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 createcredit 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…              Credit               Investor       ...
…and an opaque shadow banking system of  Investors holding sliced and diced risk                Credit                 Inv...
This pyramid of Credit funded the Mother of    all Bubbles in US property prices….
…and servicing this credit finally exceededthe 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                 Credit                  Investor                   Capital      ...
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            Credit             Capital
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 18 th Century“
Community Partnership Enterprise ModelStructure - Stakeholders  - Custodian  - User  - Manager  - InvestorLegal framework ...
User           Payment            Custodian           %                        %Investor                    Manager
Legal Framework – NondominiumTwo complementary agreementsCollective agreement between stakeholders jointlyAssociative agre...
Collective AgreementGoverns creation, issue and exchange of Stock, holds bank accounts and title/transaction registriesSta...
Associative AgreementUser – pays for the use of productive asset (land,  energy, IP)Manager – receives a proportional shar...
Nondominium - OutcomesA consensual non-statutory development corporationNeutral – removes ego and politicsCollaborative - ...
Prepay 1.0 - Stock
Prepay 2.0 – Back to the FutureStock - an undated credit returnable in payment for use  value of productive assetSold at a...
Stock - OutcomesCompetitive - no compound interestSecure – no default risk, and the more affordable the  rental, the more ...
Resolution & Transition - Getting from Here to There
Two Big Trades of the 21st Century
The Resolution TradeOlder Generations - long of Property & short of CareYounger Generations – short of property & long of ...
The Transition TradeCarbon fuels incorporate intrinsic value of energyIdeas, concepts and skills lead to saving of carbon ...
A Flight to Simplicity
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(1) Banking on Ourselves -Flight to Simplicity

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(1) Banking on Ourselves -Flight to Simplicity

  1. 1. A Flight to Simplicity Banking on Ourselves Chris Cook Schumacher College 14 November 2012
  2. 2. About me - Trading Places
  3. 3. “21st Century problems cannot be solved with 20th Century solutions”.
  4. 4. Market 1.0 – decentralised & disconnected
  5. 5. Market 1.0 – physical market presence
  6. 6. Here: Market 2.0 - centralised & connected
  7. 7. Market 2.0 - presence via intermediaries
  8. 8. There: Market 3.0 - decentralised & connected
  9. 9. Market 3.0 - network presence
  10. 10. Here - at Twin Peaks
  11. 11. Peak Credit - financial demand on people
  12. 12. Peak Oil - demand on a finite resource
  13. 13. Peak Credit – intermediary Banks createcredit pyramids on their bases of Capital Credit Capital
  14. 14. Banks outsourced credit risk
  15. 15. Freeing Capital to support more credit creation
  16. 16. Totally – securitisation and sale of debt to shadow bank investors
  17. 17. Temporarily – Credit Derivatives(CDS - a time-limited guarantee)
  18. 18. Partially – using credit insurance from insurers such as AIG
  19. 19. Radioactive cocktails of all three, like CDOs, structured finance and so on
  20. 20. The Result was a bigger Credit Pyramid than Banks alone could sustain… Credit Investor Capital Bank Capital
  21. 21. …and an opaque shadow banking system of Investors holding sliced and diced risk Credit Investor Capital Bank Capital
  22. 22. This pyramid of Credit funded the Mother of all Bubbles in US property prices….
  23. 23. …and servicing this credit finally exceededthe financial capacity of the US population
  24. 24. Maybe the end of cheap oil spiked the bubble?
  25. 25. Peak Credit – was the point when the Property Bubble began to deflate
  26. 26. But by now no-one knew where the Risk was Credit Investor Capital Bank Capital
  27. 27. Banks started to think, “if this is what our balance sheet looks like…..”
  28. 28. “…what does everyone else’s look like?”
  29. 29. The problem is not shortage of money - liquidity
  30. 30. It is shortage of Capital - solvency
  31. 31. Solvency of Banks is one aspect Credit Capital
  32. 32. The other aspect is the solvency of populations
  33. 33. And a secular decline of purchasing power
  34. 34. Loans which cannot be paid, will not be paid
  35. 35. Non-performing loans drain money out of the system...
  36. 36. ...threatening a deflationary spiral...
  37. 37. ....which requires periodic transfusions
  38. 38. ...to avoid Depression
  39. 39. Quantitative Easing – increases quantity of money and prevents deflation
  40. 40. This dilutes the value of money, and causes inflation of financial asset prices
  41. 41. Money will only inflate retail prices if lent or spent into circulation
  42. 42. But at the Zero Bound of 0% dollar interest rates strange things happen
  43. 43. Investors buy anything but dollars whether it carries a return or not
  44. 44. Investors buy Structured Products from Banks and Units in Exchange Traded Funds
  45. 45. The motive is Fear: investors aim to avoid loss, not to make speculative transaction profit
  46. 46. Financial demand – not consumption – has caused correlated commodity bubbles
  47. 47. Markets have suffered a cardiac arrest
  48. 48. So Investors have actually created the very inflation they seek to avoid
  49. 49. Funding – long term investment in productive assets
  50. 50. Financing - short term investment in creation of new assets......
  51. 51. ....and trade credit necessary for the circulation of goods and services
  52. 52. “21st Century problems cannot be solved with 20th Century solutions”.
  53. 53. In fact, the answers lie prior to the 18 th Century“
  54. 54. Community Partnership Enterprise ModelStructure - Stakeholders - Custodian - User - Manager - InvestorLegal framework – NondominiumInvestment instrument - Stock
  55. 55. User Payment Custodian % %Investor Manager
  56. 56. Legal Framework – NondominiumTwo complementary agreementsCollective agreement between stakeholders jointlyAssociative agreement between stakeholders individually or severally
  57. 57. Collective AgreementGoverns creation, issue and exchange of Stock, holds bank accounts and title/transaction registriesStakeholders have negative veto rightsInterfaces with people and organisations (legal persons)
  58. 58. Associative AgreementUser – pays for the use of productive asset (land, energy, IP)Manager – receives a proportional share in the flow of use valueInvestor – acquires Stock consisting of unitised use value sold forward at a discountComplementary to the collective agreement – akin to a for profit limited companys shareholder agreement
  59. 59. Nondominium - OutcomesA consensual non-statutory development corporationNeutral – removes ego and politicsCollaborative - stakeholder interests aligned – no principal/agent problemSocial Business – shared surplus/ not for loss - relationship-based not transaction-basedSustainable - everyone has an interest in minimising cost of use over time
  60. 60. Prepay 1.0 - Stock
  61. 61. Prepay 2.0 – Back to the FutureStock - an undated credit returnable in payment for use value of productive assetSold 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 issuerRate is not fixed, but depends on whether there is a flow and what it is
  62. 62. Stock - OutcomesCompetitive - no compound interestSecure – no default risk, and the more affordable the rental, the more secure the returnLiquid – single asset class, not fragmented by date or interest rateLiquid – Manager will always buy Stock on behalf of Users for redemption at best offer < or = to £1.00Asset-based or Peer to Asset credit
  63. 63. Resolution & Transition - Getting from Here to There
  64. 64. Two Big Trades of the 21st Century
  65. 65. The Resolution TradeOlder Generations - long of Property & short of CareYounger Generations – short of property & long of CareResolution Trade – exchange of Tenure for Care
  66. 66. The Transition TradeCarbon fuels incorporate intrinsic value of energyIdeas, concepts and skills lead to saving of carbon fuel – Nega Watts and Nega BarrelsTransition Trade – exchange of Intellectual Value for the value of carbon energy saved.
  67. 67. A Flight to Simplicity

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