Sunday, March 14, 2010

The Rise of Sovereign Risk in Advanced Economies

Nouriel Roubini
Mar 12, 2010 1:09PM

The Great Recession of 2008-09 was triggered by the excessive debt accumulation and leverage of private agents – households, financial institutions and even a fat tail of the corporate sector – in many advanced economies. And while there is a lot of talk about deleveraging, the reality is that private sector debt ratios have stabilized at very high levels while, as a consequence of the fiscal stimulus to get economies out of a severe recession and the socialization of part of private losses, there is now a massive re-leveraging of the public sector with deficits in excess of 10% of GDP in many advanced economies and debt to GDP ratios expected to sharply rise and in some cases double in the next few years.

Editor's comment: I.e. Privatizing profit and socializing debt

Mobile Money

Articles on this blog are intended to introduce the reader to the nature and shortcomings of our financial system and ways to change it to free us from debt slavery

By Chris Cook from his blog

It has been a long time since I attended an event as stimulating as last week’s 13th Digital Money Forum in London where my contribution was to briefly outline a future Money 3.0 financial architecture where banks evolve from being credit middlemen to a role as managers of direct ‘Peer to Peer’ credit creation.

While predictions are difficult, particularly about the future, actual developments on the ground are proceeding at a phenomenal pace in the developing world. Speaker after speaker outlined how different countries are converging in their use of mobile phones for payments.

Where The Money Is
When asked why he robbed banks, Willie Sutton famously replied…..’because that’s where the money is’. But in the developing world, banks are typically few and far between, ATMs are even rarer, and including alternative money transmitters like Western Union even rudimentary access to cash and payment services is difficult at best. Other banking services like credit are practically non-existent other than from local money-lenders at usurious rates.

Mobile telephone companies are moving into this financial services vacuum at a phenomenal rate. All of them establish networks of air-time re-sellers, typically local shops and agents, and users make pre-payments for mobile phone use. This in itself has had interesting side effects; one major African operator was obliged by an Central Bank to cease selling high value Phone Cards, because these were routinely being used as currency, and – to add insult to injury – holding their value better than the Central Bank issued notes.

A Ghanaian mobile payment provider outlined how conventional access to cash is available in Ghana from only around 2,000 locations, for a population of 23 million: whereas his network alone (with over 50% of the mobile phone market and over 8 million subscribers) already has, through its network of re-sellers, 300,000 points of presence, accessible to 90% of the population.

Using cheap and cheerful basic mobile phones even the least educated can simply and easily make micro-payments to each other by text message or Bluetooth, and deposit and withdraw cash, via the network of agents.

While in other countries mobile ‘Telcos’ either partner with or even buy their own banks to facilitate micro-payments, this Ghanaian operator’s shrewd approach is to work with nine banks initially, all of whom were queuing up for the aggregated ‘micro’ deposits.

In Colombia, a new service provider’s business model is simply to bring a bank together with a Telco and the tens of thousands of local ‘Mom and Pop’ shops which underpin Colombia’s economy. Perhaps the best known example is Safaricom’s MPESA payment system in Kenya, which had 15 million subscribers by the end of 2009, and is now branching out into areas such as crop insurance.

Credit where it’s due
The point I was making in my presentation was that there is no reason why the shop resellers who sell airtime – and who take in cash deposits and provide access to cash as part of the mobile money service – should not dispense with cash and receive and extend interest-free (but not cost free) credit from and to customers instead.

Such credit may be created and settled within a credit clearing union architecture. All that is required for this is a mutual guarantee agreement, similar to a credit union’s ‘common bond’; a service provider (banking as a profession) to set and manage guarantee limits and defaults; and an accounting system.

Such credit clearing has been routine between tens of thousands of Swiss businesses since 1934 on the WIR credit clearing system. More recently, in Ecuador, the FactoRepo system currently under development will enable VAT-registered businesses to discount their invoices directly with the Central Bank and thereby free up working capital. Neither Swiss Francs nor Dollars, respectively, actually change hands in these systems: instead credit obligations of businesses (trade credit) is simply used in payment of other obligations within a framework of trust, the WIR’s being private, and FactoRepo’s, public. The Swiss Franc and the Dollar are used only as the pricing reference or value standard.

Fast Forward
I believe that within a remarkably short time the developing world will be using mobile payment utilities at a minute fraction of the cost of the baroque and outrageously expensive bank-centric legacy systems in the developed world. It will only be a matter of time before such systems spread virally here, too.

The enabling factor for pervasive spread in the First World will be forms of credit and currency which are based upon a new approach to investment in the use value of land/location, and of energy, both of which are almost universally acceptable in exchange.

