The Austrian Way: Where we keep our hard earned, out of the banks

Last week we vented about how badly depositors are rewarded for capitalising much of the banking system. In case you missed it, take a look here.

Our grievance was not just to do with low interest rates. We simply don’t believe depositors understand the risks they take when lending their hard-earned to the banking mega-casino.

Given our beliefs here we prefer to keep our liquid savings away from banks whenever possible.

There are a few options we like here – some as shiny and as old as the hills, some ultra-modern, digital and slightly confusing and others are just ways of doing things together and bypassing the banks.

Listen to our chum, Dave Fishwick

You might have seen media coverage of something called the Bank of Dave recently.

It’s essentially a credit union started and guaranteed by entrepreneur Dave Fishwick. This serial entrepreneur hit the headlines with his grapples with the lovely FSA and his massive local popularity up North where he’s conducting a ‘very interesting banking experiment’.

A very good experiment if you ask Bogpaper!

The Bank of Dave is a credit union where local people lend to local borrowers, via the institution which vets borrowers the old school way, by going and meeting them, shaking their hand, looking them in the eye, seeing where they live and having good long talks about their business.

There is no leverage, the reserve ratio is 100% and Dave personally guarantees deposits.

The Bank of Dave is a roaring success so far, but there are other credit unions to look at for parking your savings too; just check this list from the now deservingly cashed up Martin Lewis.

We’re big fans of credit unions and Dave, who took on and beat the FSA.

But credit unions have been given a modern twist as well.

Peer to peer lending

Peer to peer (P2P) lending online isn’t much different to the Bank of Dave and other traditions.

A few sharp looking websites, a bit more jargon, a few more computers making lending decisions but other than that P2P lending is essentially us lending money to one another without the banks.

The P2P lending industry in the UK has developed quite a bit in the UK and US, especially since the Credit Crunch. Bogpaper readers might well have heard of names like Zopa, Funding Circle, RateSetter etc.

Online P2P lending is also done without leverage, 100% reserve ratios and less risk than many of our well-known banking giants.

We should say that this industry needs to find ways to get money out to borrowers faster, as there are stories of lenders having their money sat there for weeks without being lent out and put to work.

We also look forward to seeing the development of this form of finance over the years.

Let’s get digital

A veritable media storm has erupted this year over some odd sounding, digital currency unit by the name of Bitcoin.

Bitcoin is a decentralised, community owned, audited digital currency that was mined by the lucky early adopters. Supply, and thus value, of Bitcoin is restricted by algorithms and encryption technology. The currency’s ledger is meant to be impossible to corrupt.

Whilst this might sound uncomfortable to you, essentially what digital currencies are trying to do is create viable alternatives to our heavily printed, confetti money issued by central banks.

There are now a whole host of other emerging digital currencies such as Feather Coin, Light Coin and others, bringing welcome further competition, evolution and innovation to this space.

Once more the internet and digital world are disintermediating the over-regulated and over-protected status quo.

Whilst these ways of storing liquidity might evolve to become real threats to the monetary system in future, at this time they are new, potentially risky and subject to volatile price movements and flux.

For now we’re enjoying just keeping a few hundred quid in these anti-fiat creations, whilst using the tweet streams of fan-boys like Max Keiser to make the odd punt.

Our favourite: old yella’

We couldn’t talk about savings mechanisms without mentioning the oldest, most proven and most ultimately liquid of all: gold bullion.

Gold prices have taken somewhat of a smack this year, but this doesn’t divorce us from the money of kings. We’re not looking to speculate with gold, but preserve wealth over the long run.

Holding gold bullion, as James Delingpole will tell you too, is like holding insurance against your other worldly assets and the financial system. You hope you don’t have to call on it, but we sleep a damn site sounder owning a few ounces of the stuff. Some lucky readers might own kilos. Perhaps one of you even owns a tonne… if so, please get in touch and help us and Bogpaper fire some serious bullets in the war of ideas the statists and Keynesians are currently winning!

Gold bars, in a vault, even if traded online, are unique financial assets in that they have almost no counter party risk and they have ZERO credit risk.

Gold bars are the foundation of our humble piles. (We also like a bit of silver too, but that’s our naughty little secret!)

Only talking about liquidity

Naturally we are only talking about liquidity here and not investments… maybe we should do that another day. These just happen to be a few of our favourite forms if it.

We think big banks are often badly run with balance sheets too complicated, silos within them brewing poison that can spread and hamstring the whole organisation, we don’t think deposit insurance can really pay out when it might really need to and we find politicians and central bankers too prone to err, waver, duck and weave.

As a result we’re opting out and looking for alternative ways of saving.

Obviously we’re not giving advice here. This is just how the malcontents at Bogpaper towers feel. Advice comes with a sting in the tail these days, in a world where caveat emptor is about as popular as Jimmy Saville themed birthday cakes. Do your own digging, thinking and research and good luck with it. We don’t want the regulators bending us over the table.

