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Firstly, I don't see why Treasury credits should not be avalable to any and all business, at a price reflecting their specific risk as assessed by the bank-as-service-provider.

Any "OTC" bank credit creation outside the system would necessarily be more expensive than comparable bank-serviced loans.

So why would anyone wish to enter into such "OTC" loans?

They would both be more expensive (having additional bank profit built in, or why would they do it?), and without the Treasury guarantee....

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

by ChrisCook (cojockathotmaildotcom) on Fri Sep 26th, 2008 at 09:23:39 PM EST
[ Parent ]
I don't see how the system can be set up without some kind of limit on what the money can be lent for ... and that limit, wherever it happens to be, will end up with business on the opposite side of it. At the same time, there will be purchasing power created by the Treasury lending, which will be deposited in the banking system, and with banks relieved of capital requirements to lend within the Treasury-financed sector, they will have a source of funds to leverage in the out-of-Treasury-finance sector.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
by BruceMcF (agila61 at netscape dot net) on Fri Sep 26th, 2008 at 09:28:31 PM EST
[ Parent ]
As you point out, a hybrid system which leaves banks able to create credit would be riddled with difficulties,and therefore legislation would be needed preventing banks being anything other than deposit takers or service providers.

And of course turkeys don't vote for Christmas.  

The banking system is either disintermediated, or it isn't. Money is either an IOU credit object: or it's a relationship in which credit is an integral part.

Personally, I see no role for a Treasury as a middleman any more than I do a Bank either in public or private ownership.

The system I advocate, as I have long said, is in fact (a)"Peer to Peer"  "trade" credit - supported by a mutual guarantee etc etc on the one hand; and

(b) Peer to Peer direct investment through production/revenue sharing "Unitisation".

No legislation is needed for that model: people just have to agree to do it.

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

by ChrisCook (cojockathotmaildotcom) on Fri Sep 26th, 2008 at 09:46:59 PM EST
[ Parent ]
... legislation:
therefore legislation would be needed preventing banks being anything other than deposit takers or service providers.

This is a massive institutional change, and therefore will have massive unintended consequences.

Personally, I see no role for a Treasury as a middleman any more than I do a Bank either in public or private ownership.

The system I advocate, as I have long said, is in fact (a)"Peer to Peer"  "trade" credit - supported by a mutual guarantee etc etc on the one hand; and

(b) Peer to Peer direct investment through production/revenue sharing "Unitisation".

No legislation is needed for that model: people just have to agree to do it.

If its an incremental transition in activity, legislative and/or regulatory change will obviously be required to accommodate it, as it grows, but no, not necessarily as massive a change as outlawing banks from engaging in banking.

And of course, peer to peer trade credit and direct investment will not eliminate positive feedback loops that lead to credit cycles ... while it is certainly likely to lead to the breaking of some existing positive feedback loops, it will create new ones, and we will come across the adverse consequences as we experience our first peer to peer credit crises.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Sep 26th, 2008 at 10:00:07 PM EST
[ Parent ]

And of course, peer to peer trade credit and direct investment will not eliminate positive feedback loops that lead to credit cycles ... while it is certainly likely to lead to the breaking of some existing positive feedback loops, it will create new ones, and we will come across the adverse consequences as we experience our first peer to peer credit crises.

Positive feedback arises out of the deficit basis of the credit currently created ex nihilo by credit institutions.

If "Peer to Peer" trade credit, and peer to peer investment through "unitisation" of value such as energy and land rentals could lead to positive feedback loops then I would be interested to know how.

The instability of our system is caused by the deficit basis of credit creation: if you get rid of that deficit basis you get rid of the valueless credit that causes the feedback, and therefore the cycle.

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

by ChrisCook (cojockathotmaildotcom) on Fri Sep 26th, 2008 at 10:23:51 PM EST
[ Parent ]
... sweeping overall reform of the monetary system, so you kind of caught me by surprise suggesting what turns out to be outlawing banks engaging in banking operations as an immediate approach to sheltering the productive sector of the economy from the financial crisis.