But that is another story, and awaits the further decomposition of our terminally dysfunctional financial system of Zombie banks.

Tuesday, March 9, 2010

Ideas on Monetary Reform

By Tom Hagan (as posted on his blog)

[Includes edits entered on February 10.]

There are two basic arguments for monetary reform:

1. The present system induces an inexorable increase in inequality - the "unfairness" argument – “Them That Has, Gets.”

2. The present system is unsustainable over the long run, doomed eventually to collapse in just the kind of credit crunch we are now experiencing - the "instability" argument.

"Unfairness" is by far the weaker of the two charges against the existing system, though more easily shown. The Gini index, for instance, reveals the dramatic ascent of the US in recent years into the stratosphere of inequality. The problem is, people tend to dismiss such irrefutable evidence with some version of "The poor will always be with us", which is to say, "Inequality is inevitable".

JFK, given the argument that some upcoming legislation was “unfair”, responded with "Life is unfair." And so it is. If inequality is inevitable, why fight it? The old Andrews Sisters song says it all: inequality is inevitable, therefore we must simply bear it with a smile. Here it is - "Them That Has, Gets":

Is our present system doomed?

But if the unfairness argument can be dismissed, the argument that the system is doomed is not so easily ignored. In fact, if the instability argument can be shown to be true, then even those who ostensibly benefit from the present system will be brought up short, and, if convinced, might even join the call for reform. Something like Henry Ford deciding to pay his workers a living wage, so they could afford the cars he wanted to sell. Nowadays Wall Street bankers have convinced themselves that the unpleasantness of 2008 was caused not by any inherent instability in the system, but by various errors of judgment that can now be corrected. But suppose they believed instead that the crash in 2008 portended financial doom?

A simple thought experiment can illustrate the inevitable consequences of the present system. In recent years the benefits of increased labor productivity have flowed to the top, not out to the ever-more productive labor force still employed to produce the GDP, both here and abroad.. Average wages have stagnated, manufacturing jobs have disappeared, and bankers are getting paid more than ever. Inequality has increased. Extrapolate that out, and what happens? When the last robot is installed, meaning only capital is necessary henceforth to produce goods, and labor is needed no longer, what will happen? Who will buy the goods? The owners of capital will have enough income to purchse the GDP, but the entire former labor force will be unemployed, with no money for purchasing anything. Is that even an imaginable end-state? Isn’t it obvious even to those now reaping the benefits of the present system that the current method of wealth distribution can’t last, no matter whether it’s “fair” or not?

Forget manufacturing for the moment, and just contemplate the money system itself. “Them that has, gets” sing the Andrews Sisters. Isn’t that true? Isn’t it a common dream to acquire a pile big enough to make productive work unnecessary, enabling a life of leisure, living off “unearned income” of interest, dividends and capital gains? And once the pile is that big, doesn’t it keep growing ever bigger? Until what? Until everything is owned by one person? Again, is that an imaginable end-state? Wouldn’t society collapse long before that happened? What mechanism, short of violent revolution, prevents such a result?

“Helicopter money” to the rescue?

Many observers, from Henry Ford to Henry George, have seen the flaw of unsustainability and inevitable failure in what most of us assume to be our indefinitely sustainable system for creating and allocating wealth. Recognizing that stimulating the economy by increasing our present debt-based money supply by lowering interest rates to induce more lending might not always work once interest rates were very low, Milton Friedman and Ben Bernanke both speculated that increasing the money supply to stimulate the economy (and coincidentally redistributing wealth) could always be accomplished by printing dollar bills and dropping them from helicopters – that’s why he’s “Helicopter Ben”.

Now that the Federal Reserve can’t get the economy moving by lowering interest rates, the process has been likened, not for the first time, to “pushing on a string’. Banks, even though they can borrow money at a zero interest rate, still won’t make the loans that would end the credit crunch. Instead, they continue to sit on “excess reserves”, meaning they could make loans but won’t, until they find borrowers they trust, and are sure their loans won’t be devalued by steep deflation.

All this should trigger talk about how the present money system works, and in particular discussion of whether the current credit freeze is a manifestation of exactly the kind of ultimate instability described above: a lack of purchasing power on the part of a big chunk of the population, maybe because they have hit a debt ceiling, and just can’t afford to borrow any more. That certainly seems to be what is happening. Isn’t it time to start dropping helicopter money?

Let's issue Greenbacks instead.

