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What if instead of having to pay interest, the debt was serviced by 75% of the revenue net of operating costs?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 05:15:37 PM EST
[ Parent ]

What do you mean by "serviced"?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 05:16:25 PM EST
[ Parent ]

The same as you do:

60% will be used to cover finance costs (that would be 75% or more of money remaining)
...
some years, you have no money left after debt service.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 05:23:33 PM EST
[ Parent ]

That's possible, but of that amount of money, you'll first allocate funds to pay interest (payment for the rental of money) and then to repay whatever you can of the loan.

That's very much a possible structure. You still pay interest.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 05:26:24 PM EST
[ Parent ]

What Chris is getting at is doing away with the debt contract, meaning that if you want to talk about interest and principal in your accounting you can do that but 1) there is no obligation to pay more than (say) 75% of the net revenue over the life of the project and no penalty if the total revenue doesn't pay for the loan and interest; 2) the 'lender' still gets his 75% of the net revenue even after the loan has been fully paid, if this happens early. I suppose what this means is that all there is is a rate of return that you can calculate a posteriori, and that it may be larger or smaller than the interest rate set a priori.

As in the case of a loan, the bank would not own the assets, it would just be a capital partner.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 05:35:51 PM EST
[ Parent ]

And in the case that the project doesn't work out, what happens to the bank's money?

by Colman (colman at eurotrib.com) on Tue Nov 7th, 2006 at 05:38:22 PM EST
[ Parent ]

The same as would happen if the bank's money was in the form of debt instead of equity: the bank doesn't get it.

If the project defaults and the bank is owned debt, the bank presumably gets any remaining assets ad liquidates them for cash. Now, either the assets are worth something, in which case the default brought about by debt is actually an economic evil and allowing the enterprise to cntinue functioning would generate more money for the bank; or they are worth nothing in which case what benefit does the bank derive from getting the assets in case of default?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 05:51:54 PM EST
[ Parent ]

Why do you presume that banks liquidate the assets? Do you actually have any idea of how project finance banks work?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 06:03:31 PM EST
[ Parent ]

I was under the impression banks are generally not interested in owning any assets.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 06:06:33 PM EST
[ Parent ]

Do you actually have any idea of how perception works?

You can't be me, I'm taken

by Sven Triloqvist on Tue Nov 7th, 2006 at 06:08:23 PM EST
[ Parent ]

Re: Being the grinch (4.00 / 2)

it's not exactly so simple as this. i know in europe there's not as much asset-backed securitization going on (though clearly more and more of it, i was in it in the beginning of my finance career and was getting recruited quite a lot a couple of years back to get back into it), but on this side of the pond, theoretically of course, the bank bundles these cash flows and in turn sells them, eventually (though not necessarily directly) to the market.

typically, they'll tranche the cash flows up so that the duration of the cashflows (when the cash can be expected by the investor) can be estimated and staggered depending on the needs of various investors (insurance companies like long durations on down to fund managers looking for shorter ones for the cash and equivalent parts of their portfolios)

these flows are also priced according to the varying degrees of certainty of those flows, both in terms of size and predictability of the duration, thus you get Jerome's recognition of the "act-of-god" nature of the wind accounted for priced in there.

not saying it's not possible to make the wheel rounder here, just laying down how the back office, and ultimately, the sell side portion of the transaction, is likely to look like.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Nov 7th, 2006 at 06:18:25 PM EST
[ Parent ]

Re: Being the grinch (4.00 / 2)

That effectively eliminates the concept of debt, and includes only equity in the project. Why would equity parties refuse to bring in banks, that accept limits on the income they get, if they are willign partners?

what you do not seem to get is that debt can be CHEAPER, overall, than equity, and thus equity providers can have, with the right structure, an incentive to use debt for a portion of the capital needed, as it improves their own return.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 05:38:55 PM EST
[ Parent ]

But the problem with debt is that it is about money while equity is actual wealth.

