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