Another day another conference, this one was about “Fixing our banks – what to fix for whom?” at South Bank University.
There was a decent turnout of students and academics, and a panel providing a multidisciplinary view from auditors, customers, shareholders and employees perspectives, along with my own.
I opened the proceedings and said something like the following:
“So, we need to fix our banks according to the title of this meeting, but why? That implies there’s something wrong with our banks and so, before I go any further, I need to know what you think.
Who here thinks that banks are morally bankrupt parasites on society?
The majority of the audience raised their hands.
Good evening ladies and gentlemen.
I wasn’t sure how to start this evening, and decided to begin with the collective noun for a group of CRO’s. You are collectively known as a murder.
Now I hope you won’t murder me for telling you that as a murder of CRO’s you are a collective failure.
Oh dear, that’s not a good start, is it?
I was asked to chair a panel at the end of a one day conference on the future of payments.
I therefore listened to every presentation carefully and, in opening the panel, was asked to give a ten minute summation of what I had heard that day.
Here’s what I said:
There are a number of themes that emerged today, many of which allude to the march of technology. The keys were:
The bottom line was that this is all about the war on cash and, if you think that the world is defined by the predictions in programmes like Star Trek, then take note that in most futurist films there are no cash or physical payments.
However, more importantly, it’s about what happens when you transform the world and eradicate cash?
Transformations take place by changing people, process and technology, and what we have here is technology transforming people and process.
The technology is mobile and contactless, but it’s more than this – it’s the connected planet.
Until recently, businesses were connected with businesses and governments with governments via mainframe systems.
That changed with the PC, but the PC only connected those with a lifestyle that covered the costs of the technology. That meant only those who could afford one, and limited the world of connections to the developed economies consumers.
Now, thanks to mobile ubiquity and low-cost, every single person on the planet is connected wirelessly.
Everyone has a connection to each other, P2P, in their pocket, purse or loin cloth.
That’s the big difference and, for finance, the massive difference is that we have reached a tipping point where transaction engines for payments are in the hands of every person on this planet.
That changes the process.
The process changes because it is not just simple transaction engines that are in the hands of every person on the planet, but a whole range of mobile financial services from mobile contactless to mobile proximity, from mobile money transfers to mobile bill payments, from mobile online payments for physical goods to mobile online payments for digital goods, from mobile as a point of purchase to mobile as a point of sale, from mobile as a loyalty programme for coupons and offers to mobile identity and authentication.
The mobile planet is a raft of innovation and change, and it is difficult to keep up with all this innovation and change in our processes because we are hamstrung by our heritage.
We embedded our world in old style business to business systems, and now the consumer driven world is demanding rapid change to those systems which are hard to change (note: this is why I cannot get a charge card that works on my mobile or even on the internet).
We also are seeing so many forms of payment – contactless, QR, mobile – that it challenges us to know where to focus and invest … after all, changing processes means changing organisation products, services, structures and that’s costly too.
Or is it?
Is this replacement, evolution or co-existence?
Do you have to adapt processes to support some forms of mobile payment or all?
Where do you place your bets?
Finally, if the technology and process changes, so do people.
We are told that Google, mobile and social media is rewiring our brains.
We all suffer from attention deficit disorder.
You’re all sitting there now playing with your iPads, iPhones, androids and blackberries, more interested in who’s connecting virtually than who is here in reality.
I don’t blame you – I do the same.
But the reason we are all here talking about mobile and new forms of payment is because our customers are.
Customers are more loyal to their mobile connections than their partners
So the question from the people side of change is two-fold.
First, we need to break the shackles of being hamstrung by heritage. As many people tell me, the only place we engage with old technology is when we go to work.
Second, we need to work out how to keep our information secure as, right now, it’s not.
Sure, we need to analyse customer data to sell more and service better, but the customer doesn’t want to be digitally raped.
We talk about permissions based marketing, but the customer wants to keep their privacy.
However, conversely, the customer then goes onto Facebook and gives away their email, mobile, relationships and more.
There is no privacy or security, so how can we keep ourselves secure and private?
That’s a good way to start our debate with the panel, so firstly to …
I attended an interesting lecture last night from an economic legend: Professor Amartya Sen of Harvard University.
If you haven’t heard of him, he’s known as the Mother Teresa of economics in his native India, and has spent a lifetime fighting poverty with analysis rather than activism.
Awarded the Nobel Prize in Economic Sciences in 1998, for his contributions to welfare economics and interest in the problems of society's poorest members, Sen is best known for his work on the causes of famine.
He is currently Professor of Economics and Philosophy at Harvard University, as well as being a senior fellow at the Harvard Society of Fellows, distinguished fellow of All Souls College, Oxford and a Fellow of Trinity College, Cambridge, where he previously served as Master from 1998 to 2004.
An impressive guy.
Amartya delivered his speech as part of the London Stock Exchange Group series of lectures on the future of global finance, and the evening was hosted by LSE Chairman, Chris Gibson-Smith.
Here’s a brief summary of Amartya’s sentiments (I say ‘sentiments’ as this is not a record of his speech and incorporates my own spin on his words).
Some people say we live in interesting times, but I think we live in baffling times.
We live in baffling, rather than interesting, times because it is very hard to get any clarity about the future.
The only thing that is certain is, in the words of George Bernard Shaw, “the greatest of evils and the worst of crimes is poverty”.
Shaw wrote this in the Preface to his brilliant play, Major Barbara, published in 1907.
The tragedy of poverty is, of course, obvious to all - whether in Latin America, or in Asia or Africa, or in Europe and the United States.
The calamity of deprivation and penury can hardly be missed by those who have bothered to think about the subject, no matter whether they are themselves poor or not.
Lives are battered, happiness stifled, creativity destroyed, freedoms eradicated by the misfortunes of poverty.
But Bernard Shaw was not talking, on this occasion, about the hardship of poverty, or the misfortune that goes with it.
He was commenting, in a rather unusual way, about the causation and consequences of poverty - that it is bred through evil and ends up being a crime.
If poverty is indeed an evil, not to mention “the greatest of evils” as Shaw puts it, then there must be some wickedness, or at least some culpability, behind poverty - some wrong-doing that allows such human tragedies to occur and persist.
This raises the immediate question: who, then, are the wrong-doers?
If you look to protesters today, such as the Occupy Wall Street movement, the wrongdoers are represented by the corporate greed of capitalists and the banks.
You can just as easily take the opposite view however, and look to the Tea Party movement who see the failure being that of government and government policies.
The Tea Party align with Adam Smith, the guru of capitalism, and believe that free markets should rule.
Who is right and who is wrong?
Or is this the right question?
In thinking about strategic issues, we cannot but go into the question of culpability and the failure of duties and obligations.