If the project generates more wealth than expected, who cares that debt would have been cheaper than equity? And if the project generates less wealth than expected, debt is a problem for everyone, lender and borrower, while equity wouldn't.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 05:48:06 PM EST
[ Parent ]

Re: Being the grinch (4.00 / 2)

strictly speaking, equity is not wealth so much is it is the market's estimation of future cash flows, in a suitably discounted present value, less debt.

debt isn't in and of itself bad, and in fact the transactions i'm thinking of that chris's scheme would lead to essentially take on the profile of debt, albeit with a different contractual arrangement.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Nov 7th, 2006 at 06:21:55 PM EST
[ Parent ]

That effectively eliminates the concept of debt

That is Chris' whole thrust.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 05:48:44 PM EST
[ Parent ]

I know, but how is reducing your options good here?

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 06:04:05 PM EST
[ Parent ]

It eliminates the bad economic effects of debt on the downside.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 06:07:29 PM EST
[ Parent ]

And (none / 0)

it eliminates the good effects of debt in all other circumstances.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 06:22:46 PM EST
[ Parent ]

Re: And (none / 0)

Which are?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 06:27:46 PM EST
[ Parent ]

Re: And (4.00 / 2)

Building windfarms, for one!

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 06:30:02 PM EST
[ Parent ]

Re: And (none / 0)

Why can't that be done with equity rather than debt?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 06:31:07 PM EST
[ Parent ]

Re: And (none / 1)

because the return on equity is not good enough.
Debt requires much lower returns (thanks precisley to the fractional nature of reserve-based lending, which allows you to in effect multiply by 12 the return on the bank's capital at risk, thus allowing banks to require lowish margins - 1% instead of the 10-15% return required on equity

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 06:43:04 PM EST
[ Parent ]

Re: And (none / 0)

As there are no free lunches, what is the catch?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 06:46:07 PM EST
[ Parent ]

Re: And (none / 1)

banking crises.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 06:50:32 PM EST
[ Parent ]

Re: And (none / 1)

Hence the "economic evils caused by debt on the downside".

This is an example where each debt transaction may be good and rational for everyone involved, and for society at large, but the debt system as a whole is destructive. The difference between macro and micro, between individual and collective behaviour.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 06:55:21 PM EST
[ Parent ]

I know what you mean (none / 0)

but i'm telling you from the inside that you have reasonable lending practices and insane lending practices. One should not be forbidden because of the other.

Maybe a solution would be for bankers involved to be forced to put a chunk of their money in any deal they get their bank committed to... That would focus minds (or, more likely, would generate an industry to get around the requirement)

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 06:59:24 PM EST
[ Parent ]

Re: I know what you mean (none / 0)

I know there are reasonable and insane lending practices. I see it all around me with the London property bubble.

Maybe a simpler solution would be to simply abolish debt? Just like progressive taxation with lots of loopholes creates an industry to get around it and may end up being less progressive than a simple flat tax with an exempt minimum and no loopholes.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 07:09:39 PM EST
[ Parent ]

Re: I know what you mean (4.00 / 3)

Why abolish debt when there is a new alternative available that works better?

Keep the land in trust, and bring in investors in the future rentals of the property which their investment in money (or money's worth" of "sweat equity") makes possible.

The Occupiers become "co-owners" and rent not the Land, but the Capital invested in the Land.

The Hilton group did almost exactly this in a £350 million deal four years ago. They did not borrow against a mortgage, and create a debt with a capital repayment/interest overhead. Nor did they enter into a sale and leaseback and create a rental overhead.

They entered into a 27 year revenue sharing agreement through a Capital Partnership LLP, so that if the Hilton has a good year, so do the financiers.

Why? Probably because having seen revenues collapse post 9/11 they wanted to share the risk a bit.

This is something entirely new, guys, it's that simple.

But debt it ain't.

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

by ChrisCook (cojockathotmaildotcom) on Tue Nov 7th, 2006 at 07:21:12 PM EST
[ Parent ]

Re: And (none / 1)

This somehow reminds me of Mr. Cringley's comment about dot.com millionaires. He said something like, "People expect them to be philanthropists, but a lot of them are just in it for the money, and why shouldn't they be?"

