Transforming finance

A lot of ink has been spilled in the last half decade over the financial sector and how and why it is failing to support the real economy. What’s been missing is solutions. We know a few things that can prop up what we have – ringfencing retail banks for instance, but do we really have to stick with our current banks?

Fortunately, there are those who are working on better ideas. Not just things to patch and prop up the status quo, but ideas that will make older models of finance redundant – direct finance, peer to peer, local and alternative forms of banking.

To find these sorts of things, you just need to know where to look. And one great place to look is the Finance Innovation Lab. They’ve just put together a great summary of what they’re about. It’s a short documentary called Transforming Finance. It’s talking heads from beginning to end, so you have to be interested, but they’ve got a whole host of thinkers and practitioners innovating around finance. Worth checking out if you’ve got twenty minutes or so.

Note: due to unusual levels of spam on this thread, I have disabled comments (Feb 2014)

15 Comments on “Transforming finance”

  1. henry1941 December 19, 2013 at 1:21 pm #

    This will disappoint. Surplus wealth is sucked up as rent. The Landlords’ Game plays on. Financial reform will end up with more wealth going in the landlords’ direction.

    Perhaps you should spend the holidays playing Monopoly after all. You can change the rules. More or less money as you pass Go. Partial or complete rent collection and distribution every 20 rounds of the dice. You could even run some sort of LVT, eg the difference between Whitchapel and the other sites. How would you allow another player to join the game when all the sites are “owned”?

    Lots to ideas to talk about there.

    • Jeremy December 20, 2013 at 9:43 am #

      You’re right – most of this is tweaking the rules of the existing financial game, and as such it doesn’t represent a ‘solution’. But since we’re stuck with this system for the foreseeable, I don’t see why it can’t be made to work better in the meantime. As usual, the important thing is not to stop here.

      • henry1941 December 20, 2013 at 2:20 pm #

        Everything done as a short term measure ends up as benefits mostly in landlords’ pockets. That is a law of economics.

  2. Dag Sjvik December 20, 2013 at 3:47 am #

    Part of the solution for creating more jobs is simply to relocate more money to employees. When rich people get more money, they don’t spend them (because they already have everything they need). When employees get more money, they spend them. This creates more jobs. I think the best way to relocate money from the rich to the average (and below) employees is to tax wealth a little bit. By just taxing wealth a fraction of a percent, huge sums of money will be available for governments. This will result in reduced tax on income for ordinary employees, thereby making more of their salaries available to them. Date: Thu, 19 Dec 2013 13:00:36 +0000 To: dsj@hotmail.no

    • henry1941 December 20, 2013 at 7:40 am #

      There is something fundamentally wrong with an economic analysis that advocates “job creation”. Why would anyone want to create a job? It is a principle of nature that tasks are done with the least effort. We travel by the shortest route. We buy where it is least trouble. Nobody in their right mind creates work deliberately.

      The whole concept of an economy as consisting of “jobs” that employers graciously hand out to workers is flawed. Please look underneath the surface and see what is really going on. For millennia, people survived perfectly well without “jobs”. Why cannot we all provide for our own needs, or produce and exchange freely to provide for each-others’ needs? Isn’t that what economic activity is really supposed to be for? And what is getting in the way? Is it really shortage of money, which after all is nothing more than a medium of exchange?

      • DevonChap December 21, 2013 at 2:48 pm #

        I agreed wholeheartedly with your first paragraph, then disagreed with your second. While a peasant may not have a paid job, he or she has to work incredibly hard to survive (and then many did not due to bad harvests and the like). The division and specialisation of labour that ‘jobs’ allow has made us all much more time rich as well as economically secure – we all have to work less to provide much more than we ever could as peasants.

        • henry1941 December 21, 2013 at 9:17 pm #

          True – and yet – you may not have been around at the time – in the early 1960s we were promised lives of leisure as computers would have taken over all the tedious labour. Yet, whereas one income was sufficient to support a family 50 years ago, now it takes two. The life of leisure has not happened for most of us, and people seem to have less leisure now than they did then.

          The huge increase in the productive power of labour has not trickled down. With a computer, I can do in a day what it would have taken a week to do only 20 years ago. There has been no five-fold increase in wages. Go back further and it is the same story – electricity, internal combustion, steam power, water power – each revolution increased the power of labour by an order of magnitude, but did real wages?

          • DevonChap December 22, 2013 at 3:55 pm #

            The standard of living you enjoy today is massively higher than in the 1960s. We didn’t need a five fold increase in wages when the prices of many many things have fallen by that much and more.

            To make a trunk telephone call of three minutes in 1966 would cost you 1-4 shillings. The cost of that call today would be less than 5p. And that call you can make from your pocket anywhere you happen to be, not screwed to the wall of the hall if you were wealthy or from a drafty box if not. That increased utility isn’t measured in GDP, RPI or other monetary measures.

            Despite eating more and a wider variety of food we spend about 10% of family income on food now, as opposed to 25% in the 1960s.

            Central heating, automatic washing machines, dishwashers, fridge freezers, colour televisions were rare and expensive in the 1960s. Personal computers, video games, DVD and CD players, smart phones – none of those existed. Yet now even the poorest families have these as they are so cheap.

            We are cleaner, warmer and better dressed. We travel more, do more.
            Our lifestyle is incomparably better than they were then.

            Ultimately if our productivity had increased as it has since the 1960s but our lifestyle had not (phones and cars rare, houses rarely heated, few consumer goods etc) then we could live lives of leisure because those things are so cheap now.

            The lifestyle of the common man or woman is vastly better than in the past, It was better after the steam revolution than before, better after electricity, after internal combustion. These all do have a big and beneficial effect.

