Transcript The Future of Money New Ways to Create Wealth, Work and a Wiser

Options for Dealing with
Systemic Banking Crises
Bernard Lietaer
[email protected]
WAAS
Hyderabad
Losses Acknowledged to
September 2008
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Lehman Brothers (USA) - $17 billion
(bankrupt)
Bear Stearns (USA) - $3.2 billion (bankrupt)
Merrill Lynch (USA) - $46 billion (acquired)
JP Morgan (USA) - $5 billion (reformed to bank
holding company)
Morgan Stanley (USA) - $12 billion (reformed)
Citigroup (USA) - $47 billion
Bank of America - $7 billion
Goldman Sachs (USA) - $3.8 billion
Wachovia (USA) - $6 billion
UBS (Swiss) - $37 billion
Credit Suisse (Swiss) - $6 billion
Northern Rock Bank (UK) – £50 billion + (went
bankrupt)
Royal Bank of Scotland (UK) - $11.8 billion
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Barclays Bank (UK) - $9.9 billion
HSBC (Bank, UK) - $6 billion
HBOS (Bank, UK) - $2 billion
Lloyds TSB Bank (UK) - $1.7 billion
Deutsche Bank (Germany) - $10 billion
BayernLB (Germany) - $3 billion
IKB (Germany) - $2.6 billion
Commerzbank (Germany) - $1.1 billion
WestLB (Germany) - $1.5 billion
Credit Agricole (France) - $7 billion
Societe Generale (France) - $6 billion
Nataxis (France) - $4.3 billion
UniCredit (Italy) - $1.6 billion
National Australia Bank - $1 billion
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Total acknowledged to August 2008: $ 358.7 billion
out of a total subprime losses of $ 1200 billion…
In short, our global financial system is in…
Implications?
• “Let's recognize that this is a once-in-a-halfcentury, probably once-in-a-century type of
event.” Alan Greenspan => back to the 1930s?
• “This recession will be long, ugly, painful and
deep.” Nouriel Roubini, Prof NY University
• Last time we dealt with a crisis of this size, we
“solved it” by creating widespread fascism and
WW2
– Can we do better this time?
Plan
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Why Save the Banks?
Symptom Alleviation Options
Systemic Cause
Systemic Options
Pros and Cons
My Proposal
Conclusions
Why Save the Banks?
• Lesson from the 1930s: “2d Wave” Crisis
– When many banks bankrupt at the same time they
trigger a “2d Wave” recession in the “real economy”
– Reason: banks stop financing “real economy”
• Banks have monopoly of issuing legal tender
=> Strangulation of all other economic sectors
• Consequence: “Moral Hasard”:
– “Too Big to Fail” banks take high risks
– If profitable => private winnings
– If failed => governments will bail them out…
Costs of Bank Bailouts (% GDP)
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Sweden
USA
Spain
Japan
Venezuela
Mexico
Chili
Thailand
Malaysia
Argentina
South Korea
1991
1988
1977-85
1997
1994-5
1994
1981-83
1997-98
1997-98
1980-82
1997-98
• USA 2008 (so far)
3.6%
3.7%
16.8%
24%
18%
19.3%
41.2%
45%
45%
55.3%
60%
5.8%
Plan
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Why Save the Banks?
Symptom Alleviation Options
Systemic Cause
Systemic Options
Pros and Cons
My Proposal
Conclusions
Symptom Alleviation Options
• Nationalizing the Problem Assets
– Preferred by banking system
– US approach
– Most expensive solution because un-leveraged
• Nationalizing the Banks
– European approach
– Leverage of bank capital to money creation (minimum
x10)
– NB: Actual leverage ratio: Deutsche Bank 1.2%
UBS
2.1%
Barclays
2.4%
Unresolved Problems of
Conventional Solutions
• “2d Wave” problem only partially solved
– Banks restart lending normally only after their balance sheet is
restored
– Even with bailouts, takes minimum 3-6 years
• When large scale problem: 2d Wave vicious circle
– Bad bank balance sheet => lending restrictions => recession =>
worsens banks’ balance sheet => more lending restrictions…=>
depression?
• Deals only with central institutions problems
– Bankruptcy of financial institutions that are not “too big to fail”
– Local and State governments in financial trouble…
• Further worsens unemployment and social problems
• Example: New York has to cut 2009 budget by US 1.5 Billion…
Plan
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Why Save the Banks?
Symptom Alleviation Options
Systemic Cause
Systemic Options
Pros and Cons
My Proposal
Conclusions
Symptoms of Systemic Cause?