It put me right off him. I still don't understand the, "I'm worth a million, and I wanna be a skinflint tightarse rip-em-off-if-I-can type-a person, and so what?"

I know they exist (and they are legion!), but it's just they have an urge to separate from other humans, and bugger their misery (coz they are miserable when they're not satisfying their Id, is my opinion--those that have the money; and they don't give a bugger about misery created elsewhere by their activities--making money primary--Chris's point about money only existing as a means of value transfer at the point of transfer--banks as holding stations, adding time-value...as he says, a holding postion (a value in its own right and for which bankers should be paid)... but a holding position if there is a lag between value in and value out.

(You can see why I'm not a banker!)

My point is, maybe, that although it's easier for banks to make money with debt, why should banks be about making money? I know, they're banks, but they could be custodians of abstract value (did I get that right?), holding our potential value until we can exercise it, rather than enterprises for maximising profit--which is an unsustainable game? (It doesn't have a renewable energy source? It is coal mining not wind gathering?)

Don't fight forces, use them R. Buckminster Fuller.

by rg (leopold dot lepster at google mail dot com) on Tue Nov 7th, 2006 at 07:33:59 PM EST
[ Parent ]

Grrrr (none / 1)

although it's easier for banks to make money with debt, why should banks be about making money? I know, they're banks

NO, NO, NO. The point is that investors make more money if they borrow some of the funds they invest. Banks earn little, that's the whole point.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Nov 8th, 2006 at 02:24:13 AM EST
[ Parent ]

Re: Grrrr (none / 0)

Banks earn little, that's the whole point.

Ah yes. The banks are investing the investors' money to make a profit for the investors.

HSBC has revealed a 37% rise in pre-tax profit to £9.6bn ($17.6bn) for 2004.

The UK's big five banks are expected to unveil combined profits of at least £32bn - more than the gross domestic product of Luxembourg - during the current reporting season.

(both quotes from the BBC)

The banks make money by charging interest on loans. The investor is...the shareholder in the bank? The profit goes to...the shareholder?

So the investors are the owners of the bank...so when I say "Why should banks be about making money?" maybe I'm being silly. Banks are about maximising returns for shareholders...(aka investors)

Maybe I'm understanding Chris's point a bit better now. Banks create debt beyond their capacity to pay--shareholders couldn't cover all loans--but make money from this not-actually-existent money...

Am I getting this all wrong?

(Asked in all honesty.)

Don't fight forces, use them R. Buckminster Fuller.

by rg (leopold dot lepster at google mail dot com) on Wed Nov 8th, 2006 at 04:13:43 AM EST
[ Parent ]

Re: Grrrr (4.00 / 4)

I was a Director of an Exchange, and yet in all innocence I thought that Banks take in Deposits and then lend them out again, and make money on the difference.

They do not, although it suits Bankers that people should believe this (as the vast majority, if asked, actually do): that is what Credit Unions do.

What Banks actually do is to create Credit as a multiple of their Capital base. This credit is new, freshly minted, Money, and is deposited in the system.

Banks therefore multiply the amount of interest they pay out, the amount of interest they receive and therefore the profits they make for the providers of their Capital - the Investors.

In my view this mechanism is both morally wrong and one of the principal causes of global warming through the Economic Growth it mandates.

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

by ChrisCook (cojockathotmaildotcom) on Wed Nov 8th, 2006 at 04:31:24 AM EST
[ Parent ]

Re: Grrrr (4.00 / 2)

Of course. Banks only earn money on the difference between what they pay out on the deposits they have created and the interest they receive on the loans they have created. Plus the charges they gouge as well.

It is this "gearing" which causes asset price inflation, and, coupled with the Institution of "private property" in "Commons" such as Land, leads to the transfer of "wealth" from the many to the few.

"Fractional Reserve" credit creation by Banks is not only morally wrong (as Islam alone continues to recognise, Christianity having forgotten), but is also driving the economic growth which is leading the world down the tubes.

