Secondly, you can forget the "monied elite" - they have pretty much chump change - have you never heard of pension funds?
Long term investor demand for "Infrastructure funds", REIT's, "Income Trusts", "sukuks", etc etc show the cosmic appetite out there for long term asset-based returns.
We've hardly even scratched the surface. Replacement of deficit-based but asset-backed credit with "asset-based" investment is, I think, a huge opportunity.
That's how Macquarie Bank et al make all their money. They borrow to buy productive assets, bundle them in legal vehicles and sell 'em off to investors.
The financing costs are lower because they are essentially converting Debt to modestly yielding Equity (and therefore have no capital repayment to make).
That's the future IMHO.
And before you jump in, yes, credit is still needed for "working capital", but that can easily come about from a mutual guarantee of bilateral "trade" credit, with a bank as service provider.
All credit derivatives are doing is allowing banks to offload to investor/risk takers the only value they DO provide which is a guarantee of the borrower's credit.
The fact is that Banks as credit intermediaries are obsolete.
If I'm wrong in saying that, tell me in what respect? "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
My biggest problem is your distrust of fractional banking. it's kinda gold buggy which to me is medieval thinking. Without the ability to borrow against future earnings, most people are trapped in rental housing paying out to said pension funds, aristocracy etc.
That's how Macquarie Bank et al make all their money. They borrow to buy productive assets, bundle them in legal vehicles and sell 'em off to investors. The financing costs are lower because they are essentially converting Debt to modestly yielding Equity (and therefore have no capital repayment to make).
essentially no different than securitizing loans. Like everything I've seen of Islamic finance, it's just relabeling to make mullahs happy.
I would like an answer to your question too. There must be something I'm missing altogether. In the long run, we're all dead. John Maynard Keynes
And I have a great belief that if there was a better mousetrap we'd be using it.
And we have ALREADY started using it: I merely observe what is going on and develop it.
The Hilton group used a >£1bn "capital partnership" LLP to finance development of 10 hotels about five years ago.
The entire Canadian capital market operates in a similar way, by packaging up GROSS revenues of Companies into trusts and selling off units in these "income trusts" to pension investors.
It's just that trusts suck as an enterprise model, although lawyers love them.
LLP's are six years old, and are are only now becoming familiar in the UK.
These "Open" Corporates literally change the game. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
An LLP (UK style) is an entity, like a Company, with an independent legal existence and the protection of limited liability.
Unlike the prescriptive Company "Mem & Arts" an LLP agreement is a consensual legal agreement that says anything the members mutually agree, and there isn't even a requirement that it be in writing (not that I recommend that).
Unlike the US LLP (and the UK LP) there is not a General Partner (with unlimited liability) and Limited Partners. Despite the name, an LLP is NOT legally a partnership, but IS a corporate body.
A Land Partnership is an application of the LLP.
The freehold of land is transferred to a "Trustee" or "Custodian" Member. (exactly analogous to the way that custodians like Northern Trust "own" shares while institutions trade the beneficial interest in them)
The other Members of a "Land Partnership" are: (a) the Occupier (capital user); (b) the Investor (capital provider); (c) (optional) the Developer/ Manager.
The Investor either introduces money - or "money's worth" in (say) land, buildings, sweat equity, goods, services, whatever.
The Occupier pays:
(a) an amount in respect of depreciation and maintenance of the building; and
(b) an agreed level of "Capital Rental" which is shared proportionally between the investors in the same proportion as their holdings of "Equity Shares".
The key point is that there is no obligation to repay capital, as there is in a loan. Why should the capital be repaid, when land does not depreciate?
Since - as with shares in a Company - there is no obligation to repay investors then this is not a loan, but it IS "Equity" - just not as we know it.
WATCH MY LIPS.
THIS IS NOT A LOAN.
The LLP agreement creates what is a new form of indefinite tenure (replacing conventional leases) - an "evergreen" contractual tenure if you will, whereby for as long as he pays the rent, the Occupier has the right to occupy the property.
Anything the Occupier pays in excess of rent due automatically becomes an investment.
This is not "securitisation". If you "securitise" a loan made by a bank it is still a loan - except now it's called a bond.
That is why the "equitisation" in this model has NOTHING in common with so-called Islamic banking where the relationship with the borrower may (usually isn't) be "Islamically sound" but the money is created out of fresh air as usual. ie it is "deficit-based"
Which is why I refer to investment through LLP's - in the same way as I do to investment in "conventional" company "Equity" or units in unit trusts - as "asset-based" finance.
Investors may sell to other investors this new class of proportional shares - which may carry a proportional share in a market rental, or alternatively (in a community partnership, where other tax-like mechanisms could also be introduced in relation to the land) a reasonable index-linked return.
This is therefore essentially a simple new form of residential REIT (it is tax transparent) but with a simpler management structure without the conflicts of conventional REIT's.