  • tim hubbard

    1. For god’s sake don’t think of gold as insurance.
    2. Don’t touch any P to P or other informal form of credit/deposit unless you are highly tolerant of risk.
    3. Criticism of high street banks is no doubt highly deserved but a bit 2009, which is when they would have blown up. Instead they passed into partial public ownership and the pain was taken by the stock and bondholders as usual, with the liabilities ending up as debt on the nation, to be taken care of by taxpayers, who in turn pray for inflation and invest their capital.
    4. If you have cash on deposit spread it around. It is highly likely in any default you will be protected. The political fallout from depositors taking a hit will always be far far greater than printing a few more pounds. Before anyone says “Cyprus” that is not a proper comparison. In the UK it is inconceivable that bank guarantees would not be honoured, and 2009 showed that.
    5. If you are lucky enough to have sufficiently large sum on deposit that bank default is troubling you then you should have it invested instead. No-one should be holding large sums of cash at negative real rates.
    6. Following on from that, the real worry for cash depositors is inflation not bank default. That and low rates, which is a matter for your respective MP’s. Don’t forget that rubbish returns from cash is a consequence of the current quasi-Keynesian policy. Why is the bank rate at 0.5% when inflation is at 4%? Because it is politically expedient that it should be so.

    • http://www.bankruptculture.com BankruptCulture

      1. Why?

      2. P2P lending offers different and clear risk profiles.

      I would say that the average person is unable to know the real risks to their capital if deposited in a bank at any point in time, other than in vague terms.

      3. Did you see the news yesterday regarding Cooperative?

      4. Why is it inconceivable that something like Cyprus could not happen in another country? As an alternative what use is a balance in devalued GBP?

      5. Why should it be invested? That surely should be up to the individual. Additionally, what kind of investment? Deposit in a more suitable institution would be a similar, but better suggestion, surely?

      6. Inflation may well be an issue, but some form of bank default is a genuine risk. I believe the biggest issue is that most of what is going on seems to be hidden from view and we have to piece together the real story from little glimpses.

  • http://libertarianmoney.wordpress.com Liberty

    “Advice comes with a sting in the tail these days, in a world where caveat emptor is about as popular as Jimmy Saville themed birthday cakes.”
    :D

  • Edwin Baker

    More good stuff Austrian way. I guess it all boils down to whether you think the central planners can ‘manage’ finance forever. I don’t but I think that’s a growing if minority view.

    Banking remains uncompetitive due to years of special priveleges and barriers to entry. Now we have state created super banks too. The business of government is not the government of business.

    The industry must be prime for change. Facebook should do a credit union. I’d love to see Google enter banking. This whole idea of backstopping it all is nuts.

    Sadly in Western politics we don’t see much hope or new ideas. In the UK Carswell and Baker are pretty much bound for back bench careers. The show goes on…

  • Chris

    Digi currencies will solve all this.

    Your wallet of BTC, Feather coin or whatever comes along next, will replace a bank account.

    A place to hold capital and a payment mechanism – just like a bank account but better.

  • Henry Kennedy

    No way the authorities have got control of this one. As the BIS says, Bernanke et al are indeed losing control of this tiger’s tail. 60 years of financial intervention and meddling are being unwound. It’s not gonna be pretty and it might not be all that quick. The market’s desire for deflation, cleansing, write downs etc is being fought by Bernanke, Abenomics and other hucksters. Epic to behold. My hedge is gold.

    http://www.sprott.com/markets-at-a-glance/have-we-lost-control-yet/

    http://www.sprott.com/markets-at-a-glance/caveat-depositor/

    • tim hubbard

      If you think that is the case then gold is certainly not a hedge I’m afraid. Gols tends to go up with increasing inflation and a weakening dollar. The end of stimulus would be deflationary and would also strengthen the dollar.

  • http://gravatar.com/bogpaper Microexchanges

    Every asset has a risk associated with it, be it equities, gold, property,Bitcoin or money in the bank. The global flow of funds rotates between asset classes depending on the peoples perception of what lies ahead and the markets move accordingly.

    Paper securities can come and go, and real asset prices go up and down. But there just seems to be alot of paper assets at the moment.

    That’s why I agree with the Austrian way.

  • silverminer

    Gold and silver will be the last men standing when the Western fiat money, derivative Ponzi scheme finally bites the dust. The gold is heading East to China and Russia. They know what’s coming and are taking the necessary action to secure their positions when the currency system is re-made. I think that twat Gordon Brown sold our gold so we’re forced to join a gold backed Euro when it all goes down.

  • Apparent bigot

    Buy gold; he who has it makes the rules.

    Gordon Brown is responsible for the biggest loss of monetary sovereignty in British history.

  • Tim

    It’s a bit silly to keep on about Ponzi schemes since they involve fraud. The current markets do not although they may involve risk and leverage. in an inflationary crisis caused by current policies gold may well be a great asset as its great driver is inflation. In a full scale crunch/meltdown crisis it is unlikely to be a particularly good thing to hold. Gold positions around the world would be liquidated as governments raised cash. Government bonds in UK and US would attract the flight to quality bid they always do, and they are the only assets sufficiently liquid to attract investors who want to pull cash out of the system. As we saw in 2009. You just can’t buy or sell sufficiently large sums of gold or one of its related ETF’s.

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