• This is the biggest but not the first such crisis
– World bank identified 96 banking crises and 176 monetary crises
in recent 20 year period
– Such crisis are a remarkably “hardy perennial” (Kindleberger)
• 48 well documented major crashes between 1637 and 1929.
– Happened under very different regulatory systems, different
countries, at different development levels, at very different times…
• My claim: financial system is systemically unstable
– “An accident waiting to happen” explains also why huge efforts by
very bright and dedicated people (in central banks and private
financial system) repeatedly fail to avoid crashes…
Complexity Theory
• Robert Ulanowicz: 25 years of quantitative
modeling of real-life ecosystems using
complexity, information and network theory
• Key finding: Sustainability is measurable with a
single metric as an optimal balance between
“throughput efficiency” and “rebound capacity”.
• NB: Emergent properties from a network structure
are independent from what is being processed:
biomass in an ecosystem, electrons in electrical
circuit, money in an economy…
Sustainability in Natural Ecosystems
Rebound capacity (F)
(Diversity + Interconnections)
Throughput Efficiency (A)
(Streamlined)
0%
100%
Optimum
Sustainability
“Window of Vitality” in Natural Ecosystems
Rebound capacity (F)
(Diversity + Interconnections)
Throughput Efficiency (A)
(Streamlined)
0%
“Window of Vitality”
100%
Optimum
Sustainability
Application to Monetary System
Rebound capacity (F)
(Diversity + Interconnections)
Throughput Efficiency (A)
(Streamlined)
0%
Current operation of
Financial system
“Window of Vitality”
Effect of Monopoly
Of Conventional Money
100%
Optimum
Sustainability
Application to Monetary System (2)
Rebound capacity (F)
(Diversity + Interconnections)
Throughput Efficiency (A)
(Streamlined)
0%
Current operation of
Financial system
“Window of Vitality”
Optimum
Effect of
Complementary
Currencies
100%
Sustainability
Plan
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Why Save the Banks?
Symptom Alleviation Options
Systemic Cause
Systemic Options
Pros and Cons
My Proposal
Conclusions
Systemic Solution #1
Nationalize the Money Creation Process
• Money is a public good, that was first privatized in favor
of banks in 17th century, to finance wars
– Anomaly: bailing out banks with bank-debt money reimbursed
with interest by taxpayers?
• Governments can spend money into existence
– Banks become simply money brokers
– Banks lend out what they receive in deposit
 End of fractional reserve system => no bank failures anymore
(However, will be fiercely resisted by bank system…)
• Risk: politicizing money creation process can lead to
hyper-inflation
– However, fractional reserve process has also created periodic
hyper-inflation…
Systemic Solution #2
Ending Monopoly of Bank-debt money
• Governments (central and/or local) accept in partial
payment of taxes carefully selected complementary
currencies (other than bank-debt money).
– Complementary currencies could be those created by local
governments, or by corporations (b2b such as WIR, Terra), or even
local non profits (social purpose currencies).
– Very flexible (choice of currency, time, percent accepted, etc.)
– Example of partial precedent: Russia accepted payment of taxes in
copper during rubble crisis.
• Doesn’t end privilege of bank-debt money as legal tender,
only temporarily their monopoly...
– Doesn’t end the banks’ business model
– Complementary currency management can in fact be a new
banking service
• Criticism: less efficient…but that is exactly what is
recommended
Plan
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Why Save the Banks?
Symptom Alleviation Options
Systemic Cause
Systemic Options
Pros and Cons
My Proposal
Conclusions
Options for Managing Banking Crises
Approach
Taxpayers/
Central
Governments
Bankers
Local
Governments
2d Wave
Systemic
Cause
delayed
Unaddressed
Conventional
Nationalizing
Problem Assets
Most Expensive
Preferred
Nationalizing
Banks
Unconventional
Nationalizing
Money Creation
Complementary
Currencies
(no leverage)
Equity Dilution
End of current
business model
Unaddressed
10x leverage
Unaddressed
delayed
Unaddressed
LT solution (but
inflation?)
Unaddressed
Governments spend
money into existence
Unaddressed
LT & ST
solution
LT & ST
solution
Systemic
Solution
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End of
monopoly of
money creation
LT solution
Plan
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Why Save the Banks?
Symptom Alleviation Options
Systemic Cause
Systemic Options
Pros and Cons
My Proposal
Conclusions
My Proposal
• Bailouts will happen in any case, and my proposal kicks in
if and only if the recession or depression of “2d Wave”
starts biting…
• Temporarily, while banks can’t fulfill their funding role at
appropriate levels, have local and states accept partial
payment of taxes in selective and robust complementary
currencies
– Selection of currencies can be lined up with political objectives
– Start with robust B2B currencies (because best auditable)
– Implement WIR and Terra type systems…
• Complementary currencies are useful to solve problems
even without any crisis
– Over time, local and state governments can encourage them in
other ways than acceptance in taxes in the future
Plan
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Why Save the Banks?