You don't have any feedback on the diary itself, other than agreeing that its a solvency crisis rather than a liquidity crisis?


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Fri Sep 26th, 2008 at 10:54:51 PM EST
[ Parent ]
Mea culpa! I'm off on my hobby horse again, aren't I?

Of course I agree with you that this is a solvency crisis, and pointed out that a shortage of capital was the issue, several months ago.

And being the annoying person I am, I always then leap forward from diagnosis to the possibility of cure.

As a matter of interest, do you not agree that "sweeping reform of the monetary system" is necessary, or do you consider the existing deficit-based system can be fixed?

And if so, how?

Material for another Diary, maybe, on fixing the solvency issue?

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

by ChrisCook (cojockathotmaildotcom) on Sat Sep 27th, 2008 at 06:10:30 AM EST
[ Parent ]
... monetary system can be "fixed" is to my mind the regulation question. We by and large fixed it already, and private interests in pursuit of individual monetary gain succeeded in a six decade long project to strip out the solutions and re-break it.

It may be that is just the human condition ... the a different type of monetary system will have its own strengths and weaknesses under its own appropriate system of regulation, and its own way to break it in pursuit of individual monetary gain.

OTOH, if there are incremental steps toward that monetary system that can be used to accelerate development of a more sustainable economy, we'd want to adopt them in any event, since to worry about those problems that crop up three decades down the track, we have to get three decades down the track with a complex society intact.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Sep 27th, 2008 at 10:31:54 AM EST
[ Parent ]

... monetary system can be "fixed" is to my mind the regulation question.

But having correctly identified a shortage of capital (aka solvency) as the problem, how do you see us fixing that shortage?

It's the question of how credit is created based upon that augmented capital which is where the regulation comes in, surely?

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

by ChrisCook (cojockathotmaildotcom) on Sat Sep 27th, 2008 at 02:00:13 PM EST
[ Parent ]
... whether that is a shortage of assets or an excess of liabilities is a tangled questions, since one institutions liability is another institutions asset.

And even more, commercial banking solvency is the focus of this diary, though contract banks like general insurance firms are also at risk.

Now that we have all the investment banking in the hands of bank holding companies, by acquisition, reorganization, and downsizing, we can remove the distinction between bank holding companies and commercial banking operations and shift the focus of commercial banking regulation up to the bank holding company level.

And of course, since all the bank holding companies of threat to macroeconomic stability operate interstate, the Federal Government has broad powers to regulate their activity, over and above the carrot and stick of Federal Reserve regulation of state banks that are members of the Federal Reserve System.

I would really like to see government assistance to mortgages in trouble be used to establish a much more broadly based sector of not for profit community credit unions.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Sep 27th, 2008 at 02:45:49 PM EST
[ Parent ]
... whether that is a shortage of assets or an excess of liabilities is a tangled questions, since one institutions liability is another institutions asset.

We are in a zone here which I find particularly intriguing.

Finance Capital consists of "Twin Peaks" - the distinct and conflicting claims over assets of Equity and Secured Debt.

The claim of Equity is an absolute claim of "ownership" of productive assets of infinite/permanent duration and there is no obligation to repay - although there is the capability to do so.

The claim of Secured Debt on the other hand is a repayment obligation secured by a claim over productive assets, either of finite duration, or of indefinite duration at the option of the lender (secured overdraft).

These claims are in fundamental conflict.

Your proposal of a Public Preferred Share is one of many possible Debt/Equity hybrids in a conventional Corporation or Trust, and it is an interesting and innovative suggestion.

But the trouble is that if such a "Public Trust" is based upon Company or Trust law it will suffer from the "Principal/Agency" problem of a conflict of interest between "public owners" and "private" managers....in this case private managers who are perhaps the greediest and sharpest bastards on the planet.