True, that helicopter talk was always in jest, but there is actually some truth to it. In fact, there’s a much better way to create money and spread it around without involving the banks: have the Treasury print money, US-owned Greenbacks, and spend it into the economy for needed infrastructure. Why isn’t this being discussed? Note that the money supply increases, but US debt does not. Increasing the money supply is eventually inflationary, but only after full employment is reached will prices begin to rise. Until then, printing and spending Greenbacks does exactly what we want: increases the money supply, puts people to work, and stimulates the economy without increasing US debt or causing price inflation. So why isn’t it being discussed? At the same time, it decreases inequality. Ah, maybe that’s why talking about it is beyond the pale. It doesn’t further enrich the bankers at the expense of everyone else. Or maybe they want to avoid cracking open the door to allow government, rather than the banks, to create new money.

What caused the crash?

Which leads us back to discussing the stability of our money and baking system. Is it in fact inherently unstable? There are those who hold that it is, because in any system where banks are allowed to create money by lending it out, almost the entire money supply quickly comes to consist of the loans they make. But banks lend only principal, and what they are owed back is principal plus interest. This means they are owed back more money than exists, so the system would quickly grind to a halt, unless the banks keep increasing the money out on loan, the total debt, so enough money always exists for paying back principal plus accrued interest. So the system works as long as debt can keep increasing. But nothing can increase forever in a finite world, and the time must come when creditable borrowers can no longer be found. When that happens, the banks stop lending, and the system crashes. Banks no longer make loans, whether their “reserves” are adequate or not.

Or the banks keep lending anyway, staving off the inevitable crash by making “liar loans” to borrowers who will never pay them back. They can stave off the crash still further by packaging up the liar loans into “Mortgage Backed Securities” and selling them off to unsuspecting buyers. But eventually the loans go bad, banks start failing, and the system crashes.

Is this what is happening now? If so, the “liar loans” did not CAUSE the crash, they just allowed it to be deferred for a while, perhaps thereby making the eventual crash worse. Without "liar loans", we still would have had a crash, but sooner. Importantly, this would mean that all the “cures” based on the diagnosis that “liar loans” caused the crash can’t work – they are cures for another disease altogether. The disease can't be cured until it is correctly diagnosed.

Rebuttals to criticism of Fractional Reserve Banking

I have seen a rebuttal to this theory to the effect that no, the system can be stable because the interest paid back to the banks is not re-invested by them as loans, but is spent into the economy for goods and services. But this argument falls down if any part of the interest payment is re-lent out, and obviously that is the case in real life. So the system may crash later, but eventually it will crash.

Another argument goes that if the bank is owned by the public, so its profits go back to the body politic, then it is stable no matter what use it makes of the interest it collects. This means that a publicly owned bank like the Bank of North Dakota is fundamentally stable, whereas all of its privately owned counterparts are not. This is an intriguing idea. I would love to see it explored. How does it affect the money system in total? Suppose ALL banks were owned by the public? If a public bank practicing fractional reserve banking is stable, does that destroy the argument of the American Monetary Institute that ALL fractional reserve banking is unstable, and therefore evil?

What about the arguments against the stability of the existing system raised by the advocates of social credit? Are they obviated by public ownership of the banks?

It is truly interesting how few of these questions are ever raised by academic economists. This unfortunately gives credence to the notion that economics as it is practiced is there only to provide a fig leaf for the oligarchy, to hide what is really going on: a gradual transfer of all wealth into the hands of a few bankers. Can this be true? How can academic economists, almost all of them, blithely assume the stability of our existing money and banking system, without questioning whether it is doomed to crash?

Saturday, March 6, 2010

The reality of modern banking

Articles on this blog are intended to introduce the reader to the nature and shortcomings of our financial system and ways to change it to free us from debt slavery

By Bob Beresford, whose website is here

When Fractional lending started it was pure fraud ( still is, technically )....the money changers were pretending they had more money/gold deposits than they did to make extra loans and extra profit.
They would traditionally lend out as much expanded money as possible to make more profit and gain more economic control. The 2nd US bank 1816 - 1836 had its member banks creating paper money/loans based on a capital holding of 10%gold. That was a 10 to 1 free expansion, but based on a retail bank's capital in Gold.
Someone quoted Katherine Austin Fitts as saying that pre 2008 crash they were just illegally creating derivatives in a 10 to 1 type ratio....9 not repayable ? So they'll get away with what they can - those Merchant banks holding most debt and pulling the strings - but they need/want to be able to create an economic rhythmn and have the retail banking network locked into that.... eg via Reserve Bank controls.

The basic retail Fractional system, at least since the war, has been holding back some deposits - usually 10% - as security/reserves while the other 90% got lent out. So the bank's Capital position wasn't so stringent. This - of course - means the money supply is being controlled via Quantity, while the money recycles as deposits in ever decreasing circles. So the Reserve could fix deposit ratios ( Fractionally ) and Prudential requirements, working to a plan. Canada was running a huge 25% ratio at one stage ( 1956-81 ? ), no doubt with prudent lending criteria.....and it worked okay. Controlling money via quantity is the best way.

