The author's suggestions have some interest but as policy they are both unworkable and unnecessary. Just defining what operations deserve zero interest loans and what do not may seem simple in broad brush terms, but the actual definitions would require volumes of legislation. Administration would be a nightmare. And that's before we get into the tax implications. One of the major lessons of the past few decades, and it is a bitter one for social engineers, is that concessions and subsidies have to be very carefully designed, of they will be grossly misused.
Then there is the problem that the suggestions amount to changes in a financial system that held up pretty well in a face of financial melt down everywhere else. the real question is whether the Americans will bite the bullet and reform their financial system. We live in hope.

Interesting read as a starting point.
Worthy of refinement and consideration. Several other related issues and alternatives come to mind.
The undeniable objective fact is that the current system needs taming.
Philosophically it needs to become the tool of man not it's master.

Curmudgeon,

Loans backed by existing assets are at least 1/10th the cost of equity backed by future assets. This means that existing businesses do not invest in new assets if they can possibly help it. It means that the rule of thumb for a new technology to compete on investment grounds is that it has to be about an order of magnitude better in performance to an old technology before it can get investment finance.

If anyone is subsidised it is the holders of existing assets in comparison to those with ideas for future assets.

It is my belief that no legislation is required as it operates using existing mechanisms. If there is please point me to it.

The general area for zero interest loans is specified - not the detailed investment. That is determined by the market place in investments. This is one of the reasons why it is done this way so that citizens choose which particular investments to make not the government.

There are no tax implications. You pay taxes on earnings and on capital gains.

The system has been designed to be "exactly" the same as the current system and if by some chance there is a law that says there should be no zero interest loans then we can overcome that by charging 0.00001 percent.

The government currently guarantees ALL bank deposits so there is no issue around that.

It will work and it is being done already on a small scale with some of the NAB products.

Of course the system has to be very good at "keeping the books" but that turns out to be the easy part with modern information and communications technology.

Kevin, we have had this discussion so many times on OLO, under your Fickle Pickle nom-de-plume.

First of all, you make highly questionable assumptions.

>>It is called a financial crisis because it started as a problem with the financial system and has spread to the "real" economy.<<

The financial system is part of the real economy. With or without inverted commas.

>>Money has two basic functions. The first is as a measure of value for the exchange of goods and services. The second is as a store of value.<<

Wrong.

Money is not a store of value. Stored money has no value at all. It is inert.

It is only when money moves, that its value is discovered.

An example.

The 1970's "oil crises" moved the price of crude oil from $3 a barrel on 15th October 1973, to $80 in 1979. This provided many Middle Eastern countries with windfall profits of many billions.

If they had simply used this money to store value, they would not have built all those schools, roads, hospitals.

More dramatically, the German Mark failed dismally to "store value" in 1923. One day a billion marks would buy a loaf of bread. Store the money for a day, and it's half a loaf.

Money's one and only function is as a measure of value for the exchange of goods and services.

Which renders your fear of "fiat" money irrelevant.

"'Fiat' or printed money does not represent anything and is used to facilitate trade rather than act as a store of value."

It does actually represent something, but only symbolically (i.e. governed by the symbol it bears - $10, $50 etc.)

But you are right, it is hopeless as a store of value.

Exactly the same as gold coins, or cowrie shells, or banknotes, or leather squares, or wampum or bits and bytes in a bank account.

All of the above only have value when used in trade.

You are right, too much money on loan is painful to an economy, as we are now discovering.

But your proposed solution is, as ever, unworkable.

Pericles,

I think we both agree on what money is so I will not address your concerns about the misuse of terms.

I truly want to know why you think the solution is unworkable. I took on board ideas from our last discussion so that this scheme fits within the existing framework. The only technical difference that I can see to the way the existing system works is that government has to agree to allow the banks not to show zero interest loans on their balance sheet. In other words the government guarantee the deposits so that the loans do not have to appear. However, the government already guarantees all bank deposits so that should be possible.

There is a lot of work to be done to implement this sort of system but it isn't difficult.

I am looking for structural issues that need to be addressed or for better ways of describing the system. If you can point out any such areas or things that do not make sense then please let me know.

I am looking for any community or government groups or private groups that want to see if their community infrastructure ideas can be helped with zero interest loans. If anyone has any ideas then contact me through olo and I may be able to make some suggestions.

I'm not sure that we do, Fickle Pickle.

>>Pericles, I think we both agree on what money is...<<

And that is where my problem with your theories lies.

As I stated in my earlier post, money only acquires a finite value when it moves. The system of lending that has developed over the years identifies this value through i) interest rates and ii) time. There is also the dimension of location - a dollar has a different value in different countries, or different locations within the same country.

In project finance, the owner of the capital has a number of choices. He can invest directly in the project, in which the risk is direct and immediate. He can lend the money on terms that will be beneficial to him, either accepting an interest rate/time combination, or a share of the increased value. Or he can invest indirectly through listed stocks.

The process adopted is dependent entirely upon individual circumstances. In other words, there is no mandated "right" or "wrong" way to invest in a project, merely a combination of risk assessment and return on investment.

There is room, no doubt, for zero-interest transactions.

But that does not translate, from being individually a worthwhile and beneficial transaction, into an entire system of lending and borrowing.

Because it does not scale.

It works in the micro-finance area mainly because i) the individual amounts are small, ii) the risk to the lender can be spread over a very wide range of projects and – most importantly - iii) the incentives on the recipients to succeed extends way beyond the simple need to “repay”

But in major projects it is virtually indistinguishable from capital investment.

Finance is provided, and any increase in value is dependent upon the success of the project. The bigger the project, the greater that risk.

It is highly unlikely that “loans” - with such an uncertain future, not underpinned by a measurable return - will displace venture capital in this scenario.

And as a system, it will not on its own solve anything.

Hope this helps.