The Great Unravelling | 139 comments (139 topical, editorial, 0 hidden)

Re: The Great Unravelling (4.00 / 5)

It seems to me that this is somewhat tangential to where Mig is going. You can contractually share or dispose of ownership or usufruct in any conceivable contractual manner, but in the long run it can't work unless

property and ownership are clearly explicated, with no gaps or blank spots, and
contracts are enforceable (i.e. all parties have recourse to a consistent rule of law).

This is all the more important for cross-border arrangements.

Novel partnership arrangements by no means obviate these needs, simply because <voice_of_experience>partnerships can go terribly bad</voice_of_experience>.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Sun Oct 17th, 2010 at 04:59:48 AM EST
[ Parent ]

Re: The Great Unravelling (none / 1)

Nothing wrong with tangential, in my book.

By laying out pros and cons we risk inducing people to join the debate, and losing control of a process that only we fully understand. - Alan Greenspan

by Migeru (migeru at eurotrib dot com) on Sun Oct 17th, 2010 at 05:01:34 AM EST
[ Parent ]

Re: The Great Unravelling (4.00 / 2)

And if a partnership goes terribly bad, will not the law of land of the partners be a big factor? It is all good and well to say in a contract that disagreements shall be settled in Switzerland, but if you disagree on that, then as I see it, eventually the law of the land where the property happens to be can become very important.

Intellectual property - or rather the rather different beasts of copyright, patents, trademarks, design patents, etc - is even messier because despite attempts to steamroll the worlds states with TRIPS (and ACTA, and many more), there are still different legal traditions, making something that has monopoly protections in one country, possibly lacking in another. To use an example, the copyright of Mein Kampf is in Germany owned by the state of Bavaria, in Sweden it is owned, but not by the state of Bavaria (by courtcase, who actually owns it is unsettled), and in Algeria it is in the public domain.

A vote for PES is a vote for EPP! A vote for EPP is a vote for PES! Support the coalition, vote EPP-PES in 2009!

by A swedish kind of death on Sun Oct 17th, 2010 at 05:40:11 AM EST
[ Parent ]

Re: The Great Unravelling (none / 1)

A swedish kind of death:

And if a partnership goes terribly bad, will not the law of land of the partners be a big factor? It is all good and well to say in a contract that disagreements shall be settled in Switzerland, but if you disagree on that, then as I see it, eventually the law of the land where the property happens to be can become very important.

There would be custodians of different types of property in each jurisdiction, but purely national law could only restrict use of that property in that country - they need international agreements to police use across borders.

When it comes down to the use value of land/location it is the case that national laws, custom and practice will always - by definition - apply.

Knowledge and energy is more footloose of course, and therefore property rights may be susceptible to international, rather than domestic, dispute resolution particularly if such rights (and the Units I propose are essentially a new class) are adequately, securely and transparently registered with a trusted third party.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Oct 17th, 2010 at 07:41:47 AM EST
[ Parent ]

Re: The Great Unravelling (4.00 / 2)

dvx:

partnerships can go terribly bad

Of course they can, and that is my experience, too.

But then as I wrote here years ago, an 'open' corporate (like any corporate) is not legally a partnership at all - since it has a collective 'joint' responsibility insofar as the members consensually agree (the good bit of partnerships) - but without the 'several' individual responsibility of partners for each other (the bad bit).

Moreover, if you add to an Open Corporate the semi-permeable protective membrane of limited liability (as with the UK LLP) then you get rid of the other nasty part of partnership, to wit, unlimited liability for the actions of your partners.

So I prefer to talk about partnership-based framework agreements, but am also careful to make the crucial - indeed, game-changing - distinction which makes an open corporate protocol potentially so powerful.

As for the tangent, I agree, but felt I had to correct Mig on the necessity for the sort of 'rule of law' he referred to.

When Mig has done his update, I propose to rejoin from the tangent, and demonstrate that it is possible to package up all of the terminally buggered up contractual relationships of the US real property system (and ours come to that) into a simple but radical and complementary new system.

I made a presentation to the top 20 UK housing associations last week on precisely that subject.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Oct 17th, 2010 at 06:17:23 AM EST
[ Parent ]

Re: The Great Unravelling (none / 1)

As for the tangent, I agree, but felt I had to correct Mig on the necessity for the sort of 'rule of law' he referred to.

Chris, you clearly haven't played enough Junta or Twilight Imperium if you think that rule of law is optional in contract enforcement.