We have to ask: how can things be done differently so that the evil of poverty is ousted?
We have to identify the nature and genesis of the wrong-doing that is responsible for the affliction.
That is not, however, the same as trying to identify the wrong-doers?
The identification of wrong-doers is not our task and trying to identify the evil-doers is not the right strategy since the responsibility for creating an evil is very widely dispersed in the society.
We have to see how the actions - and indeed inactions - of a great many persons together lead to this evil, and how changing our modes of actions - our policies, our institutions, our priorities - can help to eliminate poverty.
Our focus definitely has to be on removing evil-doing, as part of our strategies and programs, rather than going on the wild-goose chase of catching the hugely dispersed collectivity of evil-doers, who may not even fully understand how their actions can be seen as part of an evil state of affairs.
In fact, we should eliminate the discussion of wrong doers completely, and focus our efforts more on how to stop poverty full stop.
This is why strategies such as closing sweatshop labour factories in poor countries, or arresting those who employ children in the making of carpets, would fail to eliminate the poverty of the victims if such action is separated from a general economic and social program.
In the vast majority of cases the employees are there in those terrible jobs because they have very few options - none that are particularly good.
This is because there has been a failure of the state and the society to create opportunities for decent employment, which makes it possible to recruit labour to do terrible jobs as the alternative may be unemployment and starvation.
That is why exploited labourers are led to soul-destroying work today in the poorer countries, and closing down sweated-labour factories without giving the victims alternative opportunities for employment or education - the latter is extremely important in the case of child labour - is not an adequate solution to the problems and predicaments of the precarious poor.
There is, of course, moral merit in restraining the pursuit of profit of businessmen through exploiting vulnerable and freedom-less labour, but a fuller solution can emerge only through positive opportunities of alternative employment and occupation, and that demands societal action.
So the first action to address poverty is to expand labour opportunities and assist in education, and not to just shutdown existing sources of income.
My argument so far has been based on seeing poverty as lowness of incomes.
Is employment with income a full solution to all problems of poverty?
To believe that would be to underestimate vastly the complexity of poverty, particularly the nature of persistent poverty.
By way of example, lowliness of income is the primary cause of starvation rather than the lowliness of the availability of food.
Is employment for income in order to buy food the answer to everything therefore?
No, as this misses the point of why there is persistent poverty
Strategic examination about eliminating poverty, or even reducing its burden, has to go more deeply into the nature of poverty.
Poverty is about the inability to lead a decent, minimally acceptable life, and while low income does make it difficult to lead a life of freedom and well-being, an exclusive concentration on seeing poverty as lowness of income misses out a great many important connections.
What are the other non-income factors that contribute to poverty: a lack of education, availability of work, investment in infrastructure and more, and capitalism addresses these issues by providing an insurance.
For example, all affluent societies have addressed extreme poverty issues through public policy programs, such as the public pension, the provision of school education, the availability of healthcare and more non-market non-commercial arranged facilities.
The economics of these areas are not obvious except that an insurance system run by the state or by some other social support system, not by profit-oriented private firms, may be a necessary part of the elimination of poverty.
Affluent societies focus upon profit maximisation and the unrestricted search for profit, but if they only relied on profit maximisation they would not function.
As a result, they balance between market mechanisms and state activities.
There is no strategic formula as to the correct balance between market mechanisms and state activities – the contrast between China and Taiwan or America and Sweden are good examples of how approaches differ – but we need to understand these balances in order to create a better world that addresses poverty with finance.
Does this mean arguing against Adam Smith’s principles for free markets?
That view is a result of a huge misunderstanding of Adam Smith’s principles, and my position is strongly influenced by his.
Adam Smith clarified how markets work and how they can work exceedingly well. He believes that you need a well-functioning market economy and clarity of why you want such efficient markets to be.
The task of politicians in managing the economy is then to search for two distinct objectives: first, to provide plentiful revenue to cover the basic subsistence needs of the people before the subsistence needs of the state; and second, to provide the state with enough revenue to finance public services.
The financial focus of public services is a critical part of Smith’s work and Adam Smith had an overwhelmingly clear view about support of the poor and undersupported in his market view.
Within his free market principles, he clearly defended the role of the state to fund public services, such as education and poverty relief.
Adam Smith was deeply concerned about the inequality of society and never used the word capitalism.
The word capitalism does not appear in any of his books or any other writing, and it would be hard to carve out anything in his works on market economies that were based purely upon capital.
For example, he specifically argued about protections from unlimited usury practices.
So how should we think about the wrongdoers that need rectification, and how should we address poverty?
According to Adam Smith and my own thinking, the key is increasing employment.
Increasing employment must remain a worldwide priority and China, Brazil and India are doing much better at this than America and Europe.
As employment and economic welfare rises, the state must use such employment to improve public services for good living and public welfare and, in this respect, India is not doing this as well as China and Brazil.
Finally, for the West in general and Europe in particular, the crisis of 2008 was created by the malfunctioning of market economies – the result was the state had to create support for their economies and this is the reason for rising sovereign debt.
But the cause of this malfunctioning is clearly what was thought of as lack of accountability of governments, but governments are accountable and this is what we are seeing today.
What we are seeing is that, in order to pay back their debts, governments have far more accountability. However, they are addressing this accountability in the wrong way.
It’s hard to see how massive austerity drives, which cuts demand and growth, can therefore be supported,
Just look at Japan and learn from what happened there over the last 20 years of austerity, which is still biting.
What these governments need is fast economic growth.
Economic growth creates resources to address unemployment and poverty.
This is the key to addressing issues in Europe and the West, and it is the indiscipline of governments that has failed the markets, not the markets themselves.
Europe needs a better form of economic accountability and management of their economies, rather than austerities which decimate human lives and economic growth.
In conclusion, I end by affirming that George Bernard Shaw was right, a hundred years ago today, to point to the connection between poverty and evil and crime. The fact that this insight came not from an economist but from a dramatist and literary giant fits in well with my general thesis that the economics of poverty involves much more than just economics. Human lives in society are interlinked through economic, social, political and cultural associations. The nature, causes and consequences of poverty reflect the richness of those connections. We have no reason to be surprised by that elementary understanding.
Amartya then took Q&A from the floor and was asked a few interesting questions.
Q: You appear to be saying that in this current crisis, it is the failure of states to regulate markets effectively that failed, rather than the markets themselves. Is this your view?
You cannot separate markets and state, and this crisis was a failure of both, but you also have to be aware of the relationship between free markets and state influence.
For example, Adam Smith argued against usury, but was convinced to change his thoughts on interest after reading the works of Jeremy Bentham.
The core of how markets and state should work is that free markets is the most efficient model of economic management, but free markets need states that set efficient regulations to avoid failure in order to be truly workable.
