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Time for a new banking system?

  
  

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YatimaMeiji
17:35 / 23.09.08
Watching all that is going on in the financial crisis, I keep hearing the words, "Failure of modern banking." So I put the question forward, is it time for a new form of banking? And what would that be?

Not being very knowledgeable in economics, the only other idea I've ever come across was in For Us The Living. Fiction yes, but I always found Heinlein's ideas very interesting, but I know many don't.
 
 
Eek! A Freek!
18:32 / 23.09.08
I always loved the Idea I read in R.A. Wilson: Have expiry dates on money.
It would be hell to manage and the system might prove only too curruptable but the gist is this: If you make $1000 in January, it loses 25% of it's value in three months, 50% in six, 75% in nine and its all gone in one year. The idea is that people will try not accumulate as much. Companies will pay more, people will spend more, prices will drop, more jobs will be created, etc... Wealth will be spread, not accumulated.
Of course the wealthy would frown upon the suggestion, and the more right leaning might accuse one of socialist (Why is this a dirty word again?) ideas, but I still like it, on the surface. I'm sure a well versed economist could show me the evil error of my ways...
Now how to track the system, therein lies the rub... but in this age of electronic processing I'm sure it's doable.
 
 
The Idol Rich
09:34 / 24.09.08
I always loved the Idea I read in R.A. Wilson: Have expiry dates on money.
It would be hell to manage and the system might prove only too curruptable but the gist is this: If you make $1000 in January, it loses 25% of it's value in three months, 50% in six, 75% in nine and its all gone in one year. The idea is that people will try not accumulate as much. Companies will pay more, people will spend more, prices will drop, more jobs will be created, etc... Wealth will be spread, not accumulated.

But isn't this equivalent to the hyperinflation and negative interest rates that we've been seeing in Zimbabwe recently? Of course, there money is losing its value in a day or whatever rather than a year but that's a difference of degree rather than kind I think.
 
 
The Idol Rich
09:41 / 24.09.08
Watching all that is going on in the financial crisis, I keep hearing the words, "Failure of modern banking." So I put the question forward, is it time for a new form of banking? And what would that be?

My understanding is that when they say this, what they mean by "modern banking" is the way that companies have moved away from the old, unsexy idea of simply borrowing money from the public cheaply and lending it to other people at a higher rate. A lot of them have taken on different and higher risk ("modern") strategies that have finally come back and bit them on the ass. I don't think they are necessarily saying that there is a problem with the model I simplistically outlined above - not to say it's not an interesting question to ask what we could have instead of that banking system mind.
 
 
A fall of geckos
11:55 / 24.09.08
I was reading a Douglas Rushkoff article, that makes the argument that prior to the Renaissance, money was primarily a barter token for goods, which often had a natural shelf-life.

Quoting from the article:

Meanwhile, local currencies had the opposite bias of centralized currency. Local currencies lost value over time. They were really just receipts on the amount of grain that farmer had brought to the grain store. Since some of that grain was lost to rats or water, and since the grain store had to be paid, money devalued each year. This meant the money was biased towards being spent. That's why reinvestment in infrastructure as a percent of total revenue was so high in the late Middle Ages. It's why they built those cathedrals. They were local efforts, by people looking to invest their abundant wealth into real assets for their communities' future. (Cathedrals were built to attract pilgrims and tourism.)

Obviously this is a European based analysis, and I'd have to read the book to comment much further, but it's an interesting point of view. He ultimately uses this to argue for decentralization of money, and the removal of the state's monopoly on currency.
 
 
Eek! A Freek!
12:44 / 24.09.08
But isn't this equivalent to the hyperinflation and negative interest rates that we've been seeing in Zimbabwe recently?

Actually, no. Zimbabwe has a huge debt load and foreign investers have pulled out because Mugabe is reneging on his promise to create a market-based economy. He is attempting to seize farmland owned by foreign interests and nationalize them. The IMF and world bank won't go near him intil he caves into their demands - Economic Shock to create a free market system.

In the meantime people are calling in their debts and devaluing the money even more.

Normally I would agree in principal with what he is doing, if he was doing it in the interest of his people and not for his own ends. The fact he's a brutal bastard doesn't help. He wants nationalizes industry and farming to fill his personal coffers, not to be used for social benefits. He won't play ball with the west anymore because his use as a strongman has worn thin and he's become a bit of a pariah by biting the hands that were feeding him.

In the above proposed system, money becomes a means, not an end. In the current free market idealogy, the accumulation of money is the end.
 
