Repos/repurchase agreements: if under a month, kept. Unwound if over a month, replaced with equity.
Short-term commercial paper (30 days or less): replaced by repos.
Longer-term commercial paper: replaced by equity stakes.
Borrowing against receivables: replaced by selling receivables.
Corporate bonds: replaced by equity.
Preferred stock: replaced by equity.
Payday loans/small pawnage/small personal loans/balance carryover on credit cards: replaced by enhanced bankruptcy + housing and job placement.
Larger personal loans, miscellaneous: abolished.
Medical type loans: replaced by bankruptcy.
Mortgages: abolished.
College tuition: for most areas of study, abolished. For certain long-running and necessarily expensive majors (mainly medical related), financed by a series of bid apprenticeships where the student can’t finance the whole cost.
Options: sellers of puts have allocated future production, or other contracted delivery.
Levered strategies e.g. in the stock market: abolished.
Explanation:
The purpose of a classical bank or common shareholder corporation, was to pool funds in order to build capital (e.g. ships for trade to the East Indies) and to provide working funds (e.g. to load firearms or other trade goods) to carry out business operations. Sometimes we think of the old regimes/banking system as “undercapitalized”, but we also should recall that famine and malnutrition was very real even in the industrializing West until the 1950s, when the sheer might of the Green Revolution and big agribusiness could flood the world with food. Hedging across a wide variety of social and economic domains was a matter of life and death, therefore betting on transoceanic voyages and the like, often was putting yourself and your family at risk. We look at the absurd profits from those voyages and say “why wouldn’t everyone do this?” well that was why. Conventional deposit banking, then, (to ignore e.g. its currency and commercial facilitation functions) was a way to spread the risk amongst multiple ventures, therefore keeping the commitment of money from immediately being an all-or-nothing proposition, therefore allowing the middle class (such as it was) to drive forward capital investment and the conduct of capital-intensive commerce.
In the 21st century, even the poor have money to bank in India and the middle-prosperous African countries. The global middle class is essentially bourgeois, therefore the concept of “money I can’t lose” in ordinary life, does not exist, and the education level of said middle class easily accommodates the understanding of equity vs. debt. So, in addition to the vastly increased popular and elite wealth that eliminates the need for universal capital mobilization, there is no significant knowledge deficit inhibiting any transition to an alternative financing regime.
With the motive forces for short deposits for long risk removed, there is no benefit to justify the gross disadvantages of such systems e.g. bank runs, financial acceleration into stock market downturn, etc. The fundamental idea is that equity replaces debt, and that the remaining debt-like instruments not only have specific efficiency-enhancing function, but also have a heavy basis in collateral, so that the impact of economic downturns (or improvements) is not magnified, hence making the price system grossly inaccurate and throwing off economic activity even more.
The first basis for debt is a repurchase agreement, where a specific collateral asset is identified from the debtor, which through the normal workings of the financial system, its existence remains essentially intact as a bond, property deed, etc. Hence, in the case of default, you’re not chasing down currency/cash flows and trying to figure out to where it got embezzled. Moreover, the basis in a definite instrument, structurally prevents the making of grossly unsecured loans.
The second basis is a bit more complicated and revolves around the efficient management of modern business. Receivables management i.e. making buyers pay up after receiving their goods for which they pledged money, is an inherent source of debt in the economy that no practical means of settlement e.g. that requires inspection of finished goods, can remove. The collection of this money e.g. in medical debt, is a domain far outside the normal conduct of business operations and hence practically is managed by entities operating separately from core business operations. That is, they are essentially financial/nominal, not directly based in the physical economy. As such, the restructuring noted above, to change from borrowing to selling, relates to the conversion of debt/bonds to equity just like you would for normal corporate borrowing; the difference is that instead of trying to package this stuff up into some exotic CDO, or borrowing against a bucket, you sell the receivables into the market if they really are amenable to wider consumption (vs e.g. aircraft inspection or signoff, where the technicians of the business are involved in the assurance of collection). Receivables are not universally salable, but the ones are trafficked, should be done as sales.
