POLICY OPTIONS FOR GENUINE FINANCIAL REFORM

Tarek El DiwanyIstanbul, 12 September 2013

Speaker notes are included in this version. Choose View >> Notes Page

Some Theology

– What is our purpose?– To whom are we accountable?– How should we measure success?– How should we regulate?

Wealth Creation versus Wealth Transfer

Wealth Creation Wealth Transfer

For personal gain

TradeInvestment partnershipWaged labour

TheftInterest-bearing loanGamblingDebasement

Not for personal gain

Community workCaringEducating one’s family

GiftEndowmentInterest-free loan

DISCOUNTING AND THE ENVIRONMENT

Given the following two forecasts, which method should be adopted under standard discounted cash-flow analysis using an annual interest rate of 10%?

• Normal farming produces 100 profit per year for ever• Intensive farming produces 150 profit per year for 15 years followed

by desertification

80,000 20,000

100,000

Rent and purchase payments

Debt-free Home Finance

Home Finance Provider

Home Buyer

Developer

title

Subscriptions

Investors

Distributions

Toll-road BOT

SPV

Subscriptions

Turnkey delivery

Investors

Milestone payments

Road users

Distributions

Toll payments

OperatorManagement agreement

SponsorTransfer of title at end of concession

Contractors

Capital Equipment Leasing

SPV

Subscriptions

Equipment Supplier

Title to equipment

Lease contract

Investors

Purchase price

Client

Distributions

Rental payments

AgentService

agreement

Third PartySale of

equipment at end of lease

period

BANK

PERSON A PERSON B

cash £10 £ 10 equity

BANK

PERSON A PERSON B

£100 money

cash £10

loan £ 100

£ 10 equity

Turkey CPI and M2 (% annual change)

1968

1970

1972

1974

1976

1978

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

0

50

100

150

200

250

m2 change %

% a

nnua

l ch

ange

UK Home Prices and Lending (% annual change)

1971

1973

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

-20

-10

0

10

20

30

40

50 house price changeadjusted net change in lending

% a

nnua

l cha

nge

Transition to an Interest-free Money Supply (1)

Implement programme of public education on need for reform

Separation of current accounts from risk-bearing investment accounts

Establishment of a state-funded bank lending on an interest-free basis

Adopt defensive restrictions on foreign capital movement

Imposition of maximum rate of interest, gradual reduction over time

Increase in M0 through government debt buy-back with simultaneous increases in statutory reserve ratios

Encourage use of capital risk sharing products in investment accounts

Gradual increase in backing of M0 with selected real assets

Existing Reform1 Reform 2Bank assetsCash 10 60 60Loans to public sector

50 0 0

Loans to private sector

40 40 0

Total 100 100 60

Bank liabilitiesOwners’ equity 10 10 10Deposits 90 90 50Total 100 100 60

Transition to an Interest-free Money Supply (2)

A New Institutional Framework

Individuals

100% Sight Deposit Banks

Investment Institutions

Public Sector Welfare Trust

Corporations Government

Public Sector Monetary

Trust

Cost of Bank Bail-outs as % of GNP

Sources: B. Lietaer from The Economist 27/9/2008, Working Papers no.1620 World Bank 1996

Country % of GNPSweden 1992-96 3.6Spain 1977-85 16.8Venezuela 1994-5 18Mexico 1994 19.3Japan 1997 24Chile 1981-83 41.2Thailand 1997-2000 45Malaysia 1997-2000 45Argentina 1980-82 55.3South Korea 1997-2000 60