 
Eek! A Freek!
12:55 / 24.09.08
Oh: I have to add that while I like the idea on paper, there is no concrete real-world proof that it is feasable. I'm just very anti-free market and like the sound of things which would seem to even out the playing field a bit.
I also think that if one works harder and smarter than others that perhaps their rewards should be greater, but at the same time there should be limits and social responsibilities. People who claw their way over others do not deserve to be rewarded. Neither do people who "make it to the top" and never give anything back to the community.
 
 
The Idol Rich
13:15 / 24.09.08
Actually, no. Zimbabwe has a huge debt load and foreign investers have pulled out because Mugabe is reneging on his promise to create a market-based economy. He is attempting to seize farmland owned by foreign interests and nationalize them. The IMF and world bank won't go near him intil he caves into their demands - Economic Shock to create a free market system.

Well, obviously it's not for the same reasons but it's the same effect isn't it? I picked Zimbabwe as a current example of negative interest rates but I could just as easily have said Germany between the wars or several other times and places. If money goes down in value when you store it then there is a negative (effective) interest rate isn't there? That's what I was getting at.

In the above proposed system, money becomes a means, not an end. In the current free market idealogy, the accumulation of money is the end.

Not if you have negative interest rates, in that case you want to get rid of it as quickly as possible before it loses value. I guess that in this situation most people who can afford to probably just store food or petrol tokens or even convert the money into material goods such as a tv hoping that that will hold its value better than the money itself. I guess that in Zimbabe those people who can will change money into a foreign currency but in the system you propose all currencies will presumably follow this model so this won't be an option.

Oh: I have to add that while I like the idea on paper, there is no concrete real-world proof that it is feasable. I'm just very anti-free market and like the sound of things which would seem to even out the playing field a bit.

But I'm not sure that it would even the playing field really would it? Wouldn't the wealthiest people just change all their money into something that held its value better and remain wealthier? I don't really see why this is anti-free market? Or am I missing something?

I also think that if one works harder and smarter than others that perhaps their rewards should be greater, but at the same time there should be limits and social responsibilities. People who claw their way over others do not deserve to be rewarded. Neither do people who "make it to the top" and never give anything back to the community.

No disagreements here.
 
 
grant
13:35 / 24.09.08
I have never taken a class in economics, but I'm suspecting Wilson might have been goofing on the way greenbacks have steadily lost value compared to gold - I seem to recall him writing about the gold standard (and what happened when we came off it) elsewhere.

That also would have been current to when he was writing, since I think it was Nixon who finally severed the tie between the dollar and gold.
 
 
Eek! A Freek!
14:09 / 24.09.08
Wouldn't the wealthiest people just change all their money into something that held its value better and remain wealthier? I don't really see why this is anti-free market? Or am I missing something?

Actually, I'm the one missing something: I am hypothesizing without taking the current model into account. I am looking through a lens of "starting from scratch".

As the world stands, that model would never work: Certain concepts of ownership must first be challenged. Personal belongings are one thing, but what of land? What about natural resourses? What about companies? Should a person have the right to own several hundreds of acres of land for personal use? Should that person be allowed to be the sole profiteer from resourses taken from the land? Should a person (or group) who starts a company be the ones who "own" that company, with the power to hold the livelihood of all the people whose work makes grow said company over their heads?

The idea of "interest" is two-fold: Money earned on accumulation and money owed on debt. The proposed model would need to eliminate these concepts totally. The problems you outline are based on the fact that there is a system of lending and borrowing, haves and have-nots. As I said, certain facets of the current notions of ownership must first be eliminated. If people are provided with adequate living spaces (I'm not talking about $20M 15-bedroom mabsions for hollywood couples.) and other large investments, their money could then be freed up for other things which would keep the new economy rolling. If money "expired", then it stands that interest could not be applied to it

In your comparison with Zimbabwe, the negative interest is one-sided. The people with the money which is not being devalued (the west) are in a position to refuse to give money to the people who need it. If the western investers faced an expiry on their accumulation of wealth themselves, they would be more willing to spread it around a bit (In principle)

Zimbabwe is an awkward example as the majority of people suffering are caught between those who are supposed to be punished, like Mugabe, and the investors who are trying to do the punishing... Actually, I think that may be the rule, not an exception...
 
 
Eek! A Freek!
14:45 / 24.09.08
I have never taken a class in economics, but I'm suspecting Wilson might have been goofing on the way greenbacks have steadily lost value compared to gold - I seem to recall him writing about the gold standard (and what happened when we came off it) elsewhere.

