Peak Credit A Flight to Simplicity  Chris Cook – BarCampBank London 5th July 2008
What is a Bank anyway?
It is a “Credit Institution”
It creates Interest-bearing Credit (or “Debt”)
… which is >97% of the Money we use
Money created as interest-bearing loans……
… is immediately deposited into the system
A Bank is also a Credit Intermediary – or “Middleman” Bank Borrower Lender £ £
… .but what does a Bank  really  do?
A Bank  guarantees  borrowers’ credit…
......and charges “Interest” for their use of this Guarantee…
… deducts from that the Interest paid to Depositors…
… plus its operating costs and any defaults by borrowers..
… and aims to make a profit…
The Credit Pyramid Bank Credit Capital
Demand for Credit has been high…
… .from property buyers and investors..
… from hedge funds and “Private Equity”..
… .and Banks started to “outsource” their implicit Guarantee….
… .“freeing up” and making best use of their Capital….
… totally  – by “securitising” debt and selling it to investors….
… temporarily  – using “Credit Derivatives”….
… and  partially  – using “Monoline” credit insurers
Result- a Bigger Credit Pyramid Investor Capital Credit Bank Capital
… with Risk “Diced and Sliced”… Investor Capital Credit Bank Capital
… so that no one knew where the risk lay…
What is Credit anyway? ?
Credit is an IOU and comes in two flavours…
… .“Trade” Credit from a Seller to Buyer backed by Value….
… .and Bank-created Credit supported by their Capital….
Credit is “Deficit-based” finance
… .essential for the creation of productive assets……
… .such as buildings, wind turbines, and software……
The problem comes when credit is created to buy existing assets……
… .typically secured by a legal claim over the asset……
… .resulting in “deficit-based” but “asset-backed” credit….
… .such as loans secured against property (ie mortgages)….
… .which are the source of over two thirds of dollars and sterling ever created…..
… and therefore of asset price “Bubbles”….
John Law created the first such Bubble in 1718
… and they have never stopped since…
… until last year we saw the culmination in the US of the “Mother of all Bubbles”….
… since when Banks have been asking themselves….
… is the risk with me?
… .or with the hedge fund I  dealt with?
… and they are thinking….
… .if this is what OUR balance sheet looks like…..
… what does everyone else’s look like…..?
So Banks now charge more for their implicit guarantees…..
… .and are much more discriminating in relation to counterparty risk…..
… .based upon the Capital they have left…
… .so that “wholesale” lending to other banks has all but dried up…..
… meanwhile investors have gone on strike
… so securitisation and credit derivatives have dried up too….
… while “monoline” credit insurers are also in deep trouble…….
… so no Capital there either…
The Result is that the pool of Capital supporting the credit pyramid….
… ..has shrunk….. Capital Credit
… interest rates set by Central Banks are irrelevant….
… .and credit is both in short supply….
… .and increasingly expensive….
If Peak Credit is behind us….
… what lies ahead….?
I believe the answer is “Peer to Peer”…..
… direct connection….
… and ”dis-intermediation”….
What does “Peer to Peer” Credit look like?
Introducing the “Guarantee Society”
“ Trade” credit is extended “peer to peer” when Seller gives Buyer “time to pay”….
… credit is subject to a mutual guarantee….
… through membership of a “community of interest”…….
… which may be geographic in scope…
… or functional, or both
Credit is interest-free, but not cost-free…
… .since provisions are made into a “default fund”…
… .and system costs shared…
… .by both sellers and buyers, since all benefit…
… .and with the sellers agreement….
… .settlement may be in money or in “money’s worth”….
… .such as units of energy or property rental value….
Banks no longer risk their capital….
… creating credit  based upon it…..
… .but  manage  “peer to peer” credit  creation…
… as credit “service providers”
“ Peer to Peer” Investment
“ Equity” consists of “ownership” of property…
… .“asset-based” rather than “deficit-based” finance
The kind of “Equity” finance Capital we are used to…
… is “stocks” or “shares”  in a “Corporation”….