As this shows, free markets and the state are two separate entities that are interdependent.
A key question in the last crisis however is whether globalisation killed that interdependency to cause the spiral of crisis we see today.
Globalisation may have undermined national states, as government can no longer effectively regulate the free markets?
There may be some truth in this statement, and this is why the G20, G8 and other global activities – the World Bank and IMF included – are key to solving these issues this time around.
Q: Do you think the euro will survive?
When the euro was created, I didn’t see why it was needed and didn’t believe it made sense. I am a fan of Europe, don’t get me wrong there as my late wife was Italian, but to start a European integration without a fiscal foundation meant that it was never going to work.
You can see this today as many parts of the EU are not served well by a Europe that has no fiscal union. Greece is a good example.
Now however the loss of a country would be very destabilising for this European Union.
This is why Germany is being forced to bailout Europe.
Could they retreat out of it? Yes.
Is that the right thing to do? I think so.
Postnote: some of Amartya’s speech is taken from a write up of an earlier presentation he made in 2007. These words of wisdom are integrated in parts of this article to ensure more accuracy of content.
As mentioned a couple of weeks ago, I took place in an interesting webinar recently with James Gardner, author of "Innovation and the Future Proof Bank"; Gijsbert Koren, author of "Crowdfunding - The New Investing"; and Rhydian Lewis, CEO of RateSetter.
The focus was around innovation and P2P financial markets, and the webinar has now been posted online for all to see.
It's in three parts.
The first part has me, James and Gijsbert talk about our books:
The second part looks at innovation in finance in general:
And the final part reviews the trends in P2P lending and funding:
Worth a look if you have 90 minutes to spare!
I was honoured to be the guest speaker for the Worshipful Company of Information Technologists at their Quarterly Lunch yesterday. The lunch was held at the Tallow Chandlers' Halls in the City ...
... although the technologists are not candlestick makers, they know where to have a party.
Anyways, in the spirits of keeping my speeches for the record, here's what I said:
Master, wardens, ladies and gentlemen, thank you for inviting me here today.
And my theme is long-term investing versus the short-term.
SHORT SELLING AND HIGH FREQUENCY TRADING ARE THE MANTRA OF TODAY’S INVESTMENT MARKETS.
It's worth discussing in depth, but we don't have time today, so here's the basics of how short selling works.
You have stocks which I borrow for a fee.
I then sell your stocks at a price of let’s say £10 and, due to the markets seeing the stocks sell in larger numbers, the price falls.
When the price is low enough, I buy the stocks back at let’s say £5, making a £5 profit on each.
I then give you your stocks back and, as you’re there for the long term, we both win in the short term.
You get a fee, and I get a profit.
It's greedy, but it's legal.
THE QUESTION IS WHETHER THIS IS BAD OR, RATHER, IS GREED GOOD?
Short-termism and making a quick buck, is not an issue is it.
It’s just greed that drives this behaviour and, as in the words of Gordon Gecko in the film Wall Street:
“Greed, for lack of a better word, is good. Greed is right. Greed works. Greed clarifies, cuts through, and captures, the essence of the evolutionary spirit. Greed, in all of its forms; greed for life, for money, for love, knowledge, has marked the upward surge of mankind and greed, you mark my words, will not only save this company, but that other malfunctioning corporation called the USA.”
SURE, GREED IS GOOD … IT HAS DRIVEN US FORWARD FOR YEARS.
THINK ABOUT IT.
All progress throughout history has been driven by short-term greed, no better illustrated than by the immortal words of Orson Welles in the Third Man:
"In Italy, for thirty years under the Borgias, they had warfare, terror, murder and bloodshed, but they produced Michelangelo, Leonardo da Vinci, and the Renaissance. In Switzerland they had brotherly love, they had five hundred years of democracy and peace, and what did they produce? The cuckoo clock."
Greed, like war, characterises humanity.
Greed is good.
Without greed, you would not have progress.
Without greed, there would have been no Renaissance.
Without greed, there would be no industrial revolution.
Without greed, there would be no British empire.
And without greed, there would be no information revolution.
And this is why we all focus upon the quick buck.
WHO, HERE, HAS NOT WANTED TO MAKE MONEY FROM THEIR HOUSE?
From their shareholdings?
From their investments?
You may say you invest and save for the long term, to pay off a mortgage and build a pension, but who here would not want to make a quick buck given the chance?
Who wishes they had invested in Microsoft when the shares were $1 … or Google … or Facebook?
And who here laments the fact that instead, they bought shares in Lotus … or Ask Jeeves … or Friendster?
We all want to make a buck and none of us is that bothered about the long-term.
That is because we are all driven by the same needs of instant gratification and instant need.
IT’S IN OUR NATURE.
Animals do not defer greed.
If you offer an animal unlimited food, they will eat until they can eat no more.
They have no patience as patience is a uniquely human characteristic.
No animal demonstrates patience like humanity, as it is part of how our brain is built.
WE CAN PROVE IT.
Before 50,000 B.C., very little happened.
The GDP of the planet stayed consistently low.
Then something changed.
In 50,000 B.C., Neanderthal man died out and homo sapiens took over.
The pre-frontal cortex provides patience, whilst the limbic mid-brain around the cerebral cortex dominates with impatience.
Neanderthals had a short frontal lobe, which is why their forehead is angled, whilst their skull was larger at the rear to accommodate the cerebral cortex.
This is similar to most animals as the mid-brain dominates their behaviours.
As a result, animals are impatient by nature, and seek instant gratification to instant needs.
Then the homo sapien emerged.
The homo sapien's forehead is flatter and this change is due to the prefrontal cortex increasing in size to accommodate our ability to think rationally and, as part of this, to demonstrate patience.
For the first time, an animal demonstrated the deferment of short-term pleasure for long-term gain.
Hence, patience is a virtue that homo sapiens discovered and is what characterises mankind and civilisations.
It is the reason why productivity increased so rapidly from 50,000 B.C. onwards.
We learned to think rationally and store food for the winter, rather than eat it today.
We learned to build houses, rather than live in caves.
We learned to farm, rather than hunt.
All of these skills required patience.
AND THIS IS WHY LONG-TERMISM IS IMPORTANT.
It is the reason why the Egyptians built Pyramids and the Church built Cathedrals.
It doesn’t focus upon net present value, but focuses upon leaving something wonderful for future generations and protecting such investments for the long-term.
There are many examples of how long thinking works.
One such example is New College Oxford which, being British, was actually established in 1379 and isn’t new at all.
The College’s Great Hall has this fantastic arched ceiling with oak beams.
After five hundred years, the beams were rotting so badly they needed to be replaced.