There seems to be a romantic nostalgia for the gold standard these days. People think of it as an economic panecea (Ron Paul I'm looking at you...) Gold was used because it seemed more or less fixed and one could back their currency on their reserves.

But with the possibility of more and more space exploration, and gold being used in more industrial applications, why base the value of currency on gold again? Couldn't a country with lots of gold mines merely hoard more and more and then artificially inflate or deflate the value? (It's always been that way, I suppose, and the cause of more than a few wars...)

I think that a completely new model needs to be worked out... Why did Gene Roddenberry have to die?
 
 
The Idol Rich
14:53 / 24.09.08
In your comparison with Zimbabwe, the negative interest is one-sided. The people with the money which is not being devalued (the west) are in a position to refuse to give money to the people who need it. If the western investers faced an expiry on their accumulation of wealth themselves, they would be more willing to spread it around a bit (In principle)

Ah, I think we’re talking at cross-purposes – I was talking about viewing Zimbabwe as a closed system, I wasn’t talking about how its people relate to the west as such. For any person in Zimbabwe who gets their wages in cash they face negative interest and an incentive to convert it into food or whatever as soon as possible, I don’t think it’s one-sided.

As the world stands, that model would never work: Certain concepts of ownership must first be challenged. Personal belongings are one thing, but what of land? What about natural resourses?

Yes, old but never (as far as I know) successfully answered questions – how can anyone own land, it was always there? I guess that land rights are one of the fundamental tenets of capitalism right? Who was it who said that mankind’s problems began when someone put a fence around something and said that it was belonged to them?
Anyway, the changes that you’re proposing are much deeper and further reaching than the way that you first outlined them and thus they’re not really an answer to the question about what a new form of banking should be. I mean, if you really start redefining ownership to this extent is it even clear that we will need banks or money at all? I think that what you’re saying is that asking “what could be a new form of banking?” is either a question that is not far-reaching enough or simply isn’t the right question at all.
 
 
Eek! A Freek!
16:09 / 24.09.08
OK... Gotcha.

Let's return to the question a bit: The collapse of modern banking... How is that even possible? The only way I can think is that the bank lends out more money than it possesses. (Please let me know if I drastically understate and over-simplify)

Now, here in Canada, every single bank pretty much consecutively tops it's previous quarter's earnings. As far as I can tell, they achieve this by following a certain formula: Decrease overhead(e-banking, less branches, less employees, etc...) approve more credit and then increase interest on that credit, and diversify investments.

Recently they have cut back on riskier ventures such as the 40year no-money-down mortgage, the likes of which caused so much problems down south.

Still: are consecutive profits sustainable? Shouldn't there be a levelling out?

Banks liquidity and potential for profit are directly tied in with the market, which these days seems to panic if someone so much as farts in the direction of an oilfield.

The market demands growth. Growth requires spending. Spending leads to loans, loans charge interest whose rates impact the market.

I'm starting to think that you are right: It's not the system of banking, but the whole ball of wax. It may be the collapse of the whole market system, not banking per se.

The core of the issue is sustainability and allowing bubbles to form. Of course bubbles are incredibly, incredibly profitable for a select few...

But some form of banking is what allows one to save their money in a safe(?) way, or borrow enough against future earnings to be able to afford something like a house*. Banks can be hugely helpful as long as they aren't milking the people they lend to.

It's the current market demands on the banking system which may be the problem: Show profit to your shareholders or else!

Mind you, we are the shareholders...

I'm getting all muddled. It seems we've bought into a delusion where we deserve more-more-more and we are digging huge holes for ourselves. It's easy for me to blame "The Market" like it's some huge amorphous all-devouring beast, but in reality it's us. Until we stop being so fucking greedy in the long run, we're going to make everyone suffer in the short term.

A paradigm shift is needed, methinks.

Communism flopped. The free-market is flopping. A middle path? Would things become stable if every single natural resourse was nationalized and the rest was open to the market? Who knows, but that's my current thinking...


*(the ownership issue again... Pisses me off: if I "own" land where the Gov wishess to put a highway or a company wants to develop, I'm S.O.L., but if a multinational wants to strip the ore out of a patch of land it owns to sell it or export it to another country...)
 
 
Mirror
01:33 / 25.09.08
Yes, old but never (as far as I know) successfully answered questions – how can anyone own land, it was always there? I guess that land rights are one of the fundamental tenets of capitalism right?