But the big change was done to chime in with world Neo-Liberalism ( as endorsed by the IMF , eg via their Shock Therapy program ....we got the full impact in NZ, from 1984 on, following massive IMF debt ).
That change was to control money via pricing, while reducing national controls and barriers ( eg Trade barriers ), and also floating currencies.
This allows the Carry Trade, and the big Banks and Financialists, money changers, speculators, to take over, as everything gets Internationalised, manipulated and interdependent and national Govs lose economic control. And the New World Order - world government based around economic control by big banks and their favoured World corporations - is ushered in.

The shift in retail banking - as per Basel 1, 1988, was towards banks basing lending on Capital held, with various ratings - called Tiers. While the loan itself had various Risk Weightings. Notably, this frees up the money supply and will accelerate it, since Deposit ratios as such were suspended by it ( hence you could now lend All the Deposits you got - not just 90% - constrained only by your Capital ratio). This is commonly only 8% ( eg 4% Tier 1, 4% Tier 2 ) on a full risk loan, for USA banks. But Foreign Central banks are given a 0% risk rating, so big Merchant/retail banks can lend to them with even less Capital banking ( it's all set up cleverly to allow more business and control by the big banks ).

BUT...note that banks are still supposed to be lending out against their a perpetual balancing act, probably balancing books every night and topping up off the short term money market, other banks, the central Reserve bank on its Overnight rate etc. That's the US Fed rate, and in NZ it's the OCR ( official cash rate ) and in NZ it works a bit differently. Our Reserve sets the base market money/interest rate by offering Interest, say 2%, for the retail banks to leave their money with the Reserve. So the market rates then build above that. I think the US Fed just sets its base money rate as a wholesale charge for issuance ( currently zero ? ). The NZ Reserve will cautiously follow BIS rules and US FED initiatives ( even the dreaded Securitisation ) does Australia.
The Reserve banks now expect to control money via pricing ( The NZ Reserve ignores retail bank deposit ratios ), following foreign leads - ultimately BIS and IMF.

The main point about this method is that is Wrong....that's why the money powers push it. It will put a country more into debt and dependency, while International money controls the world. And the IMF wants to act as a new world central bank, basing on its SDR's - Special Drawing Rights - which are just money created from nothing.

The big bankers have always been International, and parasitic, but have used America and its Dollar for colonisation, since 1944. They own the Federal gov ( and the NZ gov ) but under your Federal system the States have much power and there's the great chance for a State revolution in public banking. It would be a chain reaction. Once one state went, clusters would form. Oregon or Cal would tip the whole Western seaboard....and then there could also be a North West grouping around Alberta ( with its huge resources ) and Montana and North Dakota. And elsewhere ?
But act asap because they're now trying to destroy the US and its dollar to allow a new world system to be imposed. And meanwhile, I'm sure Geithner and co will try to legislate you out of existence before the State banks start. Note that Geithner and Paulson are on the board of the IMF. I predicted 18 months back that USA would be pushed close to civil war. It's being bled , currently, in the dreaded debt deflation death spiral.
Money supplies, at least at grass roots/Main st level are being contracted most places. They're prepping worldwide for public Asset Sales....which will finally hit America too. I figured the plan was for China ( and others ) to buy you up big time.

The thing about State banking is that it stabilises the money supply and gets it flowing the right ways and places ( money is like a blood supply ) - especially if you spend into Infrastructure. US states have much power and leeway, incl when working with the Federal money supply. And now, it's nearly all electronic, so money expansion is easy. Couldn't do that easily with finite Fed paper currency.

When this group first started I said we have to get all our facts straight, eg via technical people....some, happily, have come on board. And then make sure our State Bank protocols don't exceed whatever the Private banks do. Then no-one can criticise us unduly....we can say -' but BOA etc does that and the State has greater real assets than they do, in any one area '.

Note here that while US banks often play looser than the BIS standard, loans are not supposed to exceed deposits much, or for long. Happens temporarily, and other banks can and do join in the action as they lend short term to the bank making the loan ( who is without enough instant funds ), so all benefit and are part of the rhythmn. And banks must also have specific Reserve requirements of cash etc to cover normal activity. This level is set by the national Reserve Bank and all/part may even be held at the Reserve ( think US Fed does hold part of it? ). After that , they can lend all deposits until they max out their Capital ratios. Then, they can increase their Capital ( mainly done via shareholder stock ) or otherwise they can revert to the older Deposit Ratio fractional system and start holding back eg 8-10% of incoming deposits, or borrowings on the wholesale money markets, before lending out the rest.....that's what happens in New Zealand anyway.

