Fri May 11th, 2007 at 04:00:46 AM EST
I thought I'd diarise and update this post re Central Banks in one of the post-Blair threads...
In the age of the Internet, banks - as credit intermediaries - are simply unnecessary: to borrow (while giving credit) John Gilmour's phrase.
"The Internet interprets Banks as Damage and routes around them".
"Peer to peer" lending mechanisms such as www.zopa.com, and www.prosper.com demonstrate this trend empirically, but are a threat to Credit Unions, not Banks, since they do not act to create new credit = money, but rather to "invest" / lend existing money
Anyway: let's have a closer look at credit, money and Central Banks.
Firstly, let's consider the "unsecured" credit circulating in the economy: our "working capital", if you will.
There is no need for a Central Bank to create credit/ deficit-based Money. In Hong Kong there is no Central Bank, but there is a Monetary Authority overseeing the creation of interest-bearing credit by private Banks
I advocate a different structure: ie a national Treasury issuing the necessary credit with a Government Guarantee under the management of "Credit Managers formerly known as Banks" under the overall supervision of a Monetary Authority.
No interest is payable in this model for the use of credit - which after all costs nothing to create - but a provision would be made into a default fund backing the Guarantee, together with an administration charge to the managers.
In other words, Banks cease being credit intermediaries putting Capital at risk and instead do not risk a penny of their Capital to back loans and become service providers
Secondly: lets consider "investment".
Currently our "equity" investment in our homes is not actually an "investment" - loans are not investments -it's secured credit created through mortgage loans. This credit created by Banks and Building Societies - over 70% of money supply - isn't actually circulating, but is "locked up" / invested in land and Bricks & mortar.
Such "static" credit inflates asset prices for sure, but cannot inflate retail prices, since it is not money in circulation. The failure to make the distinction between secured and unsecured credit is IMHO what disconnects "Monetarism" from the "Real World" and makes it the complete bollocks it is.
My case is that it is possible for residential property "Occupiers" to invest in properties simply by:
(a) buying shares in a Company that owns property (eg www.opromark.com) - an ingenious (and again peer to peer), mechanism but clumsy, impractical and unscaleable;
(b) by putting property freeholds in trust, and either "unitising" rentals in a "Trust" wrapper (similar to Canadian Income Trusts) or "partnerising" by using a simple new partnership-based legal wrapper such as the US LLC or UK LLP to create proportional "Equity Shares" in rental streams.
The result of the latter is essentially a new - simple - form of "Real Estate Investment Trust" or REIT.
Moreover, and equally importantly, the convention is that Governments must borrow to invest - and Gordon Brown's "Golden Rule" convention aims at managing such borrowing over an Economic cycle of infinite (politically decided) flexibility.
A Government may retain ownership of an asset; decide a reasonable (and probably index-linked) "Capital Rental" rate of return on these assets; package these revenues either by putting them into "Companies" (aka "privatising") "unitising" using trusts (clumsy) or "partnerising" them, and sell the resulting asset classes to pension funds gagging for index-linked revenue streams.
Since in such "asset-based" finance there is no need to repay Capital, merely to charge enough for depreciation/ maintenance of the asset (the land, for instance, that constitutes a large part of most such "investment" does not depreciate), the cost of finance to the "Capital User" "Occupier" is dramatically less.
Finally, where does the credit come from to invest in these assets? Simple. It's created interest-free by the Treasury under the supervision of the Monetary Authority, and with the Government retaining "Co-ownership" of the asset - particularly land - to back the Guarantee.
The outcome is essentially a new form of "National Equity" which would gradually come to replace most of the "National Debt" and give rise to a more rational ( UK LLP?) "Balance Sheet" than the crazy one we have - where UK Plc has no "equity" - and shows the mortgage on its books, but not the house...
Implementation of a rational - disintermediated - Capital and Monetary system like this is the "Opportunity" but it is not yet lost, it's yet to be tried.....