I can speak to this at least a little bit, I think. Land rights are indeed one of the fundamental tenets of capitalism, because, as they say, EVERYTHING begins with mining - if it cannot be grown, it must be mined, and if it's something that *can* be grown, then the products of mining are required to harvest it. The private ownership of land is really about someone having, for a period of time, an exclusive right to use a piece of land, usually with some restrictions (zoning, environmental regulation, etc.) Land is essentially licensed for use with extremely low rent (property taxes) and if you don't pay the rent or if the land is required by the government for some other purpose, it can be seized.

As I see it, private property something of a myth; what people disagree on is not so much whether such temporary exclusive use should be allowed at all, but instead what restrictions that should be placed upon such use and the amount of restitution that should be returned to the commons for such a license.

As far as a banking (or indeed economic system) is concerned, I think that the most important question is what type of behavior such a system should reward and encourage, and likewise what sort of behavior should be deterred. The current incarnation of capitalism is obviously good at rewarding innovation and production, but it is perhaps too good at rewarding secondary players and middlemen; CEOs and Wall St. bankers and the like. This is largely because businesses are still organized in feudal structures. Are there any successful large business organizations that have operated as democracies?

Distributing decision making power within a business is an extremely difficult problem; ideally one would want some sort of meritocracy where everyone got a say, but the better decision makers had proportionally more influence. In good companies, this is probably how things actually work; in less good companies there are too many ways to game the system.

I wonder if it wouldn't simply be enough to limit the maximum number of employees that a company could grow to have, with a mechanism in place whereby a company could apply for a license to exceed that cap for a limited period of time so that it could successfully grow large enough to split into multiple entities. Smaller companies are generally more efficient and meritocratic, and limiting the number of employees puts a natural upper bound on the amount of influence a single company can have simply by limiting the amount of work it is possible for its employees to do.
 
 
The Idol Rich
07:36 / 25.09.08
Let's return to the question a bit: The collapse of modern banking... How is that even possible? The only way I can think is that the bank lends out more money than it possesses. (Please let me know if I drastically understate and over-simplify)

Well, banks are only required to keep a certain percentage of their deposits in the bank at any time. That’s why confidence is so important, any bank will be vulnerable if everyone tries to take out all their deposits at the same time. This is fractional reserve banking which has the effect of increasing the amount of money in circulation.
But beyond that, banks can lose money in all kinds of ways. Leveraged finance allows you to lose more money than you invest so in the case of, say, Nick Leeson he was making huge bets with the bank’s money which went against him and wiped out the bank. His bosses in London didn’t seem to understand what he was up to and allowed him free rein. Barings was a merchant (investment) bank but now commercial banks have investment arms themselves.

Still: are consecutive profits sustainable? Shouldn't there be a levelling out?

You would think that wouldn’t you? Growth is the main aim of economics – but why? Does that target make sense in a world of finite resources? I need an economist to explain that to me.

It's the current market demands on the banking system which may be the problem: Show profit to your shareholders or else!
Mind you, we are the shareholders...

Are we? In some cases the shareholders are those who hold accounts but not always. I mean I’ve got a bank account at Lloyds but no shares.

I'm getting all muddled. It seems we've bought into a delusion where we deserve more-more-more and we are digging huge holes for ourselves. It's easy for me to blame "The Market" like it's some huge amorphous all-devouring beast, but in reality it's us. Until we stop being so fucking greedy in the long run, we're going to make everyone suffer in the short term.

But isn’t the market just the natural scaled-up consequence of supply and demand? This is (for me) the problem that keeps returning, how can you get away from supply and demand? If you can't get around this does it automatically scale up to free-market capitalism? If not, then how and why? Just thinking out loud really here....

I can speak to this at least a little bit, I think. Land rights are indeed one of the fundamental tenets of capitalism, because, as they say, EVERYTHING begins with mining - if it cannot be grown, it must be mined, and if it's something that *can* be grown, then the products of mining are required to harvest it. The private ownership of land is really about someone having, for a period of time, an exclusive right to use a piece of land, usually with some restrictions (zoning, environmental regulation, etc.) Land is essentially licensed for use with extremely low rent (property taxes) and if you don't pay the rent or if the land is required by the government for some other purpose, it can be seized.

OK, but I’m talking pre-government – what does it mean for someone to own land? At some point someone has to take it by force or simply by being in the right place at the right time and then declaring that the land is theirs. There is something odd about this being the whole basis of capitalism isn’t there?

As I see it, private property something of a myth

I don’t really understand this I’m afraid, can you elaborate?