So the Dean of the College asked the groundsmen if they knew of anywhere to source some similar beams?
“Oh yes”, the head groundsman said. “Five hundred years ago, when they built the college”, he told the Dean, “the founders planted a forest of oaks of the same wood as the one’s used in the ceiling just over there.”
In other words, they had had the foresight to realise that, at a point in the Long Future, the ceiling beams would need replacing so they planted trees for just such an occasion.
THAT’S LONG THINKING.
Another example is the Dutch Government, who spent €450 million building the Maeslant barrier to protect the reclaimed land across the Coast of the Netherlands.
€450 million on an event that may never happen makes sense ... because if it did, the cost could be, let’s say, €60 billion.
What could cost €60 billion?
The devastation and disaster caused by a major flood of the Dutch coast.
And this is also the cost of the sinking of the major American coastal city, New Orleans, in 2005.
Hurricane Katrina cost the USA over €60 billion.
If the USA had thought long, they would have spent the billion it would have cost to build the flood defences for the southern coastline, and saved themselves €60 billion.
THAT’S WHY LONG THINKING IS IMPORTANT, BUT WHO BOTHERS ABOUT LONG-TERMISM?
Who wants to invest in something that might pay off in a hundred, or a thousand or ten thousand years?
Well there are some people.
And they are called Long Finance.
Long Finance wants to protect this world by looking at net long-term value, rather than net present value.
AND WHY IS LONG THINKING IMPORTANT TODAY?
Some would say because our planet is screwed.
Others because it will be if we don’t change our ways.
And others would say we uniquely adapt, as demonstrated by carbon credits and clean biofuels to address climate change.
BUT CHANGING OUR WAYS IS NEVER EASY.
Especially as impatience is in our very nature and patience is something we’ve learned … and are still learning.
And, as we talk about short selling versus long finance, we will have a continual mismatch of needs and expectation.
For example, I heard a story the other day that reflects the long versus short debate well.
A banking friend of mine told me that his son came up to him the other night and asked: "Dad, how does capitalism work?"
His Dad says:
"Well son, let me try to explain it this way: I'm the breadwinner of the family, so let's call me the Capitalist.
Your Mum, she's the administrator of the money, so we'll call her the Government.
We're here to take care of your needs, so we'll call you The People.
Your nanny, who looks after you and your baby brother, we'll consider her to be the Worker.
And your baby brother, we'll call him the Future.
Now, think about that and see if that makes sense."
So the little boy goes off to bed thinking about what Dad had said.
Later that night, he hears his baby brother crying, so he gets up to check on him.
He finds that the baby has severely soiled his nappy so the little boy goes to his parents' room and finds his mother sound asleep.
Not wanting to wake her, he goes to the nanny's room. Finding the door locked, he peeks in the keyhole and sees his father in bed with the nanny.
He gives up and goes back to bed.
The next morning, the little boy says to his father, "Dad, I think I understand the concept of capitalism now."
The father says, "Good son, tell me in your own words what you think capitalism is all about."
The little boy replies, "Well, while the Capitalists are screwing the Workers, the Government is sound asleep, the People are being ignored and the Future is in deep shit."
ON WHICH NOTE, LET’S TALK ABOUT THE FUTURE.
In the future, banking, government, society and the world will be different.
It already is, as illustrated by the fact that SEVEN BILLION PEOPLE in this world now have access to wireless infrastructures through mobile devices.
The world is now connected P2P and C2C.
Forget B2B and B2C … today’s world is all about ‘me’ to ‘you’.
And what that means is that every single one of the seven billion people can be a communicator, developer, producer and entrepreneur.
So here’s to a planet where wealth generation through wireless technologies gives everyone the opportunity to be a millionaire.
But if you are to compete in that future planet, you need to think long as that gives you the ability to compete as illustrated by these wise words from Jeff Bezos, CEO of Amazon:
"If everything you do needs to work on a three-year time horizon, then you’re competing against a lot of people. But if you’re willing to invest on a seven-year time horizon, you’re now competing against a fraction of those people, because very few companies are willing to do that. Just by lengthening the time horizon, you can engage in endeavours that you could never otherwise pursue."
THERE’S THE KEY: THINKING LONG AND HAVING A VISION.
And how do you get that.
Well, there’s two ways to think about it.
First, think about it like a Chief Financial Officer (CFO).
And a CFO I knew once met the Devil.
The Devil said to the CFO: "I can make you richer, more successful and more famous than any other CFO alive. In fact, I can make you the greatest CFO that ever walked the planet."
"Great" says the CFO, "What do I have to do in return?"
The Devil smiles, "Well, of course you have to give me your soul," he says, "but you also have to give me the souls of your children, the souls of your children's children and, just for good measure, you have to give me the souls of all your descendants throughout eternity."
"Hmmmm," says the CFO, cautiously considering … "and what's the catch?"
Or you can think of it like the late, great Steve Jobs.
Steve Jobs has many quotable quotes, but I think this one sums up thinking strategically: “"Being the richest man in the cemetery doesn't matter to me … Going to bed at night saying we've done something wonderful … that's what matters."
So go do something wonderful and build something for the next millennia rather than the next minute.
I’ve blogged a lot about the Long Now and Long Finance in the past. If you want more of this, just go visit The Long Blog about the Long Now for a full summary.
Also note that the sections of this speech about the brain is extracted from the speech of Andrew Haldane I summarised earlier this week. Not surprising as he was talking Long versus Short. A coincidence, as my theme was given to me by the Worshipful Company several months ago, but good timing nonetheless.
Last night was the occasion of the Sir John Gresham annual lecture.
This year it was held at the Four Seasons Hotel in Canary Wharf with the keynote speaker being Andrew Haldane, or Andy as is the preference, Executive Director for Financial Stability with the Bank of England.
Andy is speaking at the Financial Services Club in 2012, so I was particularly interested in his speech, as well as the fact that I’ve heard and read much about him in the past.
Andy’s theme for the night was short versus long-term investing, and whether short-termism is a good or bad thing.
This theme was based upon Gresham’s Law – bearing in mind this is the Sir John Gresham lecture – that bad money will drive out good. In today’s parlance, short money will drive out long.
But this is nothing new, Andy argued, as short-termism has been with us since time immemorial.
Just look at a few notable quotes from history:
“The untutored savage, like the child, is wholly occupied with the pleasures and troubles of the moment; the morrow is dimly felt; the limit of his horizon is but a few days off”, Jevons (1871)
“Like children who pick the plums out of their pudding to eat them at once”, Marshall (1890)
“It implies only that our telescopic faculty is defective, and that we, therefore, see future pleasures, as it were, on a diminished scale.” Pigou (1920)
It’s all about impatience versus patience and our inability to defer today’s pleasures until tomorrow.