You just can't see this, can you, Jerome? In every other way I admire what you are doing, but IMHO you are doomed to failure unless you address this fundamental basis of the global economy.

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

by ChrisCook (cojockathotmaildotcom) on Wed Nov 8th, 2006 at 04:20:45 AM EST
[ Parent ]

Re: Grrrr (none / 1)

Not only Cristianity has forgotten, but I have personally forgotten Christianity. I hope you are not advocating a return to religious morals as a cure for our economic woes?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Wed Nov 8th, 2006 at 04:24:54 AM EST
[ Parent ]

Re: Grrrr (4.00 / 2)

A plague on all organised religions.

But there are certain Values which underpin all religions.

When I set out to make sense of the emerging "enterprise model" I talk about, it intrigued me that what appears to be, if not an "optimal" model, then certainly an improvement, is also consistent with the Values which underpin all religions, as far as I know.

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

by ChrisCook (cojockathotmaildotcom) on Wed Nov 8th, 2006 at 04:38:13 AM EST
[ Parent ]

Re: Grrrr (none / 0)

I don't have a religion: do those values underpin my moral system, too?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Wed Nov 8th, 2006 at 04:40:47 AM EST
[ Parent ]

Re: Grrrr (none / 1)

You tell me. I know the Principles upon which I try to live my life, and presumably you operate according to your own Principles.

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

by ChrisCook (cojockathotmaildotcom) on Wed Nov 8th, 2006 at 05:04:51 AM EST
[ Parent ]

Re: Grrrr (none / 0)

What are the specific Values which are compatible with your model and incompatible with debt? You have just described them as "underpinning all religions".

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Wed Nov 8th, 2006 at 05:10:57 AM EST
[ Parent ]

Re: Grrrr (none / 0)

"Fractional Reserve" credit creation by Banks is not only morally wrong

I'm sure I'm asking you to reiterate a point you've already made, but why morally wrong?

by Colman (colman at eurotrib.com) on Wed Nov 8th, 2006 at 04:32:25 AM EST
[ Parent ]

Re: Grrrr (none / 0)

Chris is adopting the pre-renaissance "usury is immoral" position.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Wed Nov 8th, 2006 at 04:39:34 AM EST
[ Parent ]

Re: Grrrr (none / 1)

I think it is morally wrong to exchange something Value-less for something of Value. Bank-created Money is for the most part value-less. Counterfeiting is morally wrong for the same reason.

Concerning "usury" I think the key moral element there is not that there should be a return on Capital invested (ie interest) but is the fact that risk and reward are not shared ie the lender is entitled to both a return ON capital and a return OF capital whether the borrower is able to pay, or not.

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

by ChrisCook (cojockathotmaildotcom) on Wed Nov 8th, 2006 at 05:14:42 AM EST
[ Parent ]

Re: Grrrr (none / 0)

So it's immoral for me to hold a savings deposit account in a bank?

by Colman (colman at eurotrib.com) on Wed Nov 8th, 2006 at 05:17:42 AM EST
[ Parent ]

Re: Grrrr (none / 1)

I believe that the current practice of lending at interest is immoral, yes, because of the failure to share risk and reward.

But there is nothing morally IMHO wrong with a return on an investment, and there is no reason why "Investment Institutions formerly known as Banks" should not exist which allow you to obtain a reasonable return on your investment in (say) local property rental streams.

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

by ChrisCook (cojockathotmaildotcom) on Wed Nov 8th, 2006 at 05:31:14 AM EST
[ Parent ]

Re: Grrrr (4.00 / 2)

Banks only earn money on the difference between what they pay out on the deposits they have created and the interest they receive on the loans they have created.

This is not even correct. Banks borrow on the market most of the money they lend, and only earn income on the margin they charge. Many banks do not have deposits (it's true that those that do have a big financing advantage)

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Nov 8th, 2006 at 05:13:38 AM EST
[ Parent ]

Re: Grrrr (none / 1)

Ok. But the Money you "borrow on the market" is another Bank's Deposit with you, isn't it, (and constitutes Money freshly minted by THAT Bank.