… the “Joint Stock Limited Liability Company”….
… which is what makes the “Private Sector” Private
But while we have all been looking the other way….
… at the financial revolution based upon credit innovation…
… there have been interesting developments “under the radar”….
… in “asset-based” finance.
In Canada we have seen “Income Trusts”….
… .where part of the  gross  Corporate revenues are “unitised”….
… .and sold to long term investors…
… .such as pension funds....
… who love Income Trusts because…
… they are getting their hands on corporate revenues….
… . before the management does….
… there are lots of other new ways to “invest” in assets…
… such as “Exchange Traded Funds”…
…“ Real Estate Investment Trusts”…
… and not forgetting Islamic finance “Sukuks”
“ You don’t know what you’ve got ‘til it’s gone”
… and you don’t know what you haven’t got ‘til you see it
… in 2001 the UK inadvertently made “the Corporation” redundant..
… when they introduced the UK Limited Liability Partnership (“LLP”)
An LLP can do anything a Corporation can do..
… own property; enter into contracts etc….
… and you can’t lose more than you put in..
… .and.…errr….that’s it…..
… there need not even be an agreement in writing…
I call it an “Open Corporate”
… .the US LLC is a close cousin…
… and both make possible a “Capital Partnership”
Introducing the Capital Partnership Capital Partnership Investors Users Revenues Managers % % Custodian Ownership
… .property is held by a “Custodian”..… Capital Partnership Investors Users Revenues Managers % % Custodian Ownership
… .and Investors put in money, or “money’s worth” Capital Partnership Investors Users Revenues Managers % % Custodian Owne...
… .which Managers use to fulfil the agreed purpose… Capital Partnership Investors Users Revenues Managers % % Custodian Ow...
… and revenue or production is shared…
… ..within a consensually agreed  framework
The “Capital Partnership” enables new forms of Equity…
… .proportional (%age) ”n’ths” such as billionths..
… ..which may be bought and sold…
… but never redeemed…
… ..because there must always be 100%
“ Units”, such as kilowatt hours
… .or barrels of oil
… .or the use of an acre for a year
… which are redeemable..
… and with a value in exchange…
… but carry no rights to income…
These hold their value…
… because they are  based  on value..
…  and not a claim over value..
… .issued by a “Credit Institution”
So the possibility is there..….
… to affordably refinance housing debt…
… with simple new pools of land and property rentals…
… to keep assets in public ownership..
… but finance development by issuing non –redeemable “units” to investors…
… .carrying a reasonable index-linked return
The result could be a National Equity…
… and a shrunken National Debt.
This is not   Rocket Science…
… .but it is a Flight to Simplicity…
… .which, as it happens, is Islamically sound…..
When all is said and done
…… maybe Ethical is Optimal?
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BarCampBankLondon Peak Credit

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Presentation at BarCampBanl London re Peak Credit and what comes after.

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BarCampBankLondon Peak Credit

  1. 1. Peak Credit A Flight to Simplicity Chris Cook – BarCampBank London 5th July 2008
  2. 2. What is a Bank anyway?
  3. 3. It is a “Credit Institution”
  4. 4. It creates Interest-bearing Credit (or “Debt”)
  5. 5. … which is >97% of the Money we use
  6. 6. Money created as interest-bearing loans……
  7. 7. … is immediately deposited into the system
  8. 8. A Bank is also a Credit Intermediary – or “Middleman” Bank Borrower Lender £ £
  9. 9. … .but what does a Bank really do?
  10. 10. A Bank guarantees borrowers’ credit…
  11. 11. ......and charges “Interest” for their use of this Guarantee…
  12. 12. … deducts from that the Interest paid to Depositors…
  13. 13. … plus its operating costs and any defaults by borrowers..
  14. 14. … and aims to make a profit…
  15. 15. The Credit Pyramid Bank Credit Capital
  16. 16. Demand for Credit has been high…
  17. 17. … .from property buyers and investors..