Now, back in the leisurely days of the protracted negotiations involving UK's Northern Rock - and before HM Treasury quite rightly "bit the bullet" and nationalised it - I posted

Northern Rock Around the Clock

and the following sketchy suggestion for a "Northern Rock Partnership"


A Northern Rock Partnership?
No prizes for guessing what I think should be done instead. In my view, a fee should be paid by Northern Rock to the Government for the use of the guarantee into a "Default Pool", and this accumulating fee should form Equity ranking alongside that of the existing shareholders.

This could be accomplished by putting the assets into the hands of a Trustee/Custodian - where most assets are already (quite unknown to the beneficiary of the Trust - the Northern Down's Syndrome Association!), via the opaque "Granite" SIV.

An LLP could be used as a framework / Special Purpose Vehicle for what would be a revenue sharing "Capital Partnership" between Investors and Managers instantly recognisable to Islamic investors.

In this way:

(a) the risks and rewards could be shared equitably, which I would bet my bottom dollar they will not be in the bailout as proposed by Goldman;

(b) there could be a single asset class consisting of proportional "units" or "nth's" in Northern Rock's net revenues after a provision is made into the Pool.

I think that a "Capital Partnership" approach using an LLC as a framework might improve upon your suggested solution.

Imagine a "Resolution Partnership LLC" as follows.

(a) Custodian member - to which all of the assets are transferred;

(b) Investor member - consisting of a "club" of all of the individuals or enterprises (public and private) which have a claim over the revenues from the assets, whether Debt or Equity;

(c) Manager member - consisting of a "club" of the individuals and enterprises responsible for managing the Partnership.

The revenues are then divided into proportional (%age) Units, eg "billionths" and shared in agreed proportions:

(a) between Investor and Manager - inter Member sharing;

(b) amongst the Investor and Manager consortiums themselves - intra member sharing.

This Resolution Partnership LLC is not an "Organisation" as a "Trust" would be: it doesn't own anything; employ anyone or even do anything - it simply acts as a "chaordic" framework (to use Dee Hock's phrase in respect of Visa, which he founded) for the member stakeholders to sort this unholy mess out consensually and collaboratively.

The outcome is to create a single continuous hybrid of Debt and Equity - simple "nth's" in LLC revenues - if there are any - which I call "Open" Capital.

The new "Public" Equity arising from capital utilised would become Units in the LLC Units ranking alongside - and diluting - whatever Units are allocated to existing virtually "wiped out" Investors.

I believe that the key attraction of a Resolution Partnership LLC model is that the "Principal/Agency problem" no longer exists, because the interests of both Public Investor "owners" and Private greedy bastard management are genuinely aligned.

Moreover, the "continuity" of partnership capital ensures - I think - that liquidity and solvency essentially become the same thing.

 

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

by ChrisCook (cojockathotmaildotcom) on Sat Sep 27th, 2008 at 05:40:46 PM EST
[ Parent ]
Yes, principle/agent problems with Dodd's common stock warrant plan did enter into it.

The Senior Preferred shares are non-voting shares ... the resolution they make between the greed of the private equity owners and the interests of the public equity owners is that unless the private equity owners pay their dividend rate, their freedom to act in pursuit of private greed is severely curtailed.

However, on further reflection, I would adopt Dodd's warrant system ... except warrants on issue of additional Public Preferred Shares, and at 100%. So the firm that hands over illiquid assets that turn out to be sound when disposed of would only have the 50% Public Preferred Share holding to serve, while the firm that hands over illiquid assets that turn out to be worthless would end up with 100% of their bail-out in issue of Public Preferred shares.

If a firm goes belly-up, as most Senior preferred shares (and if existing senior preferred shareholders are not willing to concede that status and prefer the company to fold, well, that would be their right as Preferred shareholders), if anything is left after settling fixed obligations, those assets would vest with the Public Trust up to the face value of the Public Preferred Shares was refunded, with anything left over handing down the ladder.


I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Sat Sep 27th, 2008 at 05:56:14 PM EST
[ Parent ]

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