So....main point of the State bank is to get the money supply adequate, flowing and in step with the Real Economy . It is the lifeblood that Facilitates real economic productivity....not an end in itself, since it's only paper and data on computers. Meanwhile, Wall St is strangling the Real Economy with paper and electronic tricks and Compounding Interest . They own the Feds and National Gov and so the States need to take economic control for their people.

It won't be hard to improve on what Wall St does, and we can say that various systems are workable and beneficial to some degree, from the grassroots systems, eg where work hours are traded, to a full social system like Social Credit, which is also more complex to set up and regulate.
But meanwhile, noting that it's possible to morph a system later, I believe we should push the basic system that starts easily and gets most impact on the whole economy.

That's essentially the Ben Franklin and co State system, where they controlled the money supply via Quantity, while monitoring the results. They didn't care how many pounds they actually released, as long as the economy was bouncing, and obviously it would grow. Abundance equals Good. So they loaned to farmers at 5%, no doubt at Simple Interest - Compound Interest should be illegal - and spent into Infrastructure, creating cash as necessary. Result was spectacular.

So lets follow that, noting that States now have contracted money supplies at street level. And even deflation. First question then is how to get adequate money expansion using a Federal currency ( unlike Ben Franklin's State money ) ?
For a while we thought here we could create loans purely based on Capital ratios...and States have huge capital. But even if restricted to Deposit money - eg paid in as Tax, revenue or bonds - there'll be ways around it. Ellen and I both thought of rolling loans over indefinitely till adequate revenues came in. As long as the State sets up various departments, eg State bank, development bank, Retail banks ( buying out an existing private chain ? ), Ag and Industry funding deps, Infrastructure Department, Revenue thing can be paying off another........even slowly. Eg , the parks dep can borrow money from the state bank, based on its real assets, and then use that for park improvements, hiring workers and releasing more money into the state. There would be a strong policy of keeping cash in state hands and borrowers would have to use State retail bank accounts. The State Bank would run low Simple Interest, and soon drive down private bank rates. It can systematically buy out mortgages this way, even forcibly, by legislation ( and then even use Securitisation to free up more cash ! At least these mortgages would be State owned and guarranteed ).

The system of one state sector lending to another creates much debt that is Internal only - it hurts no-one and can be rolled over. It's a solution for creating money, within existing boundaries. Since most money creation now is electronic, it's easy. It would vitally ease the Federal strangulation of the money supply. And Private banks in the state initially benefit because more money is in circulation.

The ideal solution is for States to simply Create more new money outright( as the Fed can ) and spend it into Infrastructure etc. But that illegally breaches the Fed's monetary monopoly, so we have to think of clever ways to expand the money supply, and productivity, that are less blatant.

So....worth pushing for a state bank, eg via Referendum. California is ideal there. Try raising taxes somehow at same time ? Schwarzeneger is a corrupt waste of time, but Jerry Brown may well back this, and he's running in the mid year Gov elections.

We need to have basic pamphlets or email-type short writeups, even with pictures, for different audiences, that can be bounced around. Making sure we don't get our facts wrong at all.
The current banking system is an arbitrary creation, and it does create money from nothing, but we can still rescue the economies, I'm guessing, while working within its rules.
It's been set up by the Merchant banks, to suit their plans, and relies on a money supply being expanded by constant re-lending ( which is fraud ) to create more money.
Most people don't realise that it's actually new money being created, but it's backed by deposits....same money getting deposited over and over. As all power and Interest flows to the private banking network.
So any trick a State bank uses to expand its money supply is no worse. Eventually, the fed Gov or States should just admit that money is being created and withdrawn to suit an economic Ben Franklin did.

To understand why fractional banking/re-lending is a fraud, note that the Private system treats money as having real value, the same as a material object , like gold. If you can't pay back the paper, plus Interest, then the banks want a real payment - like gold.....or your house.

But you cannot lend real objects twice ( or 9 times ) at exactly the same time. Couldn't do that with Gold, either, until banks came along. If you had a great lawnmower costing $1000, you could hire it out and get some cash...but only once at a time. But the private banking system is at any stage lending the same hunk of money - or bits of it - to many people. And without constraint by deposit ratios now, so that's to even more people. And wanting Interest - more money - paid from every bit of re-lending. Which must be unworkable, long term, sucking the money supply/blood dry. Therefore, $1000 of money cannot be worth the same as a $1000 lawnmower, which can't be in several different places at once. Since the money is in several places at once - thanks to swappable paper and electronic data - then it can't be real wealth or the equivalent.
It therefore must be just a device for exchange....which is what we thought of it originally - a claim on real wealth, that you earned or inherited.

