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A Flight to Simplicity
Banking on Ourselves
Chris Cook Schumacher College
14 November 2012
About me - Trading Places
“21st Century problems cannot be solved with 20th Century solutions”.
Market 1.0 – decentralised & disconnected
Market 1.0 – physical market presence
Here: Market 2.0 - centralised & connected
Market 2.0 - presence via intermediaries
There: Market 3.0 - decentralised & connected
Market 3.0 - network presence
Here - at Twin Peaks
Peak Credit - financial demand on people
Peak Oil - demand on a finite resource
Peak Credit – intermediary Banks create credit pyramids on their bases of Capital
Credit
Capital
Banks outsourced credit risk
Freeing Capital to support more credit creation
Totally – securitisation and sale of debt to 'shadow bank' investors
Temporarily – Credit Derivatives (CDS - a time-limited guarantee)
Partially – using credit insurance from insurers such as AIG
Radioactive cocktails of all three, like CDOs, structured finance and so on
The Result was a bigger Credit Pyramid than Banks alone could sustain…
Investor Capital
Credit
BankCapital
…and an opaque 'shadow banking system' of Investors holding sliced and diced risk
Investor Capital
Credit
BankCapital
This pyramid of Credit funded the Mother of all Bubbles in US property prices….
…and servicing this credit finally exceeded the financial capacity of the US population
Maybe the end of cheap oil spiked the bubble?
Peak Credit – was the point when the Property Bubble began to deflate
But by now no-one knew where the Risk was
Investor Capital
Credit
BankCapital
Banks started to think, “if this is what our balance sheet looks like…..”
“…what does everyone else’s look like?”
The problem is not shortage of money - liquidity
It is shortage of Capital - solvency
Solvency of Banks is one aspect
Capital
Credit
The other aspect is the solvency of populations
And a secular decline of purchasing power
Loans which cannot be paid, will not be paid
Non-performing loans drain money out of the system...
...threatening a deflationary spiral...
....which requires periodic transfusions
...to avoid Depression
Quantitative Easing – increases quantity of money and prevents deflation
This dilutes the value of money, and causes inflation of financial asset prices
Money will only inflate retail prices if lent or spent into circulation
But at the Zero Bound of 0% dollar interest rates strange things happen
Investors buy anything but dollars whether it carries a return or not
Investors buy Structured Products from Banks and Units in Exchange Traded Funds
The motive is Fear: investors aim to avoid loss, not to make speculative transaction
profit
Financial demand – not consumption – has caused correlated commodity bubbles
Markets have suffered a cardiac arrest
So Investors have actually created the very inflation they seek to avoid
Funding – long term investment in productive assets
Financing - short term investment in creation of new assets......
....and trade credit necessary for the circulation of goods and services
“21st Century problems cannot be solved with 20th Century solutions”.
In fact, the answers lie prior to the 18th Century“
Community Partnership Enterprise Model
Structure - Stakeholders
- Custodian
- User
- Manager
- Investor
Legal framework – Nondominium
Investment instrument - Stock
Custodian
Payment
Investor Manager
%
%
User
Legal Framework – 'Nondominium'
Two complementary agreements
Collective agreement between stakeholders jointly
Associative agreement between stakeholders individually or severally
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)
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
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
Prepay 1.0 - Stock
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
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
Resolution & Transition - Getting from Here to There
Two Big Trades of the 21st Century
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
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.
A Flight to Simplicity