the rest as 'gambling' or some other unenforceable debt...

Craig Hubley                Business that runs on knowledge
Craig Hubley & Associates   needs software that runs on the Web
craig@passport.ca   416-778-6136  416-778-1965 FAX

On Sun, 22 Jan 1995, Censored Girls Anonymous wrote:

> Many companies are already founded on "a web of debt".
> "Sallie Mae (Student Loans), Ginnie Mae (General Loans), and Freddie Mac
> (Real Estate Loans)," all come to mind at the moment. They're nicely
> formatted, processed and make even more money for investors as the
> interest rates change.

I for one would not want to go in to more debt. I am in debt up to my 
neck due to a auto accident. I can not afford to go in to more debt. I am 
barely making it beacuse I owe on two loans, insurance, and money 
borrowed from relatives. This beacuse I thought I could afford X dollars 
a month more. I could if I wassnt out of work for as long as I was. When 
I have everything paid off, I belive I will not be borrowing anything 
else for a while. My question to you is, "Why borrow, if 1. you can 
afford to pay cash now, and 2. when you are going to have to pay more in 
the long run."

							Groove on Dude
							Michael Conlen