This fraud of lending the same article/substance/money to several customers at the same time would be more obvious if only one bank existed....and much less clear when there are many banks linked by a common Reserve.

Therefore, making money out of money, via compound Interest, ultimately erodes the whole system, and the only honest way to do things is for the State and/or National gov to control the money supply, as a fluid and arbitrary thing, in the best interest of the citizens. While admitting that it is simply creating and extinguishing money as needed, to benefit the people. The money would be flowing in the right ways and as 'deep' as possible - eg via Infrastructure - to get best results. And not running loan cycles and bubbles to punish the people and benefit the private banks.

Could people please read this properly and think hard first if responding too or about it ? We need more thought and less emails to be going places.


PS - if anyone wants to sing about their income tax, they can always download free my Taxation song off my whacky music website ( It's a bit of an anthem.

Bob Beresford

Sunday, February 28, 2010

Unitising Residential Property

Articles on this blog are intended to introduce the reader to the nature and shortcomings of our financial system and ways to change it to free us from debt slavery

Written by Chris Cook - September 03, 2009 9:38 AM
Page 1 of 2

Only in Scottish law is there to be found a pragmatic, “not proven” middle way between the absolutes of guilty and not guilty. Perhaps such open-minded pragmatism is the reason why the Holyrood parliament's Economy, Energy and Tourism Committee listened intently earlier this year to the unconventional financing options which the Nordic Enterprise Trust (NET) has developed in Scotland with support from Norwegian state agency Innovation Norway.

It was clear from informal discussions with members of the Edinburgh parliament that the effect of the credit crunch on Scottish housing is a far greater political hot potato than renewable energy, the subject on which we were giving evidence. The housing crisis is currently manifesting itself in several ways, including a rise in repossessions and homelessness; a shortage of development credit, particularly in the private sector but extending to the public sector; and the effect of the cessation of development on affordable housing.

We believe that there is a simple but radical partnership-based new solution – co-ownership – which we are prototyping in Scotland but could be applied throughout the UK and even internationally.

Public And Private

We all take many things for granted, and one of these things is that when say public sector we mean “owned by government” and when we say private sector we mean “owned by a limited company”. But, as the city of Glasgow has realised, there is an emerging alternative to the limited company. Enter the UK limited liability partnership (LLP), which was quietly introduced in April 2001. The LLP is the simplest and most flexible legal entity ever created; the agreement between members is totally open, to the extent that it need not even be in writing. It combines the best qualities of a limited company with the co-operative values of a partnership.

Glasgow has at least four municipal LLP organisations, which engage with private sector partners to provide services such as car parking, market premises, and buildings for the use of the local community. But these municipal LLPs leave financiers and ratepayers alike on the outside, which means that they are just as constrained by the credit crunch as any other organisation. The “land partnerships” which NET proposes are not organisations but frameworks for investment in municipal assets of all kinds, in particular for investment in sustainable and affordable housing.

Introducing Public Equity

A land partnership does not own anything, employ anyone, contract with anyone or even do anything. It is a simply a framework agreement between the various stakeholders. Land ownership remains with, or is transferred to, a public custodian, probably a local municipality.

We are not asking land owners to give their land away but to invest the value of the land/location, i.e. the right to occupy it exclusively. Whether or not it is municipalities or councils who invest the land, planning permission also has a value and municipalities and councils would invest the value of that consent. Once materials, labour and services – or money to pay for these – have been deployed, then valuable new housing is the result.

Once building has been completed, occupiers pay an affordable rental for the use of the investment made in the land/location. This “capital rental” will then be indexed to a suitable measure of inflation. It is also possible to imagine a separate payment purely for the use of the location.


This is the alchemy. The pool of rentals which we have created is simply divided into proportional units and investors are invited to buy these units of public equity. So units are shares...but not shares as we know them.

Investors who have seen their returns vanishing as interest rates spiral towards zero would be ready buyers of an investment such as this. Units offer a reasonable, index-linked return based on property, but with low risk since affordable rentals are by definition more likely to be paid. Units are a perfect investment for risk-averse investors such as pension funds (although not UK pension investors – for tax reasons), sovereign wealth funds, and even Islamic investors (given that no debt or interest is involved).

To all intents and purposes the proposed “rental pools” are identical to real estate investment trusts (REITs), but with the key attribute that they are redeemable against property occupation. Unlike conventional units, which typically trade at a discount (occasionally at a premium) to the market price of the underlying asset, if the market value of the units were to drop below the market value of the rental stream then property occupiers would buy and redeem them.