I wonder if it wouldn't simply be enough to limit the maximum number of employees that a company could grow to have, with a mechanism in place whereby a company could apply for a license to exceed that cap for a limited period of time so that it could successfully grow large enough to split into multiple entities.

But wouldn’t this mean you could never get economies of scale which are surely important if you are going to maximise use of resources?
 
 
museum in time, tiger in space
07:52 / 25.09.08
Smaller companies are generally more efficient and meritocratic

I would be very interested to see some evidence for this statement, because it certainly seems to run counter to my own personal experiences.

... private property [is] something of a myth; what people disagree on is not so much whether such temporary exclusive use should be allowed at all, but instead what restrictions that should be placed upon such use and the amount of restitution that should be returned to the commons for such a license.

The first part of this statement doesn't seem to have a great deal to do with the second, and I would like to hear more of an explanation regarding the supposedly mythical status of private property, as it relates to land or anything else.

I'm surprised no-one's mentioned Islamic banking yet - theoretically it's banking without usury. Another example of an alternative, interest-free system would be the JAK Members' Bank in Sweden.
 
 
The Idol Rich
08:13 / 25.09.08
I'm surprised no-one's mentioned Islamic banking yet - theoretically it's banking without usury. Another example of an alternative, interest-free system would be the JAK Members' Bank in Sweden.

Interesting, never heard of that JAK thing - and I have to say I can't really grasp how it works from the wikipedia article, might have to look that up and find a better explanation (unless you can articulate it for me).
Islamic banking is a bit of a con though isn't it? As I understand it the way an Islamic mortgage works is effectively equivalent to a "normal" mortgage. Suppose I went to Nationwide and took out a (simple fixed rate) mortgage on a hundred thousand pound house and the building society agreed to lend me the money at a rate of interest and, thus, fixed monthly payments which meant that I would end up paying back, say, £200,000 over the twenty five year term of the loan. Say I then converted to Islam and decided that I couldn't take that mortgage so I went to an Islamic bank and said I want to buy the £100k home, they would say to me, "ok, we'll buy it - and we'll sell it back to you over twenty-five years and you can buy it with monthly repayments and there won't be any interest - the price you will pay for it is £200k" - is there really any difference there?
My understanding of the definition of usury is that it is someone with money taking advantage of someone who doesn't by charging them for its use. Interest is just the way that is manifest these days but aren't the Islamic bank in my example still doing the same thing?
Is interest really morally wrong though? If you need to have something now and you haven't got it it's worth paying for isn't it?
 
 
museum in time, tiger in space
14:02 / 25.09.08
Well, one big difference with Islamic banking, as I understand it (and I could be wrong about this) is that because the bank can't formally admit that it's making (or trying to make) a profit it cannot, for example, charge additional penalties for late payments on mortgages. Another point is that Islamic banks are not allowed to invest in businesses that go against 'Islamic' values - pornographers, for instance. I suppose in some ways that brings them quite close to 'ethical banks' like the Co-operative, which have strict rules about where they put their money.
 
 
The Idol Rich
14:11 / 25.09.08
Well, one big difference with Islamic banking, as I understand it (and I could be wrong about this) is that because the bank can't formally admit that it's making (or trying to make) a profit it cannot, for example, charge additional penalties for late payments on mortgages.

With a bit of luck all banks (in the UK) will be banned from doing that soon - though of course they will just find another way to raise the funds.
Usury is forbidden in Christianity as well I'm sure you know - the west just decide to skip that rule when they realised it would be useful to do so.
 
 
grant
14:19 / 25.09.08
I *think* the difference is the Islamic bank can't sell on the mortgage for some profitable sum that'll eventually get extracted from the original buyer (through changes in contracts higher finance charges, stricter penalties, whatever). That's just a guess - I know the religious problem with usury is using money to make money, rather than just making money off goods or services.
 
 
grant
14:21 / 25.09.08
Oh, and museum says it before I finish!
 
 
The Idol Rich
14:38 / 25.09.08
So is Islamic banking better from the point of view of someone who is getting a mortgage? I guess the option is open to non-Muslims but non-take-up does not necessarily imply that it's not better, maybe it's just that people don't know about it.
I've no real idea about this but my guess would be that if the banks aren't allowed much room to manoeuvre later on in the contract they would do their best to guarantee the profit with advantageous deals at the start. Also, if the mortgage supplier can't sell your mortgage on does that mean you can't change supplier either (it seems it ought to cut both ways and this makes sense if you are buying a house off the owner, you can't choose the owner to be different if you fancy a different deal)? The downside being that if a better deal came on the market you can't take advantage of it.
Also, is this just observational or are you proposing that a system similar to Islamic banking could be a remedy to the malaise in modern banking that prompted the thread? I have to say that I haven't heard about any astronomical losses or bankruptcies from Islamic banks so they must be doing something right.
 
 
grant
01:33 / 26.09.08
Along similar lines, is this as much of a big deal over there as it would be over here?

