Re: anonymous credit
Wei Dai, <weidai@eskimo.com>, writes:
The idea goes like this. The government announces a new series of anonymous zero-coupon treasury bonds that mature in 10 years, backed by a special lump-sum tax to be collected when the bonds mature. The proceeds of the bond auction and the tax are distributed equally among everyone. So basicly, the government forces everyone to take out a loan on the credit market and guarantees its collection. Anyone who does not want the loan anonymously buys treasury bonds with all of his distribution, holds them for 10 years, redeems them at maturity and uses the proceeds to pay off the lump-sum tax.
I think this is a very intriguing idea. Let me try to spell it out in more detail with some concrete numbers. A zero-coupon bond is one with a purchase price less than its face value. After the maturation of the bond, it can be redeemed for its face value. The purchaser of such a bond is loaning money to its buyer, and he will be paid off at the end of the loan period with more money than he put in. For a ten year bond, maybe the purchase price is 1/2 its face value. A $1000 bond would be purchased for $500, and redeemed in 10 years for $1000. An "anonymous" bond would be a bearer bond, one which is sold without any record of who bought it, and which can be redeemed at maturity by whomever holds it. In the example above, the U.S. government sells, say, $1 billion worth of these 10 year zero coupon bonds. It will have to pay back $2 billion in ten years at maturity. The $1 billion in revenues is then distributed evenly to everyone in the country. Assuming a population of 250 million, each man, woman, and child gets $4. In ten years, in order to pay off the redeemed bonds, $2 billion of special taxes will be collected. This will amount to $8 per person. As Wei says, each person in the country (who doesn't participate in the bond sale) is given $4 now, and must pay $8 in ten years. In effect he is given a $4 loan, payable in ten years. If he does not want that loan, he can take his anticipated $4 and buy $4 worth of the bonds during the bond sale. This produces no gain or loss of money, but he gets the bond. Then, in ten years, he turns in his bond for $8, and uses that to pay off the $8 in taxes. He ends up without any change in his financial state, neither loaning nor borrowing money. (There is a slight complication in that at the time of the bond sale, people who want to offset their loan with a bond purchase won't yet have the loan funds to buy the bond; and at the end, people want to pay off their tax with the bond redemption, but the government can't redeem the bonds until it collects the tax. I'm not sure if this is a serious problem or not.) Now, if this picture is correct, this isn't exactly how I would have thought of an anonymous loan. The people receiving the distributed revenues from the bond sale are essentially borrowing money from the government. Every borrower is identified, and must pay back his loan in ten years via his taxes. So the loans are fully identified and not anonymous. What does happen though is that some (or most?) of the people can offset their loan by anonymously lending money (buying bonds). In effect they have borrowed money from the government, non-anonymously, but then have the option of lending all of it back, anonymously. At the end, it is impossible to know which people have retained their loans and which people have cancelled them. So you don't know who has borrowed money, and this therefore is effectivelly equivalent to an anonymous loan.
The fatal flaw, of course, is that there is no reason why the government would want to help people get anonymous loans. Can anyone find a way to fix this?
Maybe a non-governmental body could be used in place of the government. Suppose a group of people wanted to allow some members to borrow money anonymously. For example, a church group wants to help members through tough times via loans, but they don't want the recipients to be identified and bear the stigma of needing charity. Wei's idea could still be used: the church sells its own bonds, redeemable at some future date for more than the face value. The funds from the sale are distributed evenly to all members. Members who don't want to borrow make purchases at least equal to their receipts. Then, after the time period, everybody has to pay a special membership fee ("tax") so that the bonds can be redeemed. If some people can't pay, the other members will have to be willing to pay more to cover their defaults. One practical problem with this idea is that the amount of money loaned per person is small compared to the volume of transactions going on, especially for large groups. In my example above, each person only anonymously borrowed $4, given $1 billion worth of transactions. That's a lot of paperwork with associated transaction costs for a small value. With smaller groups the idea might actually be more practical, although there is less anonymity then. Hal
This looks pretty much like a standard secondary market for digital bearer bonds. For the few of those here who haven't done so already ;-), see the e$ home page for several rants on the same subject. <http://www.shipwright.com/> The only people who really need to be identified in such a market -- at least as "identified" as a perfect pseudonym needs to be -- are the issuer and the trustee, both of whom must have some kind of persistant reputation in order to issue the bonds in the first place. The issuer because they're borrowing the money for something, and trustee, because, as the financial intermediary, they're renting their reputation to the trade in exchange for a haircut on a transaction somewhere, usually at issuance and redemption. In Mr. Dai's case, the trustee is some large trustworthy entity, and the issuer is a bunch of anonymous, or at least pseudonymous, people whose reputations would be trashed by the trustee though on a separate "channel" if they don't pay up. It's actually what happens with mortgages and bank accounts all the time, except we're doing it here in bearer form. In fact, in blinding(?) the borrower's identity from the lender, we doing something pretty much like securitizing the debt. There is nothing to keep us from pooling the debt and issuing securitized versions, controlling for all kinds of risks much the same way that GNMAs, or CMOs, or other deriviative fixed income assets do. In fact, it's a very good business reason for doing this, and so it probably will happen in the long run. Once again, anonymity (of a sort) is cheaper than identity. By the way, the trustee doesn't have to be large, only reputable. If Moore's Law allows it, I anticipate markets in which the trustees could become very small indeed, and would actually form syndicates with lots of entities to handle what would now be considered routinely small transactions, like lunch. :-). This the "personal" digital bearer bond that I abuse so much as a replacement for credit cards when I explain this stuff to people who are starting to learn about it. :-). Hal's discussion about lending principal and borrowing from the same pool at the same time reminds me of a scheme I've heard for hedging against the eventual day when the US government repudiates its debt. If you feel morally obliged to kick in your share, anyway. The idea is, hold your calculated share of the national debt in US Treasuries (with interest reinvestment, of course :-)), and, when the fateful day comes, you'll owe the "money", now zero, to yourself, just like Roosevelt said. Actually, if the government is moral and starts to repay the debt, you can hold treasuries and redeem them to pay the debt-repayment surtax. Of course, you could make better money elsewhere, but there is a certain, um, fireside, symmetry about it. At this stage, however, I'm a confirmed pyrophobe, Fed-wise. Cheers, Bob Hettinga ----------------- Robert Hettinga (rah@shipwright.com), Philodox e$, 44 Farquhar Street, Boston, MA 02131 USA Lesley Stahl: "You mean *anyone* can set up a web site and compete with the New York Times?" Andrew Kantor: "Yes." Stahl: "Isn't that dangerous?" The e$ Home Page: http://www.shipwright.com/
participants (2)
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Hal Finney -
Robert Hettinga