For occupiers there is an end to any stigma of tenancy as they literally become co-owners and have a responsibility to maintain the property in good order. If they are able to pay more than the affordable rental, they automatically buy units. Even if occupiers have no spare cash, those who either assist in the initial development of the property or subsequently maintain their property in good order will effectively receive “sweat equity” units. This is because they will be able to keep the maintenance/ depreciation allowance applied to the building (since land/location does not depreciate, although its value may change).

A borrower under a mortgage contract may be foreclosed – no matter how much equity he may have – if, for some reason such as unemployment or a credit crunch, refinancing is impossible.

In co-ownership, on the other hand, an occupier may only be evicted if he fails to pay the rental and has no more units of equity to use instead of cash.
Sustainable Development

The conventional transaction-based property development model is well described as “the four Bs: Buy, Borrow, Build, and B****r Off”.

Under the existing model, developers have no interest in energy efficiency or good quality since these cost money and reduce transaction profit. In a land partnership development, the individuals or enterprises (such as housing associations) who manage development have an interest in high standards of quality and energy efficiency because this lowers the cost of occupation over time and makes the units they will receive more valuable.

The approach for contractors is firstly to invite them to invest their costs, which may be possible for businesses such as architects and engineers but not so straightforward where there are costs of materials and labour to consider. However, whether or not contractors are willing or able to invest their costs, they will be expected to receive an agreed profit margin in the form of units, and this will align their interests with those of other investors. In this way, we minimise the amount of development risk capital needed from public or private investors.

Once the developed property is complete and occupied, the manager member – again, possibly a housing association – also has an interest in doing a good job because that will increase the value of their proportional partnership equity share in the rental.

Unlocking Public Equity

Development of new housing takes time and development credit is in short supply. So we propose that some of the investment tied up in existing housing stock should be recycled and used to develop new housing. We propose to simply replace existing government, municipal and housing association borrowing with units of a new class of Scottish equity, which dramatically cuts financing costs.

Defusing The Debt Bomb

New medicines are often tested on the most desperately ill patients and we believe that our proposal could first be tested as a solution for those increasing number of Scots who are currently suffering the trauma of losing their homes to debt. So distressed properties would be transferred to a custodian, an affordable and index-linked rental would be set, and units in the resulting “pool” of affordable rentals would be sold to long-term investors, with the scheme managed by local housing associations.

For the banks, the exchange of distressed debt for units would give rise to an asset with far more resale value than any conventional security or restructured loan, which retains a debt obligation. Moreover, the fact that the rentals composing the income are affordable will mean they are more likely to be paid, and this relative certainty should justify a higher price and lower rate of return.

In this way, distressed Scottish borrowers may shake off the shackles of mortgage debt and the Scottish government's limited funding to alleviate their plight may be deployed as a revolving transitional investment in the pool while new investment is introduced by skilled Scottish financial services providers.

A New Wave Of Housing Investment

Using the co-ownership approach, international and domestic investors may refinance existing UK public and housing association debt. The massive resulting pool of development credit could then be deployed in networked sustainable development of affordable housing throughout the UK in such a way that the interests of all stakeholders are aligned.

It's not rocket science and (tongue-in-cheek) the NET even has a name for Scottish use of what is essentially a new form of partnership-based national equity: the Scottish Futures Trust.

This is an expanded version of an article published in the summer 2009 edition of Scotregen, the journal of SURF, Scotland’s independent regeneration network. Chris Cook is Principal of the Nordic Enterprise Trust. He is a well-known commentator and expert on the petroleum markets and peer-to-peer finance. He was formerly Director of Compliance and Market Supervision at the International Petroleum Exchange.

Friday, February 26, 2010

Peer-to-Peer Finance: A Flight to Simplicity

Articles on this blog are intended to introduce the reader to the nature and shortcomings of our financial system and ways to change it to free us from debt slavery

Link to article source here

By Chris Cook
February 25, 2009

Internet activist John Gilmore famously said, "The Internet interprets censorship as damage and routes around it." A key event of the Internet age was the invention of Napster, the direct online music-sharing program that helped erode the business model of the global music industry. This capability of the Internet to route around middlemen is becoming more apparent. A reader of the Financial Times in December won £10,000 for identifying peer-to-peer lending through the Internet as the "next big investment idea."

How such a directly connected financial system could work is a question that has interested me for almost a decade.

At a recent conference in Tehran on the current financial crisis, one of my fellow speakers observed that "it is not possible to solve 21st century problems with 20th century solutions." I agree. The emergent partnership-based enterprise model, however, has evolved in response to the challenges of this direct Internet connectivity.