  18. 18. … from hedge funds and “Private Equity”..
  19. 19. … .and Banks started to “outsource” their implicit Guarantee….
  20. 20. … .“freeing up” and making best use of their Capital….
  21. 21. … totally – by “securitising” debt and selling it to investors….
  22. 22. … temporarily – using “Credit Derivatives”….
  23. 23. … and partially – using “Monoline” credit insurers
  24. 24. Result- a Bigger Credit Pyramid Investor Capital Credit Bank Capital
  25. 25. … with Risk “Diced and Sliced”… Investor Capital Credit Bank Capital
  26. 26. … so that no one knew where the risk lay…
  27. 27. What is Credit anyway? ?
  28. 28. Credit is an IOU and comes in two flavours…
  29. 29. … .“Trade” Credit from a Seller to Buyer backed by Value….
  30. 30. … .and Bank-created Credit supported by their Capital….
  31. 31. Credit is “Deficit-based” finance
  32. 32. … .essential for the creation of productive assets……
  33. 33. … .such as buildings, wind turbines, and software……
  34. 34. The problem comes when credit is created to buy existing assets……
  35. 35. … .typically secured by a legal claim over the asset……
  36. 36. … .resulting in “deficit-based” but “asset-backed” credit….
  37. 37. … .such as loans secured against property (ie mortgages)….
  38. 38. … .which are the source of over two thirds of dollars and sterling ever created…..
  39. 39. … and therefore of asset price “Bubbles”….
  40. 40. John Law created the first such Bubble in 1718
  41. 41. … and they have never stopped since…
  42. 42. … until last year we saw the culmination in the US of the “Mother of all Bubbles”….
  43. 43. … since when Banks have been asking themselves….
  44. 44. … is the risk with me?
  45. 45. … .or with the hedge fund I dealt with?
  46. 46. … and they are thinking….
  47. 47. … .if this is what OUR balance sheet looks like…..
  48. 48. … what does everyone else’s look like…..?
  49. 49. So Banks now charge more for their implicit guarantees…..
  50. 50. … .and are much more discriminating in relation to counterparty risk…..
  51. 51. … .based upon the Capital they have left…
  52. 52. … .so that “wholesale” lending to other banks has all but dried up…..
  53. 53. … meanwhile investors have gone on strike
  54. 54. … so securitisation and credit derivatives have dried up too….
  55. 55. … while “monoline” credit insurers are also in deep trouble…….
  56. 56. … so no Capital there either…
  57. 57. The Result is that the pool of Capital supporting the credit pyramid….
  58. 58. … ..has shrunk….. Capital Credit
  59. 59. … interest rates set by Central Banks are irrelevant….
  60. 60. … .and credit is both in short supply….
  61. 61. … .and increasingly expensive….
  62. 62. If Peak Credit is behind us….
  63. 63. … what lies ahead….?
  64. 64. I believe the answer is “Peer to Peer”…..
  65. 65. … direct connection….
  66. 66. … and ”dis-intermediation”….
  67. 67. What does “Peer to Peer” Credit look like?
  68. 68. Introducing the “Guarantee Society”
  69. 69. “ Trade” credit is extended “peer to peer” when Seller gives Buyer “time to pay”….
  70. 70. … credit is subject to a mutual guarantee….
  71. 71. … through membership of a “community of interest”…….
  72. 72. … which may be geographic in scope…
  73. 73. … or functional, or both
  74. 74. Credit is interest-free, but not cost-free…
  75. 75. … .since provisions are made into a “default fund”…
  76. 76. … .and system costs shared…
  77. 77. … .by both sellers and buyers, since all benefit…
  78. 78. … .and with the sellers agreement….
  79. 79. … .settlement may be in money or in “money’s worth”….
  80. 80. … .such as units of energy or property rental value….
  81. 81. Banks no longer risk their capital….
  82. 82. … creating credit based upon it…..