That’s the nature of why we are short rather than long term.
But patience is a uniquely human characteristic.
No animal demonstrates patience like humanity, as it is part of how our brain is built with the pre-frontal cortex providing patience whilst the limbic mid-brain around the cerebral cortex dominates with impatience.
So what is this all about?
Well, from a million or so B.C. to around 50,000 B.C., very little happened.
The GDP of the planet stayed consistently low.
Then something changed.
In 50,000 B.C., Neanderthal man died out and homo sapiens took over.
Neanderthals had a short frontal lobe, which is why their forehead is angled, whilst their skull was larger at the rear to accommodate the cerebral cortex.
This is similar to most animals, who are impatient therefore and seek instant gratification to instant needs.
Homo sapiens emerged, and their foreheads elongated as the frontal cortex increased in size.
Hence, patience is a virtue that homo sapiens discovered and is the reason why productivity increased so rapidly from 50,000 B.C. onwards.
The brain is still developing dynamically, and technology today is changing how our brain works.
For example, there was recently a study released that proves that internet search engines are changing the way our brains remember information, as readily available information online makes people easily forget facts since computers become their external memory.
Our attention span is shortening as a result, with jobs, relationships and attention all collapsing into shorter time cycles.
Football managers used to get four or more seasons to prove themselves; now they’re lucky if they last more than one.
Alex Ferguson may well have lost his job 25 years ago, if today’s climate of rapid churn had applied back then.
CEOs used to have a tenure of ten years or more; today, the average is under five.
And marriage is an institution that is lucky to survive till death doth you part.
This applies equally to shareholdings, where the average holding of shares today is months compared to decades forty years ago.
The result is the short money will drive out long, and this self-destructive behaviour is easily seen in evidence today.
For example, in a recent survey, 78% of CFOs said that they would rather sacrifice economic value for smooth quarterly earnings.
That means they would rather avoid investing in their firm’s future if it meant this quarter’s earnings would be consistent.
We see this in dividends.
Forty years ago, dividends were not always issued.
If the company was struggling or needed to invest, they would withhold dividends.
Dividends are issued every quarter, regardless of how the firm is coping.
Maybe this reflects the pressures on stock prices and management who often have a stake in their firm’s performance due to share options.
Or maybe it’s just the pressure of the short-termists and the capital markets.
But myopic investing is not necessarily good for growth.
For example, using net present value discounting in a myopic view means that you can see negative returns on projects that would actually be delivering profits in a rational view.
As little as a 0.1 change in NPV can make the difference.
Equally, it shows itself in how firms operate their Research & Development (R&D) budgets.
A survey of the Top 1000 UK corporations found that only 1.39% of revenues were invested in R&D in listed companies compared to an average 2.63% for unlisted companies; similarly only 1.44% of revenues were placed into R&D for UK owned companies compared to 2.7% for UK based companies owned by overseas corporations.
Short-termism is rife in our businesses and it constrains long-term growth and value.
A similar survey was performed across 100,000 US companies by Asker and company found that private firms are over twice as likely to invest in the long-term value of their firms when compared with public companies, and over three times as likely to consider such investments.
So Andy’s presentation kind of summarised the nature of short term capitalism, or quarterly capitalism as McKinsey call it, and he concluded with a few ideas as to how to rectify such short-termism.
These included bringing in some longer term performance metrics for corporations and investors based upon their rate of portfolio churn, R&D spend, etc; linking shareholder rights to the length of a shareholder’s share holding; linking capital gains tax to length of the holding, such that you pay lower taxes for longer holdings; and more.
All good ideas and a view that, at the end of the day, we need to stop the short-termists “picking the plums from the pudding” or allowing the “untutored savage” to ravage the markets.
Andy was then asked a few questions form the floor.
I was amused to hear him talk about lessons from the crisis and that we thought we needed “more regulation and this time it will be better, and more regulators but this time they will be smarter. That kind of didn’t work. We must look instead at the fundamentals of the financial markets structure and address core issues such as the fact that there are some very big banks and many small banks but a missing middle. There aren’t enough mid-size banks out there.”
He did say that regulators are getting some things right now: they recognise the importance and implications of systemically important financial insitutions (SIFIs) and the capital requirements for large banks that go with this. On the downside however, regulators are still grappling with births and deaths - making it easier to get new banks born and unworkable banks removed.
He also has a dramatic turn of phrase.
Take this one for example: “almost all dinner party conversations I go to about the post financial crisis, I go in depressed and leave suicidal.”
But, on regulations and monetary policy, he concluded that “the game is to slow down the deleveraging of the global markets and that is what we have done through zero percent interest rates and quantitative easing.”
On that note, I think he’s pretty much spot on and look forward to meeting and hosting Andy at the Financial Services Club next year.
For a more expansive version of this speech, a similar presentation was given by Andy in May 2011, to the 29th Société Universitaire Européene de Recherches Financières Colloquium: New Paradigms in Money and Finance? in Brussels.
Talking about the St Paul’s protesters yesterday, you do wonder if they maybe have a good point or two to make.
Like their American counterparts, I’m sure they do but unfortunately it’s all a bit loose and airy-fairy, with a mixture of happy-clappy hippies, anarchistic anti-capitalists and an articulate few who can say it’s all about corporate greed.
Trouble is that’s too loose and unfocused to be an agenda for change that will work.
What’s needed is a singular objective such as: tie every corporate action to something that delivers benefits to society, or something like that.
A method whereby every transaction, every commercial movement, every electronic transmission submits a direct benefit to communities, citizens and taxpayers.
It doesn’t have to be in a tax form – it could be committing staff time to community projects – but it has to be allied, linked and integrated into commerce directly and with transparency.
Anyways, that’s not my agenda.
My agenda is banking and what needs to change there, and it was interesting talking with bankers yesterday about St Paul’s and other matters, in that the subject of religion came up several times.
Morals, ethics and religious focus is a mantra that’s been around a while now.
It first came up for me when I presented at Gresham College a couple of years ago.
At the time, there was this big debate about much of banking being ‘socially useless’, and how to turn this into something socially useful.
Various banks made commentary about this theme, and it was interesting that the two most outspoken leaders were both lay preachers: Sir Stephen Green, Chairman of HSBC at the time, and Ken Costa, former Chairman of Lazard International.
Back in 2009, both were talking about the industry losing its moral compass and how it was requisite to bring that bank.
The latter is now very active in making that happen by promoting an ethical code to the City, after leaving Lazards in March this year.
The issue for Costa is one of faith, as he is very active in the Church.
This is why he’s penned several articles about faith in commerce, with the latest in the weekend Telegraph saying that the City must rediscover its morality.
