The risks of ridesharing as a model for the transportation economy: it’s a lot like fractional reserve banking

More than 130 years ago, Walter Pater famously wrote that “All art constantly aspires towards the condition of music.”

Today, in a business world dominated by concepts like “just in time delivery” and “lean inventory practices,” with your neighborhood grocery store holding only a few short days of food supply on hand, it sometimes seems that the prevailing wisdom is that all industries should aspire to the condition of banking.

The parallels between fractional reserve banking and the concepts behind the grandiose vision of a ridesharing economy are a case in point., especially when you consider the point to which the risks of ridesharing are arguably being overlooked.

Most of us know that the cash that banks keep on hand represents only a small fraction of deposits. Under Federal Reserve System requirements, larger U.S. banks must maintain 10 percent of their “net transaction accounts” in the form of cash on hand. Smaller banks can keep 3 percent cash on hand. And, strictly speaking, there is NO cash-on-hand requirement for the smallest banks with less than $16.3 million in net transaction accounts.

It’s all based on the simple theory that, for any given population of depositors, most will need access to only a small portion of their money most of the time. If you’re living paycheck to paycheck, it might not seem that way. And the principle is indeed more accurate for the big, wealthy depositors whose holdings balance out the rest of us who drain our accounts pretty quickly between pay periods.

But think of it this way. If you do live more or less paycheck to paycheck, take a look at one of your bank statements. Chances are, you will see that you are indeed spending your balance down in dribs and drabs in the days between pay periods rather than all at once, as you pay bills, buy gas and groceries, and so forth. It’s a gradual process and when you add it up for all the depositors it amounts to the money “on the books” on any given day being a lot higher than the cash actually being used.

Most of the time, you’re not using most of your money. That’s why banks can use the dollar that you deposit today for a loan to help someone else buy a car, someone else purchase inventory for a store, and so on. The practice of lending out most of the money and keeping only a small portion of cash on hand is called fractional reserve banking.

The ridesharing model is similar. If you’re a typical car owner, on most days, your car is parked and not running most of the day on most days, except on the rare occasions when you might be taking a long road trip. Just like the bank that says “hey, let’s put all those idle dollars to work to get more value out of them,” the ridesharing model says “let’s get some value out of vehicles during all of those otherwise idle hours.”

Most people are not using their cars most of the time. So in theory we can serve a population’s transportation needs with fewer cars that spend more time in use.

That’s all well and fine when times are good. Fractional reserve banking works great in a booming economy. And on a normal day in a normal city, you can probably get an Uber pretty easily when you want it.

But both models can break down—badly—under extenuating circumstances. Banks fail when there’s a cash run: when too many depositors are demanding their money, due to some kind of panic situation like a brewing economic crisis, for example. We learned that lesson all too starkly during crises like The Great Depression and the financial crisis of 2008, for example.

The parallel with the risks of ridesharing as a model for the transportation economy became clearer for me yesterday, after a comment I heard Matt Farah make on the May 3 edition of his podcast, The Smoking Tire.

In a passionate expression of his skepticism about whether the grand visions of ridesharing and autonomous vehicle evangelists like Elon Musk will actually be feasible any time soon, Farah commented on the risks of ridesharing models in disaster situations.

“In a hurricane, if you don’t have a private car [to evacuate in], you will die,” Farah said.

That’s the flaw. The scenario is a “transportation run” on the ridesharing model, and it parallels a cash run on banks in the fractional reserve model.

In a situation like a hurricane evacuation, in which too many people in a community urgently need transportation to get the hell out quickly, demand will far exceed supply, if society has transformed to a point in which most people use shared transportation instead of owning private vehicles. There won’t be enough vehicles available to get everyone out in an emergency.

You can say what you want about the wastefulness of most cars being idle most of the time, but this scenario makes a compelling case that owning your own vehicle is much more than just a luxury or convenience.

When the poop hits the fan, your privately owned car (or even leased, for that matter, if the lease is all yours) can be worth more to you at that moment than its weight in gold.

That’s why we as a society need to be careful what we wish for, careful not to get intoxicated on the utopian wet dreams of the ridesharing visionaries.

The vision of a world of shiny happy people getting their transportation needs met by shared autonomous vehicles has a potentially dystopian underside that we can’t afford to overlook. And understanding the parallels between a bank run and a transportation run is a great way to get a clear view of the risks of ridesharing economies.