Freshly minted Money created as Loans is re-Deposited back into the system. That is how it works isn't it?

The aggregate of loans, and the aggregate of deposits has to balance across the system - simple book-keeping.

You are merely distinguishing between Chris Cook depositing money with you and the Bank of Utopia depositing Money with you. Naturally it's more profitable to you if I do, because you pay me bugger all.

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

by ChrisCook (cojockathotmaildotcom) on Wed Nov 8th, 2006 at 05:23:09 AM EST
[ Parent ]

Re: Grrrr (none / 0)

"Fractional Reserve" credit creation by Banks is not only morally wrong (as Islam alone continues to recognise, Christianity having forgotten), but is also driving the economic growth which is leading the world down the tubes.

I don't see how it's morally wrong. It's riskier than lending only money you actually have, but not more than fiat money printed by governments is. Are you suggesting a return to integral currency boards backed by gold (or, presumably, by oil - but how a commodity that's mostly burned can be used as a store of value beats me). That's horribly constraining.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Nov 8th, 2006 at 05:17:21 AM EST
[ Parent ]

Re: Grrrr (none / 1)

Re-reading our discussion I realised that you have actually explained that banking system crises are an unpriced externality of the debt system.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Wed Nov 8th, 2006 at 05:19:57 AM EST
[ Parent ]

Re: Grrrr (none / 0)

When you say it's riskier, who bears the risk?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Wed Nov 8th, 2006 at 05:23:04 AM EST
[ Parent ]

Banking crises (none / 0)

In the past, it used to be the shareholders of the bank, and then the clients of the bank, and in the worst cases other banks that lent to the bank.

The systemic risk was deemed so high that public insurance is de facto provided to avoid banking crises, the corollary being much more stringent regulation of what banks can and cannot do.

But there are two ways to regulate banks - (i) direct supervision of their lmnding activities and (ii) indirect regulation of their lending volume via the cost of refinancing.

Hmmm. This would be worth a new diary.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Nov 8th, 2006 at 05:29:50 AM EST
[ Parent ]

Re: Banking crises (none / 1)

It is an unpriced externality. If the banks had to contribute to a sufficient insurance fund out of the proceeds of their lending, we wouldn't be talking about debt being 12 times cheaper than equity and society taking the risk of this 12x leveraged bank operation.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Wed Nov 8th, 2006 at 05:35:46 AM EST
[ Parent ]

Re: Grrrr (none / 1)

Forget currency and forget currency boards. You are still basing your thinking on Money created by banks (ie deficit-based) but BACKED by (a claim over) something of Value.

Banks are no longer needed as Credit intermediaries. That is the logic of the combination of the disintermediating "peer to peer" (cf www.zopa.com)effect of the Internet, and the Guarantee Society / Clearing Union concept.

There is no reason why national Treasuries should not create credit directly rather than to utilise the banking system as an expensive intermediary between the Treasury and the Taxpayer. You do need a Monetary Authority in such a model though.

(Hong Kong has no Central Bank, but it does allow commercial banks to create the Money under bthe oversight of a Monetary Authority)

Energy - a "petrodollar" - could be a fungible global "Value unit" for sure.

But it is only a small fraction of Value in circulation globally. The majority of Money in circulation (>70% in the UK, I believe) is "deficit-based", but "property-backed" and was created as mortgage loans.

The solution I advocate is to unitise land and property rentals using the "Capital Partnership" structure and these units would then become a form of value in circulation.

This will happen gradually anyway, I think, because the "Capital Partnership" mechanism is an optimal form of "Equity Release" (in the UK there is over £1 trillion in property owned free of mortgage by over 65's).

The commercial opportunity for Banks is to bring together investors in those properties with investments.

John Law got it mostly right in 1705 when he advocated land rental backing for money. Unfortunately he buggered up the implementation in France with the Mississippi Company , but then, if he hadn't, the French would probably still own a third of the US.