  83. 83. … .but manage “peer to peer” credit creation…
  84. 84. … as credit “service providers”
  85. 85. “ Peer to Peer” Investment
  86. 86. “ Equity” consists of “ownership” of property…
  87. 87. … .“asset-based” rather than “deficit-based” finance
  88. 88. The kind of “Equity” finance Capital we are used to…
  89. 89. … is “stocks” or “shares” in a “Corporation”….
  90. 90. … the “Joint Stock Limited Liability Company”….
  91. 91. … which is what makes the “Private Sector” Private
  92. 92. But while we have all been looking the other way….
  93. 93. … at the financial revolution based upon credit innovation…
  94. 94. … there have been interesting developments “under the radar”….
  95. 95. … in “asset-based” finance.
  96. 96. In Canada we have seen “Income Trusts”….
  97. 97. … .where part of the gross Corporate revenues are “unitised”….
  98. 98. … .and sold to long term investors…
  99. 99. … .such as pension funds....
  100. 100. … who love Income Trusts because…
  101. 101. … they are getting their hands on corporate revenues….
  102. 102. … . before the management does….
  103. 103. … there are lots of other new ways to “invest” in assets…
  104. 104. … such as “Exchange Traded Funds”…
  105. 105. …“ Real Estate Investment Trusts”…
  106. 106. … and not forgetting Islamic finance “Sukuks”
  107. 107. “ You don’t know what you’ve got ‘til it’s gone”
  108. 108. … and you don’t know what you haven’t got ‘til you see it
  109. 109. … in 2001 the UK inadvertently made “the Corporation” redundant..
  110. 110. … when they introduced the UK Limited Liability Partnership (“LLP”)
  111. 111. An LLP can do anything a Corporation can do..
  112. 112. … own property; enter into contracts etc….
  113. 113. … and you can’t lose more than you put in..
  114. 114. … .and.…errr….that’s it…..
  115. 115. … there need not even be an agreement in writing…
  116. 116. I call it an “Open Corporate”
  117. 117. … .the US LLC is a close cousin…
  118. 118. … and both make possible a “Capital Partnership”
  119. 119. Introducing the Capital Partnership Capital Partnership Investors Users Revenues Managers % % Custodian Ownership
  120. 120. … .property is held by a “Custodian”..… Capital Partnership Investors Users Revenues Managers % % Custodian Ownership
  121. 121. … .and Investors put in money, or “money’s worth” Capital Partnership Investors Users Revenues Managers % % Custodian Ownership
  122. 122. … .which Managers use to fulfil the agreed purpose… Capital Partnership Investors Users Revenues Managers % % Custodian Ownership
  123. 123. … and revenue or production is shared…
  124. 124. … ..within a consensually agreed framework
  125. 125. The “Capital Partnership” enables new forms of Equity…
  126. 126. … .proportional (%age) ”n’ths” such as billionths..
  127. 127. … ..which may be bought and sold…
  128. 128. … but never redeemed…
  129. 129. … ..because there must always be 100%
  130. 130. “ Units”, such as kilowatt hours
  131. 131. … .or barrels of oil
  132. 132. … .or the use of an acre for a year
  133. 133. … which are redeemable..
  134. 134. … and with a value in exchange…
  135. 135. … but carry no rights to income…
  136. 136. These hold their value…
  137. 137. … because they are based on value..
  138. 138. … and not a claim over value..
  139. 139. … .issued by a “Credit Institution”
  140. 140. So the possibility is there..….
  141. 141. … to affordably refinance housing debt…
  142. 142. … with simple new pools of land and property rentals…
  143. 143. … to keep assets in public ownership..
  144. 144. … but finance development by issuing non –redeemable “units” to investors…
  145. 145. … .carrying a reasonable index-linked return
  146. 146. The result could be a National Equity…
  147. 147. … and a shrunken National Debt.
  148. 148. This is not Rocket Science…
  149. 149. … .but it is a Flight to Simplicity…
  150. 150. … .which, as it happens, is Islamically sound…..
  151. 151. When all is said and done
  152. 152. …… maybe Ethical is Optimal?
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