In the article, he states that although he believes that free market are the best way to create growth and jobs, boards and shareholders must have a better understanding of what constitutes real value.
“The present duty – on all boards to maximise shareholder value as the sole criteria for satisfying the return to shareholders – cannot continue. I am aware that this is a big change that will need detailed discussion, but we need to start with big ideas.
“For some time and particularly during the exuberant irrationality of the last few decades, the market economy has shifted from its moral foundations with disastrous consequences. I cannot recall when public feeling worldwide has run so high, and even if only a minority takes its anger on to the streets, no one should imagine that the majority is indifferent to their cause.”
Mr. Costa should know what he’s talking about as he’s been appointed by St Paul’s to negotiate with the Occupy London Stock Exchange (#olse) group to see how to create an ethical corporate agenda for change.
He’s actually supported by a large group of people called: The City.
It may be surprising to some that the St Paul’s Institute ran research that was about to be published as the protesters moved in, which discovered most City workers believe inequality is a real issue.
The survey interviewed 515 financial professionals during August and September, and found that 75% thought that the wealth divide is too great and two-thirds believe that bankers are paid too much.
Interestingly, over half stated that deregulation of the financial markets had led to unethical behaviour (you can download the report if interested).
And maybe there’s the point.
Historically, banks have had a religious backbone.
For example, in my meeting yesterday were former directors of Barclays Bank and Barings Bank. Both said they started each day with “Director’s Prayers”, with a salutation to God each morning as a group.
That backbone has been lost since the Big Bang, they claimed (October 1986).
One of them said that the City would fall apart if you practiced what God preaches.
When queried, he clarified to say that you buy when you think the seller is an idiot and you sell hoping that the buyer is one. That’s how to make money in the City, and that’s where the ethos breaks down.
Does this mean that we all have to move to Sharia rule?
But it does mean a change of thinking, a return to grass roots and a way of looking forward with more certainty.
This was the core of Bob Diamond’s speech to the BBC Today Lecture last week.
Bob Diamond is the CEO of Barclays Bank and, in a lengthy speech, he focused upon trying to answer the question as to how bankers can become “good citizens” again.
“First, we have to build a better understanding of how businesses and banks work together to generate economic growth; second, we have to accept responsibility for what has gone wrong; finally, most importantly, we have to use the lessons learned to become better and more effective citizens.”
He feels that banks have done a poor job of explaining how they can be ‘socially useful’ and makes clear that this is something that needs to be explained. He goes on to explain that a banks role is to make it easy for companies and governments to access capital by establishing a large consistent market of buyers and sellers.
“To do this they put capital at risk in order to discover what the market is willing to pay. When banks do this well, interest rates are lower. If interest rates are lower, government and business borrowing costs less. Without this, the result is clear - an increased cost of borrowing, higher taxes, lower public spending, slower economic growth and higher unemployment. Providing this kind of support to clients requires banks to take risk but this is not speculative trading, so it bothers me when these activities are caricatured as gambling.
“These activities serve a social purpose and meet a real client need whether they are carried out on behalf of governments, pension funds businesses or individuals.”
Critically, he makes the point that just as bankers caused the crisis they can also put it right.
“First, it's about how we behave, especially with our customers and clients; second, it's about what we do, and in particular how we help those customers and clients create jobs and economic growth; and third, it's about how we contribute to the communities we serve in many other ways.”
It’s a good speech – although some critiqued it as just being platitudes, motherhoods and apple pie – but as Bob says at the end:
“To the question ‘can banks be good citizens?’ the answer must be ‘yes’. But I'm mindful of what was said to me three years ago: ‘Bob, think about the fact that no-one will believe you.’ We're in the early stages of working to restore trust. I'd like to be able to say we're achieving that, but I know that for you, seeing is believing. You may not be able to see what's different today, but over time I very much hope you will see that and more.”
And note, he doesn’t use the words religion, ethics or morals once in this speech.
It’s not a question of religion.
It’s a question of culture.
“Culture is difficult to define, I think it's even more difficult to mandate - but for me the evidence of culture is how people behave when no-one is watching. Our culture must be one where the interests of customers and clients are at the very heart of every decision we make; where we all act with trust and integrity.”
And I’ll be watching to see just who makes decisions with trust and integrity.
I guarantee that under these definitions, it isn’t Goldman Sachs.
Lloyd Blankfein on the one hand claims that their bank is doing "God's Work" whilst, on the other, when asked by Senator Carl Levin at an SEC hearing last year: “Do you think (investors) care that something is a piece of crap when you sell it to them?”, Lloyd calmly answers: “no”.
There’s something slightly hypocritical in that response isn’t there?
And whilst one maverick firm can break the oath of morality to do what’s right, then all others have to follow to compete is the usual mantra.
A moral compass, an ethical view and a religious purpose in banking – or, just being a good citizen – surely has to merit a bank doing what’s right for the customer.
Until some banks and bankers get that through their thick skulls and cultures, nothing has changed.
Last night I was presenting to the MAG-net group.
MAG-net is the networking group in the City for the Mines Advisory Group, MAG, a charity supported by the Financial Services Club and others that clears areas of mines so that schools, villages and life can continue as it should in post-war territories.
They invited me to speak about anything I wanted, and so I created a new presentation about the similarities between banks and landmines (see UBS today).
The presentation developed around the idea of banks being mines that explode in economic terms, in a similar way in which landmines explode and blow away people and animals in the real world.
My premise was that just as landmines blow the legs away from humans, banks blow the legs off economies.
It’s obviously the case that this is true today, what with the Lehmans collapse with Credit Default Swaps creating the first financial crisis; and now sovereign debt in the Eurozone is developing the second.
How can such economic landmines exist in a world where we should have cleared them by now?
They exist because we allow innovation in financial instruments in an unregulated form.
That innovation is all around derivatives of derivatives.
Untried and untested weapons of financial destruction are being created every day and planted as hidden potentially unexploded bombs across the financial system.
This has been well documented in many books, with F.I.A.S.C.O. cited by many as a great illustration of the issues in a storybook form or, if you prefer the academic version, Infectious Greed, gives you the lowdown.
These two books by Frank Partnoy document the issues of derivatives, which are both good and bad.
They are good in creating leveraged risk which allows commerce to become more capable. They are good in hedging risk, allowing trades to take place that otherwise could not. They are good in bringing together mixed asset classes, so that previously unrelated goods and services can now be traded together. They are good in offsetting future uncertainty, which is why they are used.
They are bad because they are so complex, most traders don’t understand them. They are bad because they are called ‘exotics’, and are so exotic that they can explode. They are bad because they allow firms, such as Goldman Sachs, to create a massively web of interlinkage between risk that ensures those in their world can have huge exposures whilst Goldmans themselves avoid such loss. They are bad because they allow debt to be leveraged so greatly that it becomes unmanageable.
