Hi Chris,<br><br>I wonder if you ever engaged with Modern Monetary Theory?<br><br>Michel<br><div class="gmail_quote"><br><br><div class="gmail_quote">---------- Forwarded message ----------<br>From: <b class="gmail_sendername">Chris</b> <span dir="ltr"><<a href="mailto:cojock@hotmail.com" target="_blank">cojock@hotmail.com</a>></span><br>
Date: Sat, Oct 8, 2011 at 5:19 PM<br>
Subject: [gang8] Re: Pushing on a piece of string<br>To: <a href="mailto:gang8@yahoogroups.com" target="_blank">gang8@yahoogroups.com</a><br><br><br>
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<p>Chris<br>
<br>
Perceptive and well argued as ever, but in our current system it is impossible to address a solvency problem with monetary measures.<br>
<br>
The reality is that 90% of the population are insolvent; illiquid or both, and there is a systemic shortage of purchasing power in the economy.<br>
<br>
That in turn is because for the last 30 years the rewards from productivity increases went principally to capital rather than labour. This long hidden recession was hidden by borrowing against inflated property prices, and the result is - as Michael Hudson eloquently points out - that 90% of people are in debt to the other 10%.<br>
<br>
Evidence of this transfer of wealth has been the secular decline in the retail deposits of the many and the growth of the wholesale deposits of the few: this decline gave us the Northern Rock business model; shadow banking and much else.<br>
<br>
All that raising interest rates will achieve is a further transfer of wealth - and purchasing power - from the productive 90% to the largely unproductive 10%.<br>
<br>
In my view the answer lies in the re-basing of credit directly upon the use value of productive assets ie direct 'Peer to Asset investment, and the implementation of 'Peer to Peer' credit clearing mechanisms between businesses and individuals subject to a mutual guarantee. Both mechanisms could be managed by service-providers-formerly-known-as-banks.<br>
<br>
For those with eyes to see, this trend to dis-intermediation is already well under way, as banks have been queuing up to originate and sell quasi-equity products to investors such as Exchange Traded Funds; Index Funds; Real Estate Investment trusts; Master Limited Partnerships and so on.<br>
<br>
The reason banks are doing this with such alacrity is that pretty much the only capital they need as a service/liquidity provider is that necessary to cover operating costs, and they can make money in all sorts of interesting ways via their 'Delta One' desks (cf the UBS disaster). <br>
<br>
There are two massive problems in this financial market Next Big Thing.<br>
<br>
Firstly, the inflow of risk averse (NOT speculative investment intent on transaction profit) money into commodity ETFs has financially inflated commodity prices in a correlated bubble. This has provided a windfall gain to the producers who accommodated the investors by financial leasing (ie sale and repurchase) of commodities to them via investment banks.<br>
<br>
So, generally via investment banks as intermediaries, funds lend dollars to producers who lend commodities to the funds.<br>
<br>
The cosmic joke here is that the 'inflation hedging' investors attempting to avoid loss are actually responsible for causing the very inflation they aim to avoid. <br>
<br>
Secondly, these largely risk averse investors are exposing themselves to a level of market risk which was never made clear to them other than deep in the boiler-plate agreements. The regulators are well aware that ETFs are a regulatory disaster zone about to trigger.<br>
<br>
I am essentially proposing - and prototyping - a new generation of such funds with the added innovation that the Units will be redeemable in payment for the underlying value. eg REIT units redeemable in payment for rentals, or energy ETFs redeemable in payment for energy.<br>
<br>
I believe that the existing system is terminally broken, but that the emergence of pervasive direct instantaneous connections is facilitating simple but radical new solutions which will dis-intermediate both governments and shareholders.<br>
<br>
Best Regards<br>
<br>
Chris Cook</p><div><div></div><div><br>
<br>
--- In <a href="mailto:gang8%40yahoogroups.com" target="_blank">gang8@yahoogroups.com</a>, Ercouncil@... wrote:<br>
><br>
> .<br>
> <br>
> I'm not impressed by Mervyn King, governor of the Bank of England, <br>
> declaring that the current financial crisis in Britain is the worst since 1931 and <br>
> probably worse than that. The Bank of England is the heart of the British <br>
> banking system. King is paid his generous salary to do something about it, <br>
> not just stand there wringing his hands, and talking the markets even <br>
> further down every time he wrings them. He should be sacked forthwith.<br>
> <br>
> Thanks to events in mid-2007 and subseqnetly, thanks to the way Lehman's <br>
> was allowed just to go down the tubes, the banks have been spooked. So they <br>
> are now scared to lend because the perceived risk now outweighs the reward.<br>
> <br>
> Mr King has two choices on how to deal with that. He can either raise the <br>
> reward, or reduce the risk. Three choices - he could try to do both at the <br>
> same time. <br>
> <br>
> And at the risk of repeating myself, the basic rate of interest is the <br>
> basic, discount rate on irreducible business risk, particularly risk as <br>
> perceived by the banks. Interest is their reward for taking on that risk; if <br>
> the rewards for doing so are not currently high enough, then raise interest <br>
> rates. <br>
> <br>
> Banks are chronologically myopic, they cannot see the future. Even if they <br>
> accept intellectually that small businesses are the foundation of new <br>
> employment and of future economic advance, they do not want to take the risk of <br>
> funding overdrafts for small businesses, unless of course the small <br>
> business has asset backing. When it has such backing a bank can make its customer <br>
> carry the risk by putting a charge on those assets.<br>
> <br>
> We have been here before. Britain's Macmillan Committee in 1931 saw most <br>
> of this. One of the things it did was to set up the state-owned Industrial <br>
> and Commercial Finance Corporation, the ICFC. I worked for it as a <br>
> consultant in the early 1970s. Nowadays it calls itself 3i and has been put into the <br>
> private sector, where it now seems to be as risk averse as everyone else.<br>
> <br>
> I personally believe Britain's banks encourage the wrong mindset in their <br>
> staff. A good banker should always be looking for business risks, and <br>
> calculating them, not running away from them.<br>
> <br>
> In part the modern mindset is not that of human beings at all, but of the <br>
> computer systems which the banks use to assess risk. I am rapidly coming to <br>
> the conclusion that a large part of our present problem is caused by <br>
> excessive reliance on cloned computer programmes, in running banks, and in <br>
> taking trading decisions about investment management. <br>
> <br>
> The computer programmes which 'model' financial transactions were clearly <br>
> written by mindless optimists who believed they could write risk right out <br>
> of the equation. They cannot. Instead they have ushered into an era when the <br>
> computers themselves are the risk. They risk bringing the whole system <br>
> down as they mindlessly search for a risk-free world, when the only risk-free <br>
> economic world is one that does nothing at all.<br>
> <br>
> A cleverer governor of the Bank of England would recognise this. The <br>
> business community is a collective risk. Take a leaf out of Lloyds insurance and <br>
> realise that big numbers are the only safety net. If the banks are not <br>
> prepared to do it that way then the central authorities once again need to show <br>
> them how. And if the Treasury or the Bank of England underwrites risk, <br>
> then just like Lloyds, it deserves part of the reward. If that means the <br>
> interest income now need to be split two ways, that is all the more reason for <br>
> increasing interest rates.<br>
> <br>
> Chris M<br>
> London<br>
><br>
<br>
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