Dr Rowan Williams, the Archbishop of Canterbury, demanded tighter regulation of the industry and said it was out of touch with reality.

Williams added that Karl Marx had been right in his assessment of the nature of capitalism.
 
 
museum in time, tiger in space
03:02 / 26.09.08
is this as much of a big deal over there as it would be over here?

I would be very surprised if it was. Williams and Sentamu are both interesting figures, and I imagine that they would both be seen as dangerously left-wing in the States. Williams is especially interesting - he made a fairly controversial speech earlier in the year which was seen as overly sympathetic to Sharia law, for example. I don't think these comments will raise nearly as much interest. I've always seen him as someone who actually thinks about things and tends to speak his mind, although I was disappointed in the changes in his public stance on homosexuality after he became Archbishop. Coming back to the topic a little more, I notice that the Archbishops' speech may prompt a further rethink of Church investment policy:

Some of these funds also engage in short-selling - the practice of borrowing shares and selling them on, in the hope of buying them later at a lower price to making a profit.
The practice is not illegal as such. Indeed, many see it as necessary for modern financial markets to operate ...
Now both archbishops seem to suggest that short-selling as such is a questionable activity. (from here)


is this just observational or are you proposing that a system similar to Islamic banking could be a remedy to the malaise in modern banking?

Mostly observational, really. I just thought it was a bit strange that in a thread where people were suggesting alternative systems taken from sci-fi novels, no-one had even mentioned an alternative that's actually being used in a variety of countries. However, I do suspect that the rules on what Islamic banks can do with their money would probably limit their exposure to the kinds of problems we've been seeing recently, since my (very limited) understanding is that at least some of the trouble stems from the fact that banks have been putting their money through a kind of chain of financial institutions. If a bank has to make sure that it's not investing (at whatever remove) in certain kinds of business, then surely it has to exercise a greater degree of oversight?
 
 
The Idol Rich
08:41 / 26.09.08
I would be very surprised if it was. Williams and Sentamu are both interesting figures, and I imagine that they would both be seen as dangerously left-wing in the States. Williams is especially interesting - he made a fairly controversial speech earlier in the year which was seen as overly sympathetic to Sharia law, for example. I don't think these comments will raise nearly as much interest. I've always seen him as someone who actually thinks about things and tends to speak his mind, although I was disappointed in the changes in his public stance on homosexuality after he became Archbishop. Coming back to the topic a little more, I notice that the Archbishops' speech may prompt a further rethink of Church investment policy:

I tend to think of Williams as a basically decent and thoughtful man who is caught in an impossible position between what he believes is right and what he needs to do to prevent him being the person that presides over the break-up of the C of E – but that’s a different thread.

Some of these funds also engage in short-selling - the practice of borrowing shares and selling them on, in the hope of buying them later at a lower price to making a profit.

I really don’t understand all the fuss about short-selling – why is it that selling some shares is seen as an attempt to force the market down but buying a load isn’t an attempt to force it up?

Mostly observational, really. I just thought it was a bit strange that in a thread where people were suggesting alternative systems taken from sci-fi novels, no-one had even mentioned an alternative that's actually being used in a variety of countries. However, I do suspect that the rules on what Islamic banks can do with their money would probably limit their exposure to the kinds of problems we've been seeing recently, since my (very limited) understanding is that at least some of the trouble stems from the fact that banks have been putting their money through a kind of chain of financial institutions. If a bank has to make sure that it's not investing (at whatever remove) in certain kinds of business, then surely it has to exercise a greater degree of oversight?

Interesting ideas, I guess that I need to look into this more. I’ve got a feeling though that having seen the way that Islamic mortgages fudge the idea of interest there may be similar fudges in the field of ethical investment and the like. Only a feeling though and I guess that it’s pretty unfair to say that before I know so maybe I’d better shut up for the moment.
 
 
Evil Scientist
09:04 / 26.09.08
I really don’t understand all the fuss about short-selling – why is it that selling some shares is seen as an attempt to force the market down but buying a load isn’t an attempt to force it up?