All of the latter are the landmines of economies, and are no better demonstrated than by Lehmans collapse and Europe’s sovereign debt crisis.
I illustrated these two points with two charts.
The first is from June 2008, and shows the notional exposure of Goldman Sachs’ main counterparties just before the collapse of Lehman Brothers (doubleclick image for larger version):
Oh what a tangled web we weave, when first we practise to deceive! Sir Walter Scott
Now don’t think I’m Goldman bashing because, as I said last night, they are the most effective bulge bracket player in the world’s markets in creating risk and therefore alpha returns. That’s why their clients use them. However, they are also the most effective institutions in the world’s markets in creating risks that can explode in the face of their clients. That’s why they sell ‘crap’ to their customers (by their own admittance) and are happy to do it.
The second chart I used to illustrate the landmines that firms such as Goldman Sachs lay in the world’s economies is the European sovereign debt crisis and a data visualisation of which countries are most exposed to whom:
Again, derivatives were used to package sovereign debt in the same way as mortgage debt, and has created this second loss of confidence in the European economies.
The whole presentation can be seen here (needs the words to make sense probably) ...
... and the only positive note is that we can save human limbs by clearing landmines using mice to sniff the mines out.
Let’s get some more mice in the financial markets.
In researching the presentation, I found large numbers of images of people with limbs missing. Some were graphic, some were funny, some were moving and many were tragic. Give MAG five minutes of your time http://www.maginternational.org/ to consider supporting them. And any MAG-net member gets a 20% discount if they join the Financial Services Club so it’s worth supporting them for that reason alone surely?
So we start the year as we mean to go on, with a bunch of MPs grilling a banker about bonuses, bailouts, lending and such like.
Banker bashing 2011: same sheet, different day.
This time it’s the turn of Bob Diamond, Chief Executive of Barclays Bank, to take the heat in front of the Treasury Select Committee (TSC).
And yes, he can take the heat, as he’s sitting on a personal fortune estimated at over £100 million with an £8 million bonus this year.
So go on, take a punch ...
... and the Committee did.
Following the meeting live on the Parliamentary website, supplemented by tweets from journalists Robert Peston and Ian Fraser, along with the blog of the Financial Times, made for a fun morning’s viewing.
The Committee is led by recent FSClub keynote Andrew Tyrie, who began by pressing for an answer to the question of whether shareholders get to see the bonus allocations before they are allocated.
“So the shareholders don’t know what you’ll be paying and the structure of the bonus scheme you will announce?” asked Tyrie, to which Diamond soft shoe shuffled.
An hour later and the subject bounded back again thanks to John Mann, Labour’s EveryMann, who started talking about how it would be easier to get a camel through the eye of a needle than a rich banker to get through the gates of heaven.
No wonder Bob responded: “You’re not a big fan of Barclays are you?” to which Mann said: “I’m a big fan of getting answers from you.”
He was then, in the words of Robert Peston, “filleted” by fellow TSC member George Mudie who pursued a line of questioning around why banks need to pay such massive bonuses to already well remunerated people when no other industry does this.
Mr. Diamond put it down to the nature of competition in banking ... a weak answer as it has so often been made clear that there is no competition in banking except amongst incumbents who are protected by licences.
Maybe a better answer, when challenged with whether he recognised the bonus issues as being “toxic in the real world”, was:
“We are sensitive, we are listening, and one of the reasons I was looking forward to today was to have an opportunity to put some balance and some understanding….we’ve done a very poor job over the years in explaining how the compensation process is integrated in the other aspects…how investment banks contribute to society…and I certainly pledge to do more in that regard.”
Or maybe not.
Nevertheless, a key point was made that if the UK clamped odwn hard on bonuses, then banks could easily relocated – having acquired Lehmans US operations, Barclays Capital could easily place staff into that office – and this would have the consequent effect of UK taxes being gifted to the US treasury.
As Mr. Diamond intimated - or was that threatened? - “Why would the United Kingdom not be proud to have one of the world’s best investment banks located here?”
Hmmmm ... another line of questioning I found intriguing came from Chuka Umunna, a smart young labout MP, who asked about Barclays tax avoidance practices.
He began by asking how many Barclays subsidiaries are incorporated in the Isle of Man?
Mr. Diamond didn’t know.
Mr. Umunna did. There are 30.
He then asked about Jersey.
“The number is 38,” says Chuka.
Cayman Islands – 181.
Chuka made it clear that “these are well known tax havens…a cursory reading of your group returns suggests you have over 300 companies operating in tax jurisdictions around the world.”
Mr. Diamond came back with: “I can assure you the bank is not evading taxes” and, as Mr. Umunna responded, he wasn’t asking about evasion which is illegal, he was asking about avoidance on a “grand scale” but (just) legal.
There were a number of other exchanges about bailouts, competition and the ethics of banking, with qauite a few intriguing and amusing comments:
Bob Diamond on the perceived invincibility of banks:
“Banks should be allowed to fail…It’s not okay for taxpayers to have to bail out banks.”
On steering Barclays through the storm:
"Let me be clear. Being Barclays or being HSBC in this country, where a number of banks did fail, there is little differentiation between banks that failed and those that didn't... We are very very proud that we managed through this period, profitably... and with the interests of our clients."
On reintroducing the principle of unlimited liability:
"Take Bob Diamond out it. You own two big banks. Would you be able to attract the calibre of Stephen Hester (RBS chief) and Antonio (Horta-Osorio - incoming Lloyds chief) with unlimited liability? I can't think of a single nationally directed institution that didn't end in tears, it is not the natural place to be."
The MPs on Bob Diamond:
"This is very nice, but it's not getting to the point. I've got tears pouring down my cheeks... I can hear the bloody bagpipes going." - George Mudie, Labour MP for Leeds East's response to Bob Diamonds violin-inspired speech about emigrating to Massachusetts from Scotland and Ireland; He told the Committee that as one of nine children, if he wanted a new bike, he knew he would have to save for it himself.
Andrew Tyrie, Conservative MP for Chichester and committee chairman, described Barclays shareholders as “interested, clever, uninformed” and "half-asleep", as Diamond told the committee that shareholders had never asked for information on bonuses.
"Over Christmas I read my seven year old The Emperor's New Clothes.... before taking apart his arguments on competition, on the threat that banks will leave... there is no evidence that banks will move. It's extremely disappointing, you are in denial about the taxpayers' support for you; denying a lack of competition in the industry; you're denying customer satisfaction; you're denying the lack of support for small businesses... the Emperor is wearing no clothes." - Andrea Leadsom, Conservative MP for South Northamptonshire.