There is a large amount of business based around cash flow, in particular when bank accounts run low. Fundamentally, that is an undercapitalization of an individual’s daily life, and the appropriate solution to that is not to run an entire financial sector based around inefficient repeated actions that compensate for whatever has gone wrong in a person’s life. The better answer, when people reach the point that everyday expenses are hitting bottom of the bank account, is to put them into an enhanced version of today’s bankruptcy. They appeal for help, and the state immediately pays down their petty debts. Then, the state facilitates them to get jobs and a living situation in which they can pay down that debt to the state, and maintain a working checking account/capital buffer, so all of these other industries can shut down and release their workers to more productive pursuits.
Note, bankruptcy still will be a real thing, especially for large medical debt that often has no prospect of major repayment, so the enhanced procedure doesn’t quite apply in all cases. Other elements of the welfare state have to kick in e.g. when a single elderly person takes a fall and goes in the downward spiral.
Business mortgages are easy to abolish, as that’s direct undercapitalization. The primary home mortgage is a more complicated situation because there is a cost of management offset, that notionally makes owning a house more economically efficient when the size of the house is large (because the percentage cost of the owner’s risk as a non-resident, increases with the size of the home, overcoming the larger fixed cost e.g. to doing and managing maintenance ad-hoc/yourself, vs. a corporate owner who can contract in bulk). That is, if you have a large but relatively poor family/friends, you clearly can use the large house and would lose money under the abolition of mortgages. However, this is conditioned under several factors:
- That you are going to stay in the house for a long time (7+ years is notional, but practically 10+ years is becoming more common as housing prices in many Western countries e.g. Canada, are becoming large, therefore normal market fluctuation in those prices financially locks you in to waiting to sell when the market recovers. Other problems involve interest rates and being locked into a good mortgage, therefore your exit gets very complicated)
- The financial markets are at a peak (because the opportunity cost of having that much money locked up in a big house is not trivial), therefore putting money in the market is likely to show negative returns after inflation, hence the opportunity cost is mitigated
- That you and your roommates have the steady income to service the debt over the 10-15 years that is the practical minimum for a mortgage (otherwise you would sell assets to cover the difference), AND you have enough initial capital assets to make down payments, etc. so that it does not functionally resemble rent/you are adequately protected against loss of home value
Some people can meet those requirements, but most can’t. Moreover, the condition that markets are going to underperform vs. the price of the house, historically has not been easy to meet. Consequently, when we talk about continuing to allow home mortgages, we are talking about allowing a specific optimization for cost, based on factors that most people don’t control. Hence it is a minority of people that can (but may not) benefit with mortgages, while the majority probably don’t benefit, and everyone gets to deal with financial crises aggravated by mortgage debt obligations, which historically have socialized losses/taxed everyone. Hence I don’t believe the benefit to allowing mortgages for a minority, justifies the cost for all.
In the case of college tuition, most undergraduate education now effectively can be accomplished via Internet study. There still is lab work, but that’s of a manageable magnitude/yearly cost. Consequently, the normal mode needs to shift to part time work through college, reverting to the older model, with a stretched out education. Full time college study still is acceptable (and could be sponsored e.g. with work commitments in the summer and then a couple of years after, no long-term indentured servitude), it’s just that we should not let students go deep into debt. Note as sanity check, many college majors already are oversubscribed in the current situation, therefore dialing back the amount of subsidized (particularly in lower-paying majors where the student may get chained to debt for a decade or more) education is indicated in any case.
Options trading is complicated because futures contracts necessarily exist as part of normal economic activity. The question is whether only vanilla futures/forward contracts suffice (because e.g. I need to open a mine/build a factory), or whether other hedging activities improve both profits and overall economic efficiency. I don’t think I fully understand the fundamentals that underlie secondary trades, so I would leave the point at that someone who puts onto the options market has to have a source of the contracted item lined up.