Funny old world...

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

by ChrisCook (cojockathotmaildotcom) on Wed Nov 8th, 2006 at 05:50:27 AM EST
[ Parent ]

Re: Grrrr (none / 0)

If 12x more money is needed for investment than is available (as Jerome claims) this gives us an idea of the amount of equity-money that would need to be created to maintain the current level of investment and the current level of return on investment. With interest rates effectively at zero (as the money wouldn't be created by means of debt and there wouldn't be a need for a base rate to control the evel of debt indirectly) lower return rates would become viable, so maybe the 12x multiplier would be reduced to, say, a 6x multiplier?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Wed Nov 8th, 2006 at 05:54:59 AM EST
[ Parent ]

Re: Grrrr (none / 0)

investors make more money if they borrow some of the funds they invest. Banks earn little

At the risk of banking crisis from debt overextension.

You have also said the banks are themselves highly leveraged (by the fractional reserve multiplier).

Without debt you have

investors making less and banks the more (but without leverage) on the upside
none of the headaches [also for the lender] of default on the downside
no social risk from bank default
possibly a lower aggregate level of investment [flip side to 3)]

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Wed Nov 8th, 2006 at 04:28:07 AM EST
[ Parent ]

No (none / 0)

Not correct. Tha banks will need a larger fraction of the revenues of the investment to make a revenue similar to what they had - because they need to put up a lot more capital in the project than we fractional reserves requirements. So banks will make the same, but investors will make a lot less (and will nto go ahead with the project).
Not true. The default risk is linked to whether the project makes income or not, not to how it's financed.
True.
Yeah. A LOT less. You're talking dividing lending levels by 12, and then shrinking investment a lot more as a lot of investment propositions become unprofitable with the bigger chunk of profits required by banks.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Nov 8th, 2006 at 05:25:30 AM EST
[ Parent ]

Re: No (none / 0)

True, I got mixed up between the amount the baks make, which is the same, and the fraction of the total income which goes to the bank, which is more.
How does "defult" work? If you don't have an obligation to pay other than a share of revenue and there is no revenue there is no obligation to pay and so no need to "default". If you have an obligation to pay debt that you can't meet now you may have to "default" even if there is a likelyhood of future revenue.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Wed Nov 8th, 2006 at 05:33:27 AM EST
[ Parent ]

Default (none / 0)

It would not be a "default", but someone would still be losing money.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Nov 8th, 2006 at 08:17:31 AM EST
[ Parent ]

Re: Default (none / 1)

Is not having a "default" not a benefit, given the same monetary losses?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Wed Nov 8th, 2006 at 08:37:47 AM EST
[ Parent ]

Re: Default (4.00 / 2)

Sorry to say it: it depends.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Wed Nov 8th, 2006 at 02:59:36 PM EST
[ Parent ]

Re: No (none / 1)

Putting together 1 and 4, Banks would also have to settle for a lower return on investment generally, and so the reduction in investor returns in part 1) wouldn't be as large. This is about the return rate, not the level of investment which might well be cut by a factor of 12 as you say.

Where is our resident Keynesian macroeconomist Drew when we heed him? Is that damn election over yet? </snark>

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Wed Nov 8th, 2006 at 05:40:30 AM EST
[ Parent ]

Re: And (none / 1)

I'm not sure they're eliminating debt, it's more that the debt is secured with future energy flows, not debt flows. essentially, a debt/barter deal. maybe i'm over-simplifying, but that's where i see this going.

i'm thinking like 4L's for coffee.

barter deals are an accountant's paradise. the magic of hidden reserves made easier by alternative economics...

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Nov 7th, 2006 at 06:31:25 PM EST
[ Parent ]

Re: And (none / 0)

i mean, "not cash flows

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Nov 7th, 2006 at 06:38:07 PM EST
[ Parent ]

Re: And (none / 0)

They are.

I will not finance windfarms for electricity, and nor will the turbine manufacturer.

