I don't see why this is a blanket terrible idea - a ban on loans with interest, which are the only sort of loans that are economically rational for the lender, is a moral principle of one of the world's most popular religions (Islam) and used to be a moral principle of another (Christianity) until it was corrupted by capitalism in its lands. So we must at least concede that the idea of a world where loans are forbidden is well within the Overton window.

A world where people don't need loans seems like a pretty good world, honestly. I've been fortunate enough that my parents were able to finance my college education out of their savings, and I rent my apartment because I don't want a big mortgage, and my life is I think better compared to people I know with student loans and mortgages. A world where everyone has the same access to resources that I had is a worthy goal, and if we can fund that by banning loans, seems fine.

There is a whole industry of sharia-compliant finance to work around the ban on loans. The solution for the christian dislike for money-lending back on those days was for non-christians to do it. A world where people don’t need loans might be nice, but not all the people can use your parents’ money (and depending on what you want to do and how rich is your family, even you might need additional financing).

That's more about compliance in name only than actually following the faith. Like arguments if turning on the lights counts as setting a fire.

Of course. The point is that, paraphrasing Crichton’s Jurassic Park, debt finds a way.

Wait, why are interest-free loans the only kind of economically rational loans? Commercial debt contracts include interest, and are executed exclusively between sophisticated buyers and sellers of debt.

I think I put too many negatives in that sentence. I am claiming that interest-bearing loans are the only economically rational ones (because otherwise you're taking on nonzero risk for definitely zero reward), and interest-free loans used to be widely acknowledged as the only morally justifiable ones.

Ah, you're right. It's just the sentence structure that confused me.

(I asked another question here but decided I'm having a hard time reading or composing standard written English today so, some other time!)

No, you can still make a loan by buying a bond etc.

I simply feel banks have conflicting goals as they need to be 'good at' customer service and making loans. This creates a lot of poor incentives and economic distortions.

Yes, it will be very convenient for people to issue bonds when they need a loan to buy a house or start a business...

Credit Cards are an example of non bank loans.

The difference is people fronting money for loans would need to take on real risks without FDIC protection or have safe deposits but need to pay for bank services.

You know that the large majority of credit card loans are given out by banks, right? https://www.nilsonreport.com/upload/TopIssuersofUSGPCC.3.jpg

Sure, but like GM's finance division making car loans; Credit Cards are a viable business even without access to depositors.

Often the capital for many bank issued credit cards does not come from depositors at all.

Ok, so we don’t let banks loan money. I guess they may still take deposits but if they are not going to pay any interest people will keep accounts as low as possible.

On the other hand, all the financing needs will be covered by other means. These “non-banks” will have to obtain capital as equity and debt, maybe even loans from other non-banks, but certainly not as deposits.

What was the problem that we where trying to fix anyway?

> What was the problem that we where trying to fix anyway?

Risk of financial collapse. Banks are risky because they have a lot of leverage, people more directly loaning money may take a 20% hit after a housing collapse, but that's not such a big deal.

The banks that collapsed during the last crisis are not the kind of banks that take deposits and give out loans. They were the kind of non-banking businesses that you talk about.

And one of the reasons for the crisis was “shadow banking”, because many home loans were not really given by banks (some were directly created by other institutions, some were first created by banks but then packaged and sold). The subprime crisis would not have happened, at least to the same extent, if loans had been kept in the balance sheets of banks.

Here is a short list of recent bank failures most of which are very much traditional banks: https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U...

Including the United States' largest savings and loan association, until its collapse in 2008: https://en.wikipedia.org/wiki/List_of_bank_failures_in_the_U...

You are right, I was thinking of large (systemic) failures and actually I had completely forgotten about WaMu. Clearly forbidding the banking business (as in savings and loans) would prevent bank failures. But I´m not sure the alternative businesses that would fill the void would be much better.

> would be much better

I suspect, but can't prove companies that need to demonstrate comptitence in lending to gain access to capital would be better at making loans than companies who gain capital by doing other things and then suddenly have access to a lot of capital and need to find a use for it.

Consider tech companies like Apple/Google/Microsoft have access to vast amounts of Capital yet does not really effectively use it for much.