The benefit that rule of law brings - the one benefit that only consistent external enforcement can bring - is the ability to enter into intertemporal contracts (as in "I give you X today, you give me Y tomorrow"). Absent a consistent external enforcement framework, nobody ever has an incentive to hand over information, goods or other resources without immediately receiving something of equal value in return. Because absent external enforcement of obligations, having someone owe you a favour is an incentive for them to sell you out, rip you off or otherwise screw you over (if I owe you a debt, the cost of you becoming my enemy is reduced by the value of the debt I owe you. Even worse, if you weakened your position and strengthened mine by whatever action placed me in debt to you originally, you reduce your ability to enforce the debt yourself).

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Oct 17th, 2010 at 07:40:17 AM EST
[ Parent ]

Re: The Great Unravelling (none / 1)

I confess I have not played either game.

Comrade Stalin it was who said 'Trust: but Validate'.

So the framework of trust I advocate is for the performance guarantees which are given by market participants to be backed mutually - eg by provisions or collateral - in a way agreeable to all.

I see no reason why a market service provider should not provide the necessary risk management and quality control in such a 'Guarantee Society' architecture in accordance with the protocols laid down in the agreement. This is in fact pretty much the way that P & I clubs currently operate for mutual insurance of shipping etc.

UK P&I Club - What is P&I?

The Advantages of Mutuals over Fixed Premium Insurers

Not for profit
The P&I Clubs provide at cost insurance without profit. Fixed premium insurers aim to make a profit for their shareholders.
Control
Ultimate control of P&I Clubs is in the hands of the shipowner assureds, through elected shipowner boards/committees which decide policies on eg., scope of cover, claims payments, premium calling etc. Ultimate control of a commercial insurer is in the hands of the insurance company, and not the shipowners.
"Dividends"
P&I Clubs regularly pass back to the shipowner the benefit of a good underwriting year through reduced or returned premiums. Fixed premium insurers are most unlikely to do so.
Commitment
P&I Clubs have existed continuously for more than 140 years. Fixed premium insurers have no convincing track record of commitment to P&I insurance.
Scope of Cover
P&I Clubs provide the most comprehensive cover available including the right of the board to cover "omnibus" claims. Fixed premium insurers provide less cover than P&I Clubs.
Letters of Undertaking
P&I Clubs' cost-free letters of undertaking are generally accepted worldwide and can be provided without delay. Fixed premium insurers usually require bank guarantees to free ships from arrest, with resulting costs and delays.
Service Philosophy
In a P&I Club, the managers are the servants of the Club, dedicated to the provision and development of the service the Club's shipowner members require. Fixed premium insurers are insurance suppliers to shipowner customers.

At the end of the day, the ultimate sanction in the networked 'Market 3.0' I advocate is that a market participant will be excluded from the market temporarily or permanently.

In this context, I'm reminded of an anecdote from someone I know who provides barter software and runs several successful barter exchanges. He had a complaint from a user that there was virtually no liquidity on the system, but the fact was - my friend tactfully explained - that this guy had pissed off so many other users that there was merely no liquidity visible to him.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Oct 17th, 2010 at 07:59:19 AM EST
[ Parent ]

Re: The Great Unravelling (4.00 / 2)

So the framework of trust I advocate is for the performance guarantees which are given by market participants to be backed mutually - eg by provisions or collateral - in a way agreeable to all.

Holding collateral in escrow is always possible, of course, but that will be a decidedly non-trivial expense. One benefit from consistent rule of law is the ability to dispense with such expensive insurance policies.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Oct 17th, 2010 at 08:12:07 AM EST
[ Parent ]

Re: The Great Unravelling (none / 1)

Withn the right data architecture (Hong Kong's clearing system - where there is real-time settlement and no central counterparty - comes close) the cost is pretty trivial.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Oct 17th, 2010 at 09:04:24 AM EST
[ Parent ]

Re: The Great Unravelling (none / 1)

Yes, if you have simultaneous exchange, then you don't need escrow services.

If, however, I give you a shipyard, Mig gives you steel, you build a ship and Jerome sails it to some place where Nomad has a container of stuff... then, unless we can rely on external enforcement of Jerome's obligation, you, I, Mig and Nomad will have to hold Jerome's collateral in escrow for months, while the cargo is physically shipped. This restricts Jerome's ability to put that stuff to productive use in the meantime, which is a very real (though not immediately apparent) cost.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Oct 17th, 2010 at 10:00:54 AM EST
[ Parent ]

Re: The Great Unravelling (4.00 / 2)

Yet international letters of credit have long been used to facilitate just such intertemporal problems. Banks provide a significant access to the money contained in the letter of credit based on the agreements themselves and the history of compliance of the parties involved. The importance of this mechanism was clearly revealed in the fall of '08 when its continued operation was threatened by the financial collapse. Unless remedied, mass starvation could have ensued.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Oct 17th, 2010 at 10:26:56 AM EST
[ Parent ]

the point is (4.00 / 4)

that the problem was not solved by letters of credit, it was solved by having around banks which could credibly provide such letters of credit.