Barter is hideously complicated to manage.

Debt is a great invention. Like all things, it is good in moderation. Thus the need to strictly regulate banks and keep them on a leash, but not to prevent them from doing their job. and thus the need to keep money relatively expensive (i.e. valuable relative to assets) to avoid to fuel asset bubbbles and irrational exuberance.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 06:46:01 PM EST
[ Parent ]

Re: And (4.00 / 4)

The true sources of Credit - or "Time to Pay" - are the Individual, and the Enterprise.

There is no reason why any charge should be made for this "trade" credit, since it costs nothing per se.

Barter systems are not difficult, or "hideously complicated" - they are dead simple.

Just look at the Swiss WIR, or proprietary systems such as Bartercard and Ozone.

However, a charge for the operation of a barter-based mutual credit system, and a provision into a default fund, are quite reasonable ,and Banks would fulfil a valuable function if they operated as managers of such a system.

But they do not. Banks operate as a (no longer necessary) credit intermediary They create Debt as a multiple of their Capital base, in line with Basel requirements. In my view such credit manufacture is to all intents and purposes equivalent to counterfeiting. If I did it, I would be arrested.

There is no need to keep money "expensive" - because it simply has no "cost" beyond system administration and defaults. What IS necessary is to prevent Banks from creating debt as a multiple of their Capital base since it is the largely Value-less nature of Bank credit that is in fact the cause of asset price inflation.

The other cause of inflation is not "monetary" but "fiscal" - ie when Governments have their Central Banks print Money not backed by taxation revenues.

Debt is a great invention for the transfer of wealth to the few, and the impoverishmant of the many, particularly when combined with the institution of "Private Property" in "Commons" such as Land and Knowledge.

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

by ChrisCook (cojockathotmaildotcom) on Tue Nov 7th, 2006 at 07:04:40 PM EST
[ Parent ]

Re: And (none / 1)

Debt is a great invention.

Is there a way to have debt without creating money as a side effect?

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 07:37:20 PM EST
[ Parent ]

Yes (none / 0)

Don't put the monkeys in charge of the banana plantation!

Debt is a contract wherein the renter (borrower) agrees to return the money (principle) and to paying a stipulated fee (interest) for the use of money over the life of a loan.

Nowhere in this transaction is there a neccessary creation of money.

She believed in nothing; only her skepticism kept her from being an atheist. -- Jean-Paul Sartre

by ATinNM on Fri Nov 24th, 2006 at 05:07:51 PM EST
[ Parent ]

keep up the good thoughts, original thinking is sorely needed.

this being said, debt isn't all bad. at the very least, if we're running the central bank and the government, we can always inflate our way out of it, eh Jérôme?

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Nov 7th, 2006 at 06:23:48 PM EST
[ Parent ]

No, we can't, the central bank's duty is to maintain inflation more or lest constant.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 06:28:33 PM EST
[ Parent ]

that's what the current central bank's role is.

that's not necessarily what a good central bank, accountable to all of its citizens, would assume.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Nov 7th, 2006 at 06:32:26 PM EST
[ Parent ]

That was just a snark about your recurring debate with Jerome on the ECB ;-)

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 06:36:34 PM EST
[ Parent ]

The problem (4.00 / 2)

is not debt, but excessive debt, that puts an unsustainable burden on otherwise sound businesses. That comes from irrational exuberance on the part of the banks, and of the investors (who always lose their money before the banks do).

We are clearly at a point today when lenders are doing crazy, unreasonable things, and they will get burned. The problem is not debt, but putting too much debt against a given asset - a more complex way to overpay for something.

The problem is that a bank losing money can trigger an economy-wide crisis. That requires smart regulation. The problem is that we have had insane monetary policies at the Fed, which has refused to recognize asset bubbles, and has fed the exuberance with much too low interest rates. The issue is not debt, but bad regulation and bad monetary policy.