Re fractional reserve banking, my view is anything but medieval. It's right up to date.
Credit intermediaries are simply unnecessary. They are obsolete, like all other intermediaries in the Internet age.
On the one hand, a bank may manage the bilateral creation of "trade" credit, and also provisions into and operation of a default fund, mutually owned within a "Guarantee Society".
On the other hand, a bank may appraise "peer to peer" "Land Partnership" investments in property, introduce investors to investments, and risk capital by making markets in these quasi REIT units.
In neither case need a bank put its capital at risk by creating credit based upon it. In neither case is the bank acting as an intermediary between "depositor" and "borrower", but instead as a service provider.
The model is "sustainable" because the developer does not borrow, buy, build and bugger off, but acts as a consultant/service provider with an interest in the outcome, and without having to borrow or risk any capital.
It is therefore more "profitable" for all concerned to develop "sustainably" and energy efficiently, because this lowers the cost of ownership over time and hence increases the net rental return. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Neither does the "Occupier" have any "ownership" - he has a right of occupation (whatever that means). There could easily be many different "Occupiers" eg fishing rights, farming rights, and so on.
So for the sake of argument if it costs £100,000 to buy the land and build the property, then we go to the market and see what investors are looking for in returns from what would become a UK "Property Pool" as more properties joined the scheme. This rate will be based upon what an investor thinks is an acceptable rate of return on a rock solid (property based) and index-linked return.
Maybe 3 or 4% would be acceptable for an index-linked return that would be instantly accessible. It could even run down to 2% or less (UK government index linked gilts were issued at 2% and were sold down to 0.4% at one time, dunno what they are trading at now).
The location of the property is entirely irrelevant, since this is a pool of the Capital invested IN the land. The location value of the land - which changes over time - and how this fits in with the financing of local communities, is a separate subject. I see "Community Partnerships" in due course replacing/becoming local government.
2. Good point. Except that it would be quite in order for a land owner to agree to transfer his land into trust in return for an agreed valuation based upon (say) 20% of the property rentals flowing from the developed property.
Equally, the soon-to-be Occupier might put in sweat equity (eg digging foundations - which used to be mandatory in Norway if you wanted funding from the State housing bank) - and a builder, plus all the other service providers involved, would be given the option of exchanging their "costs" for an "equity share". Anything more than their costs (ie a profit margin) they would be expected to invest, so they have an interest in doing a good job.
In other words, it is only necessary to obtain pre-existing "money" insofar as you need to pay "external" costs. The land investor is key: and here it is possible to imagine that the community which grants the right to build residential property could become an "investor" too, to a significant degree, sharing the gains with the land owner.
3. In this model, "default" relates to the inability to pay rent, and that would of course result in repossession (if equity has been exhausted), and a new Occupier. There is no default otherwise, and an Occupier can take a payment holiday anytime he wishes, provided he has an investment in the property Pool to his name (ie paid rentals ahead of time).
There can be no credit default because this is not credit. If you want your money out, simply find a buyer for your generic UK property pool units. Plenty of investment institutions making markets there, I would think.
If you want to invest longer term then do so, in something else.
Equally the right of occupation has no time element. It's merely a question of whether or not you want to live there, and whether or not you can afford the Capital rental involved (and any community land related charges).
In fact I see a Community land related charge (a location rental) as being a potentially powerful tool in redressing the balance over time between the haves and have nots.
But that's another story.
Land Partnerships would be just as simple as now - otherwise they will not work, for sure.
Do you call the existing system of buying and selling property simple?
In this model, property is never bought and sold again, although occupiers, investors and maybe managers change over time.
Management issues would be colectively decided insofar as they need to be (eg condo's and cooperatives) with managers only if necessary.
Investors have no say in matters that concern occupiers, only in terms of matters that concern them (eg the "value" of new investment in money or money's worth) "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
Banks provide a service. You seem to believe with more information people can do without the packaging and management of differing time horizons. I say that is damn near impossible for ordinary folks as opposed to the large corporations and pension funds you use in your examples. Sure, giant pools of capital can take very long views and be patient. But most ordinary folks cant. Their savings make up a large chunk of the money in the system.
you make many blithe assumptions that people can easily find buyers to take them out of an investment that they've changed their mind about. Pretty easy with simple instruments but a right to a stream of cash from a building lease with the lessor having the right to buy in on some complicated formula? Again, good luck finding a market for this. Looks like a Rube Goldberg mousetrap to me.
I agree that I can only make sense of Chris' model to finance investments in productive capital. But, then again, under Chris' model all homes are put into trust and residents pay rent (though if they overpay they can own a fraction of the house).
Sometimes I speculate on a model where all real estate is community-owned and occupancy rights are leased, with the income replacing property taxes. But I don't think that is culturally acceptable. Can the last politician to go out the revolving door please turn the lights off?