Symptom Alleviation Options
Systemic Cause
Systemic Options
Pros and Cons
My Proposal
Conclusions
Conclusions
• Re-regulation is necessary and will be on everybody’s
agenda, but it can only make such crises less frequent, not
eliminate them.
• We can do better than in the 1930s
– avoiding fascism and a World War?
– but only if we consider systemic options…
• The systemic option of complementary currency is
– within the political decision power of local and state governments
– Very flexible in terms of how and for what it is implemented
– An acceptable compromise for banking system?
Follow up
Key Points
• Systemic problems in Today’s International Money
System
 “We now have a non-system” Schmidt, Chancellor of Germany
 “We need a new Global Currency” Paul Volcker, ex-Chairman Federal Reserve Board
 “I foresee private currency markets in the 21st century” Alan Greenspan,
Chairman, Federal Reserve Board
• Growing Risk of a Global Recession or Depression
Both problems solved by a business initiative to create
Terra, a new
Electronic International Complementary Currency
A Complementary Currency is a medium of exchange circulating in
parallel with - not replacing - conventional currencies.
Familiar example of complementary currency: Frequent Flier Miles
A better way?
Four Systemic Problems with
Today’s Money System
Financial Instabilities  The current banking crisis is #97 over past
1.
two decades World Bank
No International Standard of Value  Currency Risk now
2.
dominant risk in International Business
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When coverage is available hedging costs are incurred.
When coverage not available (e.g. LDCs), less investments lead to despair
and ultimately extremism/terrorism.
Pro-cyclical Money Creation  amplifies business cycle
3.
Today’s money created as bank-debt
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During booms, credit is easy => more boom
During busts, no credit is available => worse bust
Roller-coaster in sales, payments, staff hiring and firing
“Short-termism”  Unsustainable strategies
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Discounted cash-flow with positive interest rate currency => long-term irrelevant
While effective
conventional
solutions are…
Presentation Outline
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The Problems
Solution
Win-Win Strategy
Current Status of Project
Solutions are not to be found within the box
Thinking out of the Box?
“Never, ever, think outside the box.”
Proposed Solution
Definition
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Terra = reference unit defined as standardized basket of key
internationally traded commodities & services
Example: 100 Terra =
1 barrel of oil
+ 10 bushels of wheat
+ 20 kg of copper
…
+ 1/10 of ounce of gold
NB: any standardizable good or service can be included
– Similar stability to gold standard, but with basket instead of single
commodity (more stable than any one component)
 more stable than today’s national currencies
4 fold reduction of volatility compared to US$ on basis of 9-12
commodity basket
– Terra is Inflation-resistant by definition
Proposed Solution (2)
Issuing Mechanism
• Terra Alliance (user’s alliance) issues Terra as inventory
receipts for goods sold to it by producers
– Example: oil company sells 1 million barrels to Terra Alliance, and gets
credited with Terras at market prices, and can use Terras to pay suppliers…
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Fully backed currency => Robust currency
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Storage costs of basket is paid by the bearer of the Terra = demurrage
of 3.5-4.0% per year => Terras pure medium of exchange and
contracts, not store of value
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When recession looms => excess inventories of commodities
=> more Terras in circulation => activates economy in countercycle
with economy
Proposed Solution (3)
Legal/Tax Aspects
- From legal and tax viewpoint: Terra is simply
standardized “countertrade” (international barter)
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Volume of countertrade now over $1 Trillion/year, more than
10% of all international trade, growing at 15%/year
Example: Pepsi-Cola gets paid in Russia with Stolichnaya Vodka
No need for new international treaty or governmental legislation
Presentation Outline
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Defining the Problems
Solution
Win-Win Strategy
Current Status of Project
Win-win Strategy
• Reasons for blockage of previous proposals:
– They were all trying to replace the official
money system
• In contrast, Terra is complementary currency
– They were expensive in implementation
• In contrast, Terra operation is completely selffinancing
– They were upsetting substantial vested interest
• In contrast, Terra is a win-win for all key parties
Win-win Strategy (2)
Advantages for business users
• More stable and predictable international currency
– No or less hedging costs
– No or less inflation
• Countercyclical
– Less roller-coaster of business cycle
– Less roller-coaster in finding staff and then firing them
• Less Short-termism
– Demurrage charge realigns financial interests with
longer-term thinking
– Leaving a better world for our grand-children…
How does one convince a corporate elephant
to change?