As I understand it, the practise of short-selling allows someone to sell off shares and then buy them back much more cheaply when they've dropped in price and then effectively gambling that the shares will go back up so you can do it all over again (presumably).

Selling the shares isn't an attempt to force the market down, but the short selling technique relies on the shares that have been sold dropping in price so they can be brought back and still make the seller a tidy profit.

It doesn't appear to provide any real benefit to an economical system as far as I (with my profoundly amateur eye) can see.
 
 
The Idol Rich
09:30 / 26.09.08
As I understand it, the practise of short-selling allows someone to sell off shares and then buy them back much more cheaply when they've dropped in price and then effectively gambling that the shares will go back up so you can do it all over again (presumably).

Well that's right up to the end bit, after you've closed the trade you don't care which way they move. They don't need to go back up for you to do it again.

Selling the shares isn't an attempt to force the market down, but the short selling technique relies on the shares that have been sold dropping in price so they can be brought back and still make the seller a tidy profit.
It doesn't appear to provide any real benefit to an economical system as far as I (with my profoundly amateur eye) can see.

Well, according to all the fuss recently it's an attempt to force the market down but I don't agree with that personally (as a rule - it can be I guess). Yes you're making a bet against the stock but is that really a bad thing? If you think a stock is overvalued shouldn't you be able to use your knowledge to your advantage? Isn't the idea of a properly functioning market to value stocks correctly (whatever that means)? Bubbles are normally seen as a bad thing and if you are being forced to bet only on shares going up it's going to cause a distortion of the market.
I would say that short selling provides advantages in as much as it increases the likelihood of fair valuation of a given stock, it provides liquidity to the market and, possibly most importantly, it can be used as a hedge for various other trades. For example, if you buy a number of equity futures you are making a potentially large bet on the market rising, however if you then sell short a number of shares that balances it and you can execute that trade at an advantageous price then you are not taking a directional or risky bet. I feel sorry for all the people last week who were planning on hedging things by short selling and who have suddenly had the goal-posts moved on them.
 
 
Evil Scientist
11:20 / 26.09.08
I feel sorry for all the people last week who were planning on hedging things by short selling and who have suddenly had the goal-posts moved on them.

I suspect they'll have enough to get by. Although I would have thought they'd have seen the writing on the wall for short selling as soon as it started to be talked about as one of the factors leading to the current problems.

What are your thoughts on the suggested pay-capping for the executives getting bailed out if Bush's $700bn rescue package goes through? It sounds like a good idea to me but there has been suggestions that it might drive money into off-shore accounts or keep the talented people away just when the economy needs them the most.
 
 
The Idol Rich
12:11 / 26.09.08
I suspect they'll have enough to get by. Although I would have thought they'd have seen the writing on the wall for short selling as soon as it started to be talked about as one of the factors leading to the current problems.

Well I have to say that hedge fund managers don't get too much sympathy from me but I think they've got a legitimate cause for complaint here - I don't that they could have guessed that such dramatic legislation would have been enacted so quickly - especially since the number of shares on loan in HBOS (a reasonable guide to the size of short positions) actually decreased in the week where HBOS fell the most.

What are your thoughts on the suggested pay-capping for the executives getting bailed out if Bush's $700bn rescue package goes through? It sounds like a good idea to me but there has been suggestions that it might drive money into off-shore accounts or keep the talented people away just when the economy needs them the most.

I wouldn't claim to know much about this to be honest (er, as opposed to the other things - yeah right). My first thought is that they seem to be trying to rush through a deal worth a massive amount of money very quickly - can they really have done a proper analysis of what it will mean? As for the salary cap, seems fair to me, if you want to get benefits from the government you have to sign up to something in return right? Not sure about a fear of driving talented people away - presumably this is suggesting the creation of a two-tier market consisting of a group of companies that are backed by the government but which face restrictions whereas another group of riskier companies face fewer restrictions - but surely there would be constraints on how large these unrestricted companies could grow and to what extent they could affect the financial system as the whole problem at the moment is that companies that have no controls on them have been able to grow to the extent that they are not allowed to fail.
 
 
grant
18:33 / 26.09.08
Can someone tell me this "Money as Debt" educational video is fundamentally wrong in some way?
 
 
grant
19:46 / 26.09.08
Aw crap. I just mailed that link to a few friends, and one replied, in part:

It's funny you should mention that video.
My boss has a math degree, was a securities broker
for years, has done $2 billion worth of corporate
acquisitions and is generally a sharp guy who
understands Wall Street. Three days ago, he asked me
to download that video and pop it on a DVD and give
it to his college-age daughters.
 