The intermediaries ARE the solution, not the tools.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sun Oct 17th, 2010 at 10:36:30 AM EST
[ Parent ]

Re: the point is (none / 0)

Can you explain why a P & I Club - which is managed by s service provider - would not be a solution that would work just as well?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Oct 17th, 2010 at 11:24:24 AM EST
[ Parent ]

Re: the point is (4.00 / 2)

JaP

it was solved by having around banks which could credibly provide such letters of credit.

Part of the solution was governments providing increased guarantees to existing banks to make their offerings more credible. They could have offered the same guarantees to new banks or to different institutions. It was the credibility that was key and the credibility of the banks was impaired.

As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sun Oct 17th, 2010 at 03:17:18 PM EST
[ Parent ]

true (none / 0)

but you'd still need banks to provide the L/Cs.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sun Oct 17th, 2010 at 03:43:18 PM EST
[ Parent ]

Re: The Great Unravelling (4.00 / 3)

Correct.

The intermediary banks (and other institutions) stopped intermediating, and the system froze.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Oct 17th, 2010 at 11:26:10 AM EST
[ Parent ]

Re: The Great Unravelling (4.00 / 2)

Chris's theories are like communism (or libertarianism): great in theory, unworkable in practice. More specifically, they require, to work, that people behave in ways that are totally different from what real life suggests. With such an hypothesis, even current capitalism would work.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sun Oct 17th, 2010 at 08:20:16 AM EST
[ Parent ]

Re: The Great Unravelling (4.00 / 2)

With respect Jerome, I have 35 years of experience of market and enterprise regulation and development and have a fairly clear idea of what will work (and more to the point IS working) in practice and what won't.

Firstly, how do you account for the fact that partnership working - and new enterprise models enabling it - are emerging at such a phenomenal rate (even the Economist has written about it)? In my view this is because these structures harness self-interest and turn it to mutually beneficial purposes.

Secondly, there is the matter of the trend to dis-intermediation. You are yourself - and I congratulate you for taking the plunge - an example of this trend, being now a member of a niche service provider, rather than an employee of a credit intermediary.

It is in the interests of the credit institutions themselves that they should transition to service provision, because this will minimise their capital requirement to the level necessary to cover operating costs.

The fact is that payments to 'unproductive' rentier management and shareholders are unnecessary in a directly connected world, and in my (you think, Utopian) view capitalism will (indeed it already is) eat itself and will re-emerge in a networked; dis-intermediated and non-toxic form operating 'not for loss' rather than 'for rentier profit'.

As for theories: I believe in getting to practical applications, and that is precisely what I am doing.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Oct 17th, 2010 at 09:01:48 AM EST
[ Parent ]

I am outsourcing a competence (4.00 / 3)

What I do is a job that needs to be done in any case between a project developer and its lenders. In normal times, that competence is required within the developer and within the banks, and they don't need to hire external help (developers may outsource this occasionally).

The market I jumped to work in is quite unusual in that the sector-specific competence is still very scarce (it's a new industry, and precedents are few) and the syndication market being still dead, you need to have it in many banks simultaneously to get a deal to happen (as you need many lenders upfront, instead of the usual practice of negotiating just with one, which syndicates later on). And not many banks have it today. So what I do is work on the sponsor side to structure a deal that enough banks can accept, because the banks are, today, not able to structure a deal together on their own.

This will not last. Banks will build up the experience and internalize the competence. The coordination role will become less necessary as underwriting capacity comes back on the market.

In any case, banks are needed just as before to do the actual lending - the money is not found elsewhere.

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sun Oct 17th, 2010 at 10:44:28 AM EST
[ Parent ]

Re: I am outsourcing a competence (none / 1)

Jerome a Paris:

This will not last. Banks will build up the experience and internalize the competence.

I think you may be overly pessimistic here. There are an increasing number of niche banking service providers who will IMHO continue to thrive, and I suspect banks may often prefer to use them, rather than training new boys, and then losing them to the next new market entrant with a big cheque book....

Jerome a Paris:

In any case, banks are needed just as before to do the actual lending - the money is not found elsewhere.

I find very useful the distinction - made by the Scottish Futures Trust in their submission to the Scottish Government's recent Independent Budget Review - between high risk; short/medium term financing of development of productive assets; and low risk; medium/long term funding of completed assets.

I believe - in my Utopian way - that there are literally trillions of dollars currently earning negative real returns on T-Bills, Gilts etc, and whose owners would be only too pleased to fund energy assets by direct investment in their pools of production, were the means available.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Oct 17th, 2010 at 11:48:24 AM EST
[ Parent ]

your distinction exists (4.00 / 2)

between entities willing to finance operating assets, and those willing to take the construction risk by providing funding prior to completion of the project.

