According to Chris Cook, the “direct, instantaneous connections of the Internet make possible direct people-based (peer-to-peer) credit relationships between individuals and direct asset-based (peer-to-asset) credit relationships between individuals and productive assets.”
“The direct, instantaneous connections of the Internet make possible direct people-based (peer-to-peer) credit relationships between individuals and direct asset-based (peer-to-asset) credit relationships between individuals and productive assets.
On the face of it, it could be expected that such dis-intermediation – which I term Napsterization, after the music file sharing phenomenon – would be resisted by banks as credit intermediaries. But in fact, the opposite is true.”
* The Characteristics of Economy 3.0:
– In parallel with the credit innovation that eventually led to the point of Peak Credit and the collapse of the banking system, there has been a parallel series of innovations in legal vehicles for investment in productive assets, involving trust law and partnership law, rather than company law.
From 1995 onwards, beginning with the Goldman Sachs Commodity Index fund, a breed of funds was created that took on commodity risk – initially through holding long-term positions in the futures markets – with a view to “hedging inflation” and a decline in the value of commodities relative to the dollar.
From 2005 to 2008, these funds grew rapidly and began to inflate commodity market prices as producers began to lease – through sale and repurchase agreements – commodities to the funds in return for a loan in dollars. The outcome was to enable oil producers to literally monetize oil stored in the ground, in tanks or in pipelines, and the flow of dollars into funds led to the bubble and collapse in oil prices in 2008.
The Federal Reserve Bank addressed the collapse of Lehman Brothers by reducing dollar interest rates to zero and by creating dollars that were used to buy Treasury Bills – so-called quantitative easing.
At this point, through 2009, the flow of inflation-hedging dollars became a flood as banks queued to launch new funds and to set up the necessary support and trading operations. Commodity and equity prices became completely detached from the underlying reality of physical production and consumption, and of flows of profits and dividends, as funds took ownership – through purchases or leases – of commodities and equities purely as an alternative to holding dollars.
– Since the credit market is essentially dead, or at least on life support, the reason banks flocked to sell funds to clients is that market risk is not with the banks but with investors. Banks need relatively little capital to be service providers to the funds, and are able to make substantial profits in very short-term trading on behalf of the funds.
The banks have knowledge in respect of the ownership of market inventory which is not known to other market participants. These are the merchants who buy and sell physical commodities, and speculative financial traders such as hedge funds or even risk-taking individual investors, who attempt to make transaction profit. Through such information asymmetry, and the use of new trading tools such as high-frequency trading which provide often dubious liquidity, high profits may be made on minimal capital.
The adjacent possible
– The point is that, as capital became scarce after October 2008, banks evolved their business model to the adjacent possible of marketing and operating new quasi-equity instruments. They transitioned from an intermediary role to a service provider role because it was and is profitable to do so.
But these instruments, and the presence in the markets of investors who aim to avoid loss rather than make profits, have now led to what are essentially two tier and false markets.
In my home turf of the oil market, all the signs are that in the absence of massive new flows of quantitative easing dollars from the Federal Reserve, and/or substantial cuts in oil production, especially from members of the Organization of the Petroleum Exporting Countries, there will be a collapse in oil market prices in the first quarter of 2012. Indeed, some market participants have already taken option positions in the oil market in anticipation (or in fear) of a fall in the oil price as low as $45 per barrel in 2012.
The coming collapse in commodity prices will lead to the next great regulatory scandal of mis-selling, when the risk-averse investors who bought these funds from the banks make massive market losses to which they never realized they were exposed.
At that point the way will be open to go Back to the Future – to the next adjacent possible – which is direct people-based credit and direct asset-based credit.
P & I clubs
– People-based credit is not the direct peer-to-peer interest-bearing credit provided by companies such as Zopa. Instead, trade credit is extended directly from trade sellers to trade buyers, within the kind of mutual risk-sharing agreements that have existed for thousands of years. To this day, mutual “P & I club” insurance of shipping and other risks still takes place in the City of London, and these protection and indemnity mutual clubs have been managed by the same service provider for 135 years.
In a mutual “credit clearing” system within a P & I cub risk-sharing agreement – or guarantee society – buyers and sellers would pay no interest on credit but would pay for the use of the system, and would also pay a guarantee charge or provision into a pool in common ownership to guard against defaults.
21st century stock
Issues of stock appropriate for the 21st century will enable direct credit creation not only for short term/high risk development financing but also when productive assets are complete, for long term/low risk funding.
Owners of productive assets simply create and issue undated credits/units that are redeemable in payment for the use of the asset. For example $1.00’s worth of rental revenues pre-sold for 80 cents will give an absolute return of 25%, but the rate of return depends – literally – upon the rate at which units of stock may be returned to the issuer and redeemed against use.
Instead of debt fragmented by date and rate of interest, there will simply be single classes of stock, and even if financial investors do not buy stock for investment, users of productive assets such as occupiers will always buy stock at a price less than face value in order to redeem it against use.
The fact that the issuance of stock is as possible for assets in public ownership as it is in respect of assets in private ownership opens up simple but radical new options for public financing and funding.
– Stock may in fact be seen as currency sold forward at a wholesale discount, and I think of such undated credit as open capital, to distinguish it from closed and proprietary forms of debt and equity finance capital.
My vision of a 21st century “Open Capitalism” is of new forms of stock based upon land rentals which will come to be what are essentially networked land-based national currencies created literally from the ground up.
Other forms of stock, some locally acceptable, others internationally, will be based upon the intrinsic value of energy, such as stock redeemable in payment for carbon fuels; electricity, and even heat.
These currencies will change hands “peer to peer” against goods and services with the backing of a mutual guarantee based upon the capacity of individuals to provide such goods and services.
Finally, the reference point or pricing benchmark against which transactions will be made will logically be an absolute amount of energy, and the global economy will go onto an “Energy Standard” for exchange, thereby enabling the transition to a low-carbon economy.”