 
Mirror
02:37 / 27.09.08
OK, but I’m talking pre-government – what does it mean for someone to own land? At some point someone has to take it by force or simply by being in the right place at the right time and then declaring that the land is theirs. There is something odd about this being the whole basis of capitalism isn’t there?

I'm not sure how odd it is; I mean, competition for resources is not exactly limited to humans, and land is about as fundamental a resource as you can get. Realistically, the way that the U.S. was settled (excluding of course the horrendous treatment of the aboriginal Americans) was about as egalitarian as one could get - the land was simply divided up into blocks, and distributed to whoever would take it.

As I see it, private property something of a myth

I don’t really understand this I’m afraid, can you elaborate?

Well, at best land is owned by an individual for at most that individual's lifetime, and as I mentioned previously it's only owned contingent upon the agreement of others that that individual owns it. Same with any property, really. While one can aspire to a society where rights never devolve to the use of force, I suspect that game theory probably dictates that such an equilibrium cannot exist.

I wonder if it wouldn't simply be enough to limit the maximum number of employees that a company could grow to have, with a mechanism in place whereby a company could apply for a license to exceed that cap for a limited period of time so that it could successfully grow large enough to split into multiple entities.

But wouldn’t this mean you could never get economies of scale which are surely important if you are going to maximise use of resources?

There wouldn't be anything prohibiting cooperatives of independent entities working together; the catch is that while any given company's internal workings could be private, their external interaction with other companies would have to be public. Also, I'm not suggesting any limitation on the amassing of capital; the trick is that as an entity of limited size there's a natural upper bound on how much influence you can have - people can only do so much work, so at some point you have to delegate, contract out, and hence distribute your influence. Such a cap could be introduced gradually, as well, starting high enough such that only the largest businesses would be broken up (something that's not without precedent in regulatory history) and gradually lower the cap over time. It would eventually have the effect of making the whole economy more modular. Smaller entities can adapt more quickly to changes, as well.
 
 
The Idol Rich
08:11 / 27.09.08
It's funny you should mention that video.
My boss has a math degree, was a securities broker
for years, has done $2 billion worth of corporate
acquisitions and is generally a sharp guy who
understands Wall Street. Three days ago, he asked me
to download that video and pop it on a DVD and give
it to his college-age daughters.

Well, I've got a maths degree too and I worked as a trader for a while and from what I remember of that film (I'm afraid I was drunk last night when I watched it) it's mostly on the, er, money. Didn't really understand the bit at the end about how they suggest doing away with interest though. Gotta give it another watch when I'm more with it.
 
 
The Idol Rich
08:17 / 27.09.08
Narrator got an annoying voice though eh?
 
 
The Idol Rich
10:10 / 27.09.08
I'm not sure how odd it is; I mean, competition for resources is not exactly limited to humans, and land is about as fundamental a resource as you can get. Realistically, the way that the U.S. was settled (excluding of course the horrendous treatment of the aboriginal Americans) was about as egalitarian as one could get - the land was simply divided up into blocks, and distributed to whoever would take it.

Well, I wouldn’t disagree with that but when the great great grandchildren of the guy who had the biggest stick inherits their land it’s hard to see how they have any more right to it than I do.
I see what you’re saying about it being fundamental though. Owning land is obviously going to be something that people want (and need) to do but the way it's filtered down through history to the stage we're at now is quite strange I think - as is the case with many things.

Well, at best land is owned by an individual for at most that individual's lifetime, and as I mentioned previously it's only owned contingent upon the agreement of others that that individual owns it.

But it stays in the family by inheritance doesn’t it? Yes it’s contingent on agreement but it turns out that (at the moment in this country at least) people stick to their agreements.

There wouldn't be anything prohibiting cooperatives of independent entities working together; the catch is that while any given company's internal workings could be private, their external interaction with other companies would have to be public. Also, I'm not suggesting any limitation on the amassing of capital; the trick is that as an entity of limited size there's a natural upper bound on how much influence you can have - people can only do so much work, so at some point you have to delegate, contract out, and hence distribute your influence. Such a cap could be introduced gradually, as well, starting high enough such that only the largest businesses would be broken up (something that's not without precedent in regulatory history) and gradually lower the cap over time. It would eventually have the effect of making the whole economy more modular. Smaller entities can adapt more quickly to changes, as well.

So companies can gain economies of scale by working together – clever idea I think. Potential problems with arguments between the companies as to how things should be done but definitely interesting.
 
  

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