            I fear you have some romantic idea of the past and discount the advances we have made.

          • henry1941 December 22, 2013 at 8:46 pm #

            That still leaves an important question unanswered. In 1963 it was possible to buy a home with one person’s earnings, now it takes two and still it is a stretch. Why is this?

          • DevonChap December 22, 2013 at 9:28 pm #

            You would have to have a very good income and the right background to buy a house in 1963 as the banks were reluctant to lend.

            Since the 1980s the mortgages have become available to ordinary people and the population has increased by 20%. for the last 15 years interest rates have also been historically low. The increase of demand and increase of supply of money has pushed up prices. Our restrictive planning laws prevent enough houses being built to fill the demand. Another reason is that far more couples have two earners.Since they are competing for houses that extra income goes towards the house prices.

            These are the reason house prices have rocketed. More money chasing a fairly static number of homes.

          • henry1941 December 22, 2013 at 10:22 pm #

            In 1963 you got a house purchase loan from a building society or the local authority. To claim restrictive planning laws are causing a supply blockage is implausible given the number of consents that have been granted but which have not been followed by construction. Figures of around 300,000 or more have been suggested. I know of city centre sites which have been vacant since 1986 WITH planning consent for development for most of that time. But in any case, the best residential sites cannot be reproduced by additional building.

            You have put your finger on the issue, however, when you say that higher incomes have simply driven up prices. I purchased a house in the centre of Brighton in 1983 and sold it for more than ten times that amount in 2012. I then purchased a flat for 2.6 million SEK in the middle of Gothenburg and that has gone up by about 10% since then. Where has all this value come from? I mean, who has created the additional wealth that a seller can claim?

          • DevonChap December 23, 2013 at 8:31 pm #

            Forgive me but in 1963 it was hard for the common man to get a mortgage.

            From your previous posts you have said you were a scientist. Assuming you had a degree for that in 1963 you would have been in the top 10% educationally. Banks would be much more likely to loan you money. Don’t forget in the 1960s the government set limits as to how much banks could lend. It is the lower orders getting above their stations and buying houses that causes the problems you see.

            Of course higher incomes have driven up prices (nice that you admit incomes are higher).Supply and demand. The number of households has increased faster than homes at the same time as incomes have increased so the fixed constraint(houses) is able to command more. It is very similar to the way increased TV rights for sports goes almost entirely into top footballers wages.

            300,000 homes is a pin-prick in our requirements. So even if builders are sitting on that number of permissions (hey its not like they might have problems getting the money to build them or anything) that is 1-2 years building even at current rates. Since it takes several years to get permission for big builds that is hardly a big cushion or very unreasonable. We didn’t have a problem with hose prices in the 1930s because people could build with few restrictions. Neither in the 1950s since councils did the building and planning so approved their own schemes. Now is very different.

          • henry1941 December 23, 2013 at 9:06 pm #

            In 1963 the lower orders were all living somewhere so the difference was tenure, not occupation. House purchase was by mortgage loan from building societies, not banks, and only one income was taken into account in making the loan, which was restricted to about 70% of the valuation. In the later 1960s, building societies started to take partners’ incomes into consideration, and this supply of additional credit is what drove up the prices, leading to the first of the three post-war house price bubbles which burst in 1974, following a couple of years where gazumping became widespread. Note also that it is not the value of the bricks and mortar that went up, but of the underlying land values.

            Household formation is to some extent promoted by additional supply. So it is impossible to put a sensible figure on requirements – it is a moveable feast. If the builders cannot get the credit to carry out the construction, as you hint at, then it is not planning that is the bottleneck. I am not, by the way, trying to defend the planning system, but getting rid of the controls is not going to cure the shortage. The whole way the land market operates guarantees that there will always be a shortage.

            Thus, in the 1930s there was still no surplus of affordable decent housing, despite the large scale of building which went on then. This development was in any case made possible because of infrastructure improvements without which the people who lived in those houses would not have been able to travel to work.

          • DevonChap December 24, 2013 at 2:18 pm #

            Are you suggesting that house shortages would reduce divorce? Family-break up along with immigration is what has driven the increase in households. The cause of those is greater female emancipation and greater freedom of movement. Neither is caused by housing supply.

            There is an argument that young people expect to live away from home when they are in their early twenties, which they wouldn’t have in the past and rising housing costs are curtailing this. So supply does have an effect but whether this is desirable is another question.

            Running a building firm is a difficult thing. You want to build a similar number of houses each year. Since planning takes time and is unpredictable (appeals may drag on unexpectedly, you may get turned down or accepted more than you expect) builders want to have several years worth of land with planning to smooth out the construction. If I built 2,000 houses this year, 300 the next and 1,000 the third I would need to be hiring and firing lots of staff. While if I built 1,100 a year for 3 years I can give certainty to my staff, as well as my investors. Easier planning wouldn’t change all of that but would mean there wouldn’t be a need to sit on anything since a lot of that uncertainty would vanish.

          • henry1941 December 24, 2013 at 2:43 pm #

            The availability of housing has an important bearing on household size, in both directions. It is a major factor in people’s decision whether to share or live separately, especially among the young.

            You are talking about large building firms. These companies make most of their profits not from construction but from the increases in land price which occur when planning consents are granted, and from the further increases in land price during the land price cycle and by getting their timing right. There are huge profits to be made by purchasing land decades in advance and then waiting for demand to catch up. That is classic speculation of the worst sort. There is also something seriously amiss with the way that house building is concentrated into the hands of so few companies, resulting in local monopolies of supply and poor consumer choice.

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