And indeed, like in onshore wind, you will see pension funds and other low risk, long term investors coming to hold offshore wind assets, which provide stable revenues over very long periods. But they are not here yet (apart form a couple of deals) because the industry is in its infancy and cannot yet demonstrate the risk profile these investors need.

Even construction risk, which will be borne by project finance banks (and of course, by equity investors) is still difficult to finance, because the risk is so little understood.

And banks cannot externalise the risk analysis - and they shouldn't, as that is what is their core business. And in project finance, they take the job seriously and do it well. But these are conservative times, and it is difficult to get banks to commit to new sectors with no track record, especially as they are asked to take more risk than in other industries (other project finance sector either have construction guarantees by strong sponsors like oil companies, or turnkey construction contracts with very large contractors; here you have multiple contracts with no sponsor guarantees, and higher intrinsic risk due to the weather complication of building offshore).

So yes, there will be room for advisors on the project side, but banks are indispensable, and they need to have the competence in-house, otherwise they cannot approve the loans, and nobody else will provide them

Wind power

by Jerome a Paris (etg@eurotrib.com) on Sun Oct 17th, 2010 at 11:59:27 AM EST
[ Parent ]

Re: The Great Unravelling (4.00 / 2)

With such an hypothesis, even current capitalism would work.

:D

The Fates are kind.

by Gaianne on Sun Oct 17th, 2010 at 08:23:36 PM EST
[ Parent ]

Re: The Great Unravelling (4.00 / 3)

JakeS:

Absent a consistent external enforcement framework, nobody ever has an incentive to hand over information, goods or other resources without immediately receiving something of equal value in return.

That's much too general. A system based on personal or in-group trust is perfectly workable. An externally enforced framework only becomes necessary in relationships that go beyond that.

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter

by generic on Sun Oct 17th, 2010 at 08:32:57 AM EST
[ Parent ]

Re: The Great Unravelling (none / 1)

generic:

A system based on personal or in-group trust is perfectly workable.

Especially with transparency among members.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Oct 17th, 2010 at 09:05:36 AM EST
[ Parent ]

Re: The Great Unravelling (4.00 / 2)

A system based on personal or in-group trust only works if you know everybody in the in-group in question personally. Which is a rather restrictive sort of clause to place on economic activity.

- Jake

Austerity can only be implemented in the shadow of a concentration camp.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Oct 17th, 2010 at 10:01:03 AM EST
[ Parent ]

Re: The Great Unravelling (4.00 / 2)

I don't think you quite have to know all members personally, but membership in the group would still be very restrictive. At least I don't see how you could scale such an arrangement to society size.

Von überall könnte das Volk, Urbrut alles Undemokratischen, Zelle des Terrors, über die gewählten Hüter von Wachstum und Wohlstand® kommen. - flatter

by generic on Sun Oct 17th, 2010 at 10:19:54 AM EST
[ Parent ]

Re: The Great Unravelling (none / 1)

ChrisCook:

When Mig has done his update, I propose to rejoin from the tangent, and demonstrate that it is possible to package up all of the terminally buggered up contractual relationships of the US real property system (and ours come to that) into a simple but radical and complementary new system.

I'll look forward to it with interest.

... But first, it will have to be shown that contractual relationships actually exist.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Sun Oct 17th, 2010 at 10:51:47 AM EST
[ Parent ]

Re: The Great Unravelling (none / 1)

dvx:

.. But first, it will have to be shown that contractual relationships actually exist.

Indeed it will have to be shown, but not necessarily 'first'.

When a 'Rental Pool' - which is the solution I advocate - is put together prior to the creation and issue to stakeholders of Units in the Pool, then it will be for the existing stakeholders in the relevant properties to prove they actually do have a right to become members of the Pool, and an entitlement to 'Units' in the usufruct of the stream of rental payments by Occupiers.

In the case of the Occupier, that membership is usually not in doubt, possession being - as it is said - 'nine tenths of the law'.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Sun Oct 17th, 2010 at 12:01:26 PM EST
[ Parent ]

Re: The Great Unravelling (none / 0)

I say "first" because if no contractual relationships exist, there will be less incentive to move toward any kind of alternative structure (absent external compulsion).

Before any solution can be reached, it has to be established who holds the notes.

The fact is that what we're experiencing right now is a top-down disaster. -Paul Krugman

by dvx (dvx.clt ät gmail dotcom) on Sun Oct 17th, 2010 at 05:14:02 PM EST
[ Parent ]

The Great Unravelling | 139 comments (139 topical, 0 editorial, 0 hidden)

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