Regulation
Education
Financial
Incentive
Sustainability: The Monetary Engine
What do we invest in?
Physical Reality
(Tree Metaphor)
10 years
Costs: 10 $
$ 100
100 years
$ 1,000
Costs: 10 $
$7.60
Currency with Positive
Interest @ 5%/year
$ 61.39
Financial Viewpoint
Value discounted to today:
Currency with Demurrage @
5%/year
Demurrage = time-related
charge (opposite of interest)
$ 167.02
$ 168,903.82
Value discounted to today:
Short-term thinking is not intrinsic to human nature, but created by today’s money system
 NB: Historical Precedents: Dynastic Egypt, “Age of Cathedrals”
Win/win Solution (4)
Benefits for everybody
• Makes Sustainability
a realistic global
objective
=>Reversing the
hourglass?
Win/win Solution (5)
Benefits for everybody
• Makes Sustainability
a realistic global
objective
• Terra countercyclical
 less instability in
jobs
Main lesson from
the Euro…
Follow-up
Texts available:
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“Terra/TRC Summary” and “Terra/TRC White Paper” on www.terratrc.org
“Of Human Wealth” (new synthesis book)
“The Future of Money” (London: Random House): www.amazon.co.uk
“The Future of Payment Systems” White Paper for banking sector (available
for free on request via email).
Internet:
– www.terratrc.org dedicated website opened today
– Email: [email protected]
Two Implicit Hypotheses in Economics
Money is “value neutral”
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Our money system is a given, like the number of planets in
the solar system…
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Money is a passive medium of exchange that simply facilitates
exchanges.
The type of money used doesn’t affect the kind of transactions
performed, doesn’t influence the investments made, or the
relationships among their users.
Because of hypothesis #1, the monopoly of national money doesn’t
matter.
The monopoly of national money is more “efficient”
100% of economic theory built on these hypotheses.
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Both hypotheses have been proven invalid!
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What becomes possible if we revisit them?
=> Addressing systems rather than symptoms…
Win-win Strategy (1)
Advantages for initiators
• Co-designing the system
• A way to change illiquid assets (inventory) into
working capital
• Now: inventories are a cost item
• With Terra: negligible costs for getting working capital
• New strategic option whenever excess inventories
• Now: either store at own costs or dump in market (further value
reduction)
• With Terra: sell to Terra Alliance that will keep it in storage, and
storage costs for bearers of Terra
• More cost effective countertrade
• Now: typical costs 3-5% of face value
• With Terra: costs approx 0.1% of face value
• + All advantages of other business users
Win/win Solution (3)
Benefits to the Banking Sector
• Today, banks don’t play any role in countertrade
(up to 10-15% of global trade and fastest growing sector)
– Standardization introduced by Terra enables financial sector to
provide its traditional services similar to any foreign exchange
transaction (accounts, transfers, advice)
• Terra is only contractual and planning instrument
– Financing remains in conventional currency created by banking
system
• Terra is countercyclical  stabilizes world economy
– Positive impact on banking portfolios
– Makes job of Central Banks easier
Win/win Solution
2. Benefits for Corporate Initiators
“Side Effects”
Today’s Way
“Terra Bridge” Way
Costs:
Currency Risks (Hedging costs)
Drop in LDC
Investments
Poverty
Social
Adaptation
Costs
Political
instability
Ecological
Degradation
Opportunity Costs:
Foregone investments (ex: in LDCs)
Misallocation Costs
No Standard
of Value
Standard
Basket
Stable Reference
Value
Anticyclical
Dampening
of Business Cycle
Demurrage
Long-term thinking
profitable
Costs:
Adaptations to business cycle
Opportunity Costs:
Operational Investments suboptimal
Amplification of
Business Cycle
Costs:
Regulatory Pressures
Opportunity Costs:
Long-term Investments suboptimal
Expensive in direct costs
and opportunity costs
Short-termism
1. Cost Reductions
- reduced storage costs
- reduced hedging costs
2. More Stable Global Trade
3. Realigns financial interest with
long-term view
Win/win solution (3)
LDCs
Worldbank
Commercial banks
LDC
“Terra Bridge”
Debts
IMF
Adjustment Programs
in hard
FDI
Currencies
Commodity Production Problems
Poverty,
Development Failure
Dumping
Scarcity of Hard
Terra issued
directly
Currencies
to Producers
Degradation of
Terms of Trades
Countercycli
cal
Storage Costs
Wealth
Creation by
and in LDCs