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A Flight to Simplicity
Banking on Ourselves
Chris Cook Schumacher College
14 November 2012
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About me - Trading Places
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“21st Century problems cannot be solved with 20th Century solutions”.
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Market 1.0 – decentralised & disconnected
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Market 1.0 – physical market presence
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Here: Market 2.0 - centralised & connected
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Market 2.0 - presence via intermediaries
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There: Market 3.0 - decentralised & connected
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Market 3.0 - network presence
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Here - at Twin Peaks
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Peak Credit - financial demand on people
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Peak Oil - demand on a finite resource
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Peak Credit – intermediary Banks create credit pyramids on their bases of Capital
Credit
Capital
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Banks outsourced credit risk
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Freeing Capital to support more credit creation
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Totally – securitisation and sale of debt to 'shadow bank' investors
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Temporarily – Credit Derivatives (CDS - a time-limited guarantee)
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Partially – using credit insurance from insurers such as AIG
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Radioactive cocktails of all three, like CDOs, structured finance and so on
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The Result was a bigger Credit Pyramid than Banks alone could sustain…
Investor Capital
Credit
BankCapital
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…and an opaque 'shadow banking system' of Investors holding sliced and diced risk
Investor Capital
Credit
BankCapital
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This pyramid of Credit funded the Mother of all Bubbles in US property prices….
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…and servicing this credit finally exceeded the financial capacity of the US population
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Maybe the end of cheap oil spiked the bubble?
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Peak Credit – was the point when the Property Bubble began to deflate
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But by now no-one knew where the Risk was
Investor Capital
Credit
BankCapital
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Banks started to think, “if this is what our balance sheet looks like…..”
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“…what does everyone else’s look like?”
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The problem is not shortage of money - liquidity
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It is shortage of Capital - solvency
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Solvency of Banks is one aspect
Capital
Credit
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The other aspect is the solvency of populations
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And a secular decline of purchasing power
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Loans which cannot be paid, will not be paid
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Non-performing loans drain money out of the system...
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...threatening a deflationary spiral...
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....which requires periodic transfusions
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...to avoid Depression
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Quantitative Easing – increases quantity of money and prevents deflation
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This dilutes the value of money, and causes inflation of financial asset prices
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Money will only inflate retail prices if lent or spent into circulation
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But at the Zero Bound of 0% dollar interest rates strange things happen
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Investors buy anything but dollars whether it carries a return or not
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Investors buy Structured Products from Banks and Units in Exchange Traded Funds
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The motive is Fear: investors aim to avoid loss, not to make speculative transaction
profit
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Financial demand – not consumption – has caused correlated commodity bubbles
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Markets have suffered a cardiac arrest
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So Investors have actually created the very inflation they seek to avoid
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Funding – long term investment in productive assets
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Financing - short term investment in creation of new assets......
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....and trade credit necessary for the circulation of goods and services
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“21st Century problems cannot be solved with 20th Century solutions”.
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In fact, the answers lie prior to the 18th Century“
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Community Partnership Enterprise Model
Structure - Stakeholders
- Custodian
- User
- Manager
- Investor
Legal framework – Nondominium
Investment instrument - Stock
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Custodian
Payment
Investor Manager
%
%
User
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Legal Framework – 'Nondominium'
Two complementary agreements
Collective agreement between stakeholders jointly
Associative agreement between stakeholders individually or severally
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Collective Agreement
Governs creation, issue and exchange of Stock, holds bank accounts and title/transaction registries
Stakeholders have negative veto rights
Interfaces with people and organisations (legal persons)
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Associative Agreement
User – pays for the use of productive asset (land, energy, IP)
Manager – receives a proportional share in the flow of use value
Investor – acquires Stock consisting of 'unitised' use value sold forward at a discount
Complementary to the collective agreement – akin to a 'for profit' limited company's shareholder agreement
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Nondominium - Outcomes
A consensual non-statutory 'development corporation'
Neutral – removes ego and politics
Collaborative - stakeholder interests aligned – no principal/agent problem
Social Business – shared surplus/ 'not for loss' - relationship-based not transaction-based
Sustainable - everyone has an interest in minimising cost of use over time
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Prepay 1.0 - Stock
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Prepay 2.0 – Back to the Future
Stock - an undated credit returnable in payment for use value of productive asset
Sold at a discount – eg £1.00 of Rental Stock sold for 80p gives an absolute return of 25%
Rate of Return is literally the rate at which Stock may be returned to the issuer
Rate is not fixed, but depends on whether there is a flow and what it is
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Stock - Outcomes
Competitive - no compound interest
Secure – no default risk, and the more affordable the rental, the more secure the return
Liquid – single asset class, not fragmented by date or interest rate
Liquid – Manager will always buy Stock on behalf of Users for redemption at best offer < or = to £1.00
Asset-based or 'Peer to Asset' credit
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Resolution & Transition - Getting from Here to There
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Two Big Trades of the 21st Century
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The Resolution Trade
Older Generations - long of Property & short of Care
Younger Generations – short of property & long of Care
Resolution Trade – exchange of Tenure for Care
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The Transition Trade
Carbon fuels incorporate intrinsic value of energy
Ideas, concepts and skills lead to saving of carbon fuel – Nega Watts and Nega Barrels
Transition Trade – exchange of Intellectual Value for the value of carbon energy saved.
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A Flight to Simplicity