Finance consists of three things: credit, which facilitates trade and enables the creation of productive assets; investment, which consists of financial claims over productive assets such as secured debt (e.g., mortgage loans); and equity, which is an ownership interest in a corporation, and typically exists in the form of shares.

Credit and investment may be achieved without the intermediation of banks. Since bank capital will be further depleted as the credit crunch spreads into the productive economy, peer-to-peer finance offers a solution from an entirely unexpected direction.

Direct Credit

Trade sellers have extended credit to trade buyers for thousands of years. As trade has developed nationally, regionally, and globally, one of the key enabling factors has been credit intermediation by banks. This intermediation protects sellers by taking on the credit risk of buyers and enables trade to flow by providing liquidity to sellers.

It is possible to dispense with a credit intermediary and provide such a framework of trust through the use of an agreement—a guarantee society—whereby sellers and buyers collectively provide a mutual guarantee. This mutual guarantee may then be supported by provisions made by both seller and buyer into a default fund in the hands of a neutral custodian.

A service provider could then set guarantee limits, operate the accounting system, and deal with defaults in return for a fee. The crucial advantage for banks of such a guarantee-society credit-enterprise model is that they would no longer have to put capital at risk by creating credit based upon it.

Direct Investment

When we distinguish the public sector from the private sector, we are actually distinguishing between enterprises and assets that are owned by the state and those which are owned by that specific enterprise model known as the joint stock limited liability corporation.

In recent years, media attention has focused on developments and events in the field of credit. The emergence of new generations of alternative investment vehicles—such as income trusts, real estate investment trusts, exchange traded funds, and hedge funds constituted as limited partnerships—has passed relatively unnoticed.

In particular, there has been an explosion in the United States of the use of the simple and flexible new partnership-based Limited Liability Company. In Britain and elsewhere, an even simpler form—the Limited Liability Partnership—is emerging at a phenomenal rate for purposes never intended by legislation introduced with the intention of limiting the liability of partners in professional partnerships.

Such partnership-based entities may be used as framework agreements—not organizations—which bring together investors with users of investment in a capital partnership. In this way, it is possible to create new revenue- and production-sharing mechanisms for direct investment in productive assets of all types, and particularly in real property and in energy assets through what I call "unitization."


Let's consider how this might be used to refinance a portfolio of distressed mortgages. The properties are transferred to a neutral custodian, and an affordable rental is agreed upon. That rental is then index-linked. The resulting Rental Pool is divided into proportional units which are allocated between investors and a suitable management consortium.

For the "co-owner" occupier, this is a new form of rent-to-buy, since any amount paid in excess of rental will buy units. For the "co-owner" investor, units provide a reasonable, index-linked, secure revenue stream, ideal for risk-averse long-term investors such as pension funds. For banks, this is an optimal form of refinancing through a "Debt/Equity Swap."

Similarly, we may finance a wind turbine simply by creating units redeemable in, say, 10 kilowatt hours of energy and selling these to investors. In the United Kingdom, the sale of between 30 and 40 percent of production finances the turbine, and with a few percent of production to a manager, the balance is pure surplus.

Direct peer-to-peer investment gives rise to shares, but not as we know them. Once again, we see a role for banks as service providers, appraising investments, advising investors, and providing liquidity—all classic investment banking roles. As with direct peer-to-peer credit there is again no need for banks to risk capital by creating credit based upon it.

The enabling factor for a new generation of peer-to-peer finance is a new generation of networked partnership-based framework agreements and entities. The work of visionaries like David Johnson of New York Law School and Oliver Goodenough at the Vermont Law School in creating the new Vermont Virtual LLC is a major advance in this direction.


A generic clearing-union network of direct financing will enable a simple but radical new approach to global economies. It could enable systemic fiscal reform based upon taxation of privilege rather than earned income, and it also offers new solutions for financing public assets. Most exciting of all, it enables a new networked generation of global markets, and even the potential for a "New Settlement"—a Bretton Woods II—establishing a new global architecture for world trade.

Chris Cook was formerly director of the International Petroleum Exchange, and is now a strategic market consultant, commentator, and enterprise architect. He is currently developing new partnership-based enterprise models and financial products based upon their application to Internet market networks.

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Related Resources:

* What Should Bretton Woods II Look Like? (Commentary)
* Reach Out and Enrich Someone (Briefings)
* M-PESA: Mobile Money for the "Unbanked" (Policy Library)
* The Digital War on Poverty (Commentary)
* The $100 Laptop: The Next Two Billion People to Go Digital (Policy Library)
* Renewable Energy Hedges (Innovations)

Monday, January 18, 2010

The Alberta Social Credit League, Constitution and By-Laws, 1958

Please click on each individual frame for a readable view.
The original photo files of a much higher quality are available