1 / 55

Options for Dealing with Systemic Banking Crises

Options for Dealing with Systemic Banking Crises. Bernard Lietaer blietaer@earthlink.net WAAS Hyderabad. Lehman Brothers (USA) - $17 billion (bankrupt) Bear Stearns (USA) - $3.2 billion (bankrupt) Merrill Lynch (USA) - $46 billion (acquired)

zeroun
Download Presentation

Options for Dealing with Systemic Banking Crises

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. Options for Dealing with Systemic Banking Crises Bernard Lietaer blietaer@earthlink.net WAAS Hyderabad

  2. 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 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 Total acknowledged to August 2008: $ 358.7 billion out of a total subprime losses of $ 1200 billion… Losses Acknowledged to September 2008

  3. In short, our global financial system is in…

  4. Implications? • “Let's recognize that this is a once-in-a-half-century, 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?

  5. Plan • Why Save the Banks? • Symptom Alleviation Options • Systemic Cause • Systemic Options • Pros and Cons • My Proposal • Conclusions

  6. 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…

  7. Costs of Bank Bailouts (% GDP) • Sweden 1991 3.6% • USA 1988 3.7% • Spain 1977-85 16.8% • Japan 1997 24% • Venezuela 1994-5 18% • Mexico 1994 19.3% • Chili 1981-83 41.2% • Thailand 1997-98 45% • Malaysia 1997-98 45% • Argentina 1980-82 55.3% • South Korea 1997-98 60% • USA 2008 (so far) 5.8%

  8. Plan • Why Save the Banks? • Symptom Alleviation Options • Systemic Cause • Systemic Options • Pros and Cons • My Proposal • Conclusions

  9. 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%

  10. 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…

  11. Plan • Why Save the Banks? • Symptom Alleviation Options • Systemic Cause • Systemic Options • Pros and Cons • My Proposal • Conclusions

  12. 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…

  13. 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…

  14. Rebound capacity (F) Throughput Efficiency (A) (Diversity + Interconnections) (Streamlined) 0% 100% Optimum Sustainability Sustainability in Natural Ecosystems

  15. Rebound capacity (F) Throughput Efficiency (A) (Diversity + Interconnections) (Streamlined) 0% “Window of Vitality” 100% Optimum Sustainability “Window of Vitality” in Natural Ecosystems

  16. Rebound capacity (F) Throughput Efficiency (A) (Diversity + Interconnections) (Streamlined) 0% Current operation of Financial system “Window of Vitality” “Window of Vitality” Effect of Monopoly Of Conventional Money 100% Optimum Optimum Sustainability Application to Monetary System

  17. Rebound capacity (F) Throughput Efficiency (A) (Diversity + Interconnections) (Streamlined) 0% Current operation of Financial system “Window of Vitality” Effect of Complementary Currencies 100% Optimum Sustainability Application to Monetary System (2)

  18. Plan • Why Save the Banks? • Symptom Alleviation Options • Systemic Cause • Systemic Options • Pros and Cons • My Proposal • Conclusions

  19. Systemic Solution #1Nationalize 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…

  20. Systemic Solution #2Ending 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

  21. Plan • Why Save the Banks? • Symptom Alleviation Options • Systemic Cause • Systemic Options • Pros and Cons • My Proposal • Conclusions

  22. Options for Managing Banking Crises

  23. Plan • Why Save the Banks? • Symptom Alleviation Options • Systemic Cause • Systemic Options • Pros and Cons • My Proposal • Conclusions

  24. 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

  25. Plan • Why Save the Banks? • Symptom Alleviation Options • Systemic Cause • Systemic Options • Pros and Cons • My Proposal • Conclusions

  26. 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?

  27. Follow up

  28. Key Points • Systemic problemsin 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, FederalReserve Board • Growing Risk of a Global Recession or Depression Both problems solved by a business initiative to create Terra, a newElectronic International Complementary Currency A Complementary Currency is a medium of exchange circulating in parallel with - not replacing - conventional currencies. Familiarexample of complementary currency: Frequent Flier Miles

  29. A better way?

  30. Four Systemic Problems with Today’s Money System • Financial InstabilitiesThe current banking crisis is #97 over past two decades World Bank • No International Standard of ValueCurrency Risk now dominant risk in International Business • 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 Today’s money created as bank-debt • 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 • Discounted cash-flow with positive interest rate currency => long-term irrelevant

  31. While effective conventional solutions are…

  32. Presentation Outline • The Problems • Solution • Win-Win Strategy • Current Status of Project

  33. Solutions are not to be found within the box

  34. Thinking out of the Box? “Never, ever, think outside the box.”

  35. Proposed SolutionDefinition • 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

  36. 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… • Fully backed currency => Robust currency • 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 • When recession looms => excess inventories of commodities => more Terras in circulation => activates economy in countercycle with economy

  37. Proposed Solution (3)Legal/Tax Aspects - From legal and tax viewpoint: Terra is simply standardized “countertrade” (international barter) • 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

  38. Presentation Outline • Defining the Problems • Solution • Win-Win Strategy • Current Status of Project

  39. 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 self-financing • They were upsetting substantial vested interest • In contrast, Terra is a win-winfor all key parties

  40. 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…

  41. How does one convince a corporate elephant to change? Regulation Education Financial Incentive

  42. 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 Financial Viewpoint Currency with Positive Interest @ 5%/year Value discounted to today: $ 61.39 Currency with Demurrage @ 5%/year Demurrage = time-related charge (opposite of interest) Value discounted to today: $ 168,903.82 $ 167.02 • Short-term thinking is not intrinsic to human nature, but created by today’s money system • NB: Historical Precedents: Dynastic Egypt, “Age of Cathedrals”

  43. Win/win Solution (4)Benefits for everybody • Makes Sustainabilitya realistic global objective =>Reversing the hourglass?

  44. Win/win Solution (5)Benefits for everybody • Makes Sustainabilitya realistic global objective • Terra countercyclical less instability in jobs

  45. Main lesson from the Euro…

  46. Follow-up • Texts available: • “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: blietaer@earthlink.net

  47. Two Implicit Hypotheses in Economics • Money is “value neutral” • 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. • Our money system is a given, like the number of planets in the solar system… • 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. • Both hypotheses have been proven invalid! • What becomes possible if we revisit them? => Addressing systems rather than symptoms…

More Related