Thus my tendency to err on the hawkish side. Money becoming too valuable can sometimes be a problem (but that's one which is easily solved by "printing" more); money being depreciated by lax monetary policy brings inflation or worse, asset bubbles that inevitable translate into bank crises.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 06:29:16 PM EST
[ Parent ]

We are clearly at a point today when lenders are doing crazy, unreasonable things, and they will get burned.

No, they will get bailed out when they should get bought out and made to work in the public interest.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 06:32:19 PM EST
[ Parent ]

oh they get bailed out, but they still get burnt. a generation of bankers is wiped out - sure, a new one comes in its place, but it is a new generation.

and they start planning how to avoid that crisis again.

Again, the problem is that money is left to be too soft for too long by the regulator.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 06:40:45 PM EST
[ Parent ]

Re: The problem (none / 1)

heh, and if they run cl in the '90's, they create their own crises, but mostly the taxpayer gets burnt.

The Hun is always either at your throat or at your feet. Winston Churchill

by r------ on Tue Nov 7th, 2006 at 06:44:06 PM EST
[ Parent ]

The CL had the same problems as the other banks, just on a slightly larger scale. The others were able to hide it, not the CL (also for political reasons - this was Beregovoy's toy; the problem is that his suicide prevented to make a decent accounting of what happened because it had become impossible to blame him what what the CL did. Again, it was a regulatory problem, with the fireman encouraging the criminal to burn stuff).

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 06:48:26 PM EST
[ Parent ]

It is always possible to find a posteriory causal chains and present them as responsible for the collapse even if when the collapse is a systemic phenomenon.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 06:53:13 PM EST
[ Parent ]

Re: The problem (4.00 / 2)

That's not good enough.

The outgoing generation of bankers already reaped the 7-digit performance bonuses and fed the asset bubbles, and then when they caused an economic meltdown they were protected by limited liability. They lost their jobs but they retained their wealth, and the people damaged by the recession don't get anything back.

And the new generation of bankers will learn how to win the last war and embark into another cycle of lending, get intoxicated with their own success and become careless and irresponsible lenders all over again, but as they will be using newly developed exotic financial instruments all their safeguards will fail to work like they did for the previous generation of bankers.

Lather, rinse, repeat.

Buyouts not bailouts.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 06:51:08 PM EST
[ Parent ]

Oh I agree (none / 1)

but that gets us back to the political context which makes money the overriding value in society, and the ability to generate money in the short term the most valuable skill; and the pressure that puts on regulators to tolerate transactions that artificially boost short term monetary gains at the expense of the long term.

Blame not the instruments, but those that abuse them, and those that tolerate the abuse when they could put a stop to it. Just like physics should not be blamed for atomic bombs.

In the long run, we're all dead. John Maynard Keynes

by Jerome a Paris (etg@eurotrib.com) on Tue Nov 7th, 2006 at 06:56:35 PM EST
[ Parent ]

Re: Oh I agree (none / 1)

I am still not convinced that money creation through debt is appropriate.

To me it seemed like an unintended consequence. When people had asset-backed money and didn't really understand economics as we do today, debt just created inflationary pressures. Then the banks, who were the source of the problem, where asked for a solution and they institutionalised their practises by inventing fiat money, fractional reserve banking and the theory of money creation through debt.

The difference between physics and economics is that in economics we have a measure of control over the rules of the game.

Those whom the Gods wish to destroy They first make mad. -- Euripides

by Carrie (migeru at eurotrib dot com) on Tue Nov 7th, 2006 at 07:02:29 PM EST
[ Parent ]

There is not time left for another such cycle. This time the bailout will collapse government treasuries throughout the western world. Then Peak Oil. Then the Warming. Then global quasi-war condition with stray nukes, resource conflicts between major powers, civil wars in the most populous nations, etc... (aka Peak Human Population).

I just don't think the illusion of monotonous "progress", and "growth", will hold in the next generation of minds. I'm not even sure the level of regulation of economies and the restrictions on civil liberties will allow such things as stock and bond markets.

Pierre

by Pierre on Fri Nov 24th, 2006 at 04:00:11 PM EST
[ Parent ]