Re: anonymous credit

[Hal Finney <hal@rain.org>]

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