Banks create new credit=Money on the back of their capital base, and it is this supply of "new" value (actually it's deficit-based "anti-value") that serves as the lifeblood of our economy and provides the building blocks of new businesses.

And for the reasons you give, people are not too bothered about defaulting - and that is without even understanding (not one person in 10,000 understands) the reality of deficit-based "fractional reserve" banking. If they truly understood that, people would be trashing the banks wholesale.

The real alternative is for the members of credit unions and local businesses to get together within a local (or functional) "Guarantee Society" legal protocol and to mutually guarantee bilateral credit granted "peer to peer" between Members. This would take place between people who know each other or have some sort of "common bond" (which is of course a requirement for credit unions)

No interest is charged within this GS model, but costs and defaults are shared through making provisions into a "Default Fund". The result is "banking without the bank" ie no credit intermediary but a requirement for either a bank,credit union, ratings agency, whatever, as a service-provider.

Great for a Bank, by the way: they no longer have to put capital at risk since they no longer create the credit but instead manage credit creation, system integrity and operation.

"The future is already here -- it's just not very evenly distributed" William Gibson