"Why is it easier for a man to pass through the eye of a needle than a rich man to pass into the Kingdom of Heaven?" – John Mann, Labour MP for Bassetlaw, applies the well-known Biblical saying after Diamond’s vague replies on bonus, saying it’s a matter for the board.
Anyways, the one quote that remained with me throughout the whole grilling was this one from Bob Diamond: “There was a period of remorse and apology for banks, that period needs to be over.”
In other words, time to move on.
I think that was wishing on a star however.
If you’re seriously interested, here are all the top entries on this story:
And a few news reports too:
I was preparing a presentation last week to deliver in Spain that had the sexy title: “Challenges for European banks in a crisis and post-crisis environment.”
It wasn’t a title I chose, but led to me creating an amalgam of many different threads of thinking, some of which you will recognise if you follow this blog.
First, I thought about all the things that we refer to today as phrases which mean something, and yet weren’t even around three or four years ago. These phrases include:
and my own personal favourite is the Vampire Squid that is Goldman Sachs.
These are now in the public psyche and are used regularly in conversation, along with other more complex terms like Structured Investment Vehicles, Credit Default Swaps and Mortgage Backed Securities.
I then thought about the things that policymakers are talking about in response to the above. This includes:
On Basel III in particular, the landscape is confused.
This was hotly debated at SIBOS for example, with Standard Chartered stating that the new regulations would lead to trade finance becoming 15% to 37% more expensive, with volumes reducing by 6% – equivalent to a $270 billion a year reduction in global trade – and a 0.5% fall in Global Gross Domestic Product (GDP).
Werner Steinmuller, who leads the transaction banking services for Deutsche Bank, agreed at the Frankfurt Euro Finance meeting I attended last week, saying that: due to trade finance issues, global trade will go down six percent, resulting in a twenty percent increasing in pricing for instruments and a 0.3% fall in Global GDP.
Interestingly the International Chamber of Commerce published a study looking at the default risk of trade finance instruments, and finds that the regulations are potentially punishing trade.
The study examined the trade finance activity of nine global banks from 2005 to 2009, which together arranged 5.2 million transactions accounting for $2.5 trillion. It found that only 1,140 of those transactions defaulted. Of the 2.8 million transactions arranged during the crisis in 2008 and 2009, only 445 defaulted.
Percentage wise that’s a 0.016% default rate. In olden parlance, that’s diddly-squat, and it makes you wonder whether the regulators are using a sledgehammer to bank in a very small nail.
Which brings me to the final area of background: the big issues.
The big issues remain the same: bank governance and behaviours.
Here we have phrases like:
and other things in the fray.
In this area, the regulators and policymakers have little clue what to do as if they act on their own, they are likely to alienate the industry and find a huge loss of tax revenues if, as would be anticipated, the banks and their employees relocated. But waiting to act as a cohesive G20 whole is also just as unlikely, so these things will remain the same.
Nevertheless, I do think there will be a rethinking of the bank code of conduct, with the leadership of the industry taking a stand to try to improve the image.
In the UK, this has certainly been the case under BBA Chairman Stephen Green, who has created a lending taskforce during the Autumn, and I fully expect such coordinated response to be created for other areas, although bonuses doesn’t seem to be one of them.
The most important area however is the customer.
Not just the retail customer, the Gen “Y am I broke” customer or the business customer.
Customers will demand a revolution of banking, and some already are.
But the real revolution will come about due to the fact that this planet has now connected every individual, so that they don’t need institutions.
This is what Venessa Miemis and I were debating recently, and the ability to create new currencies through social P2P services is potentially very disruptive.
Except that the pipework and plumbing of payments will remain where it’s always been: with the banks.
And that’s the real question in this post-crisis, zero trust world of finance: can banks be anything more than just plumbing in tomorrow’s world?
Oh yes, and for those who are interested here's the slide deck that went with this presentation:
I bet Venessa didn’t realise what she had started when she had her rant the other day, but I’m enjoying the thought process started by Venessa’s reactions to SIBOS, my reactions back and the reactions of the community reading these entries in their commentary and thoughts.
In fact the commentary is great, and I appreciate everyone’s words of wisdom which has potentially unleashed some real forward momentum in building a hybrid social finance model.
As a result, I’ll keep pushing on this door whilst it’s open.
First, a key question: if banks are oil, how can you build better vehicles?
I think we’ve been arguing the wrong point when we attack the banking system per se, as the core of banking – the bit that it really exists for – is to oil global trade, as opined by Stephen Hester, CEO of RBS.
At the SIBOS plenary session, Stephen reflected that there had been a crisis in banking, and that “the world has seen that crisis but not reacted by turning in on itself, but recognising instead that globalisation is still the model that creates the greatest wealth for the greatest group of people, so it must be continued. This means the financial system has to maintain its place as the oil in the globalisation process and for information exchange.”
So banking is the oil of commerce and society, providing the ability for individuals, businesses, countries and governments to trade.
Oil as an industry is a good simile in fact.
For example, we don’t start with saying: “I want some oil”, just as we don’t wake up saying: “I want to make a payment”. We start with saying: “I want to get from A to B in the most comfortable way” or “I want to buy something”.
In the case of the journey, for some of us it means buses; for others, it means a car; for a few, it means a Ferrari or Porsche; and for a rare few investment bankers, it means a private helicopter.
All of these vehicles run on oil and if we think of banking in this way, then we are we attacking the oil rigs and refineries?
We want those to be safe and regulated, especially after the BP Deepwater Horizon oil spill.
What we should be thinking about is the vehicles that run on oil and (a) try to come up with better, cleaner, more fuel efficient versions of these vehicles; and (b) a way to switch from oil to other renewable energy sources.
And I think that’s the discussion we’re having here, so let’s start with how to come up with better vehicles? Tomorrow, I’ll tackle the idea of switching from banking to other fuels of finance?
Oil is an industry that needs regulating and banking needs regulating, especially after the credit crisis.
So what does this mean?
Well regulation limits competition.
We haven’t seen many new oil firms launched in my lifetime, but then who would want to be in that industry after Exxon Valdez, Piper Alpha and now Deepwater Horizon?
It’s a dangerous industry that could destroy our planet but, whilst we need oil, we live the risks.
However, we limit them by avoiding too much competition to create too much risk in the oil refinery system.
This is equally true of banking which is why there is so little competition in the core of banking.
For decades, we have said that banks will be disintermediated, and yet I cannot think of one core area where banks have been disintermediated.
I tweeted this recently, and various folks came back with examples like savings products leaving banks and moving into mutual funds.
But savings is not the core of banking.
Deposit accounts are the core of banking.
And that’s where I’ve seen zero disintermediation.
That is not to say it has not been tried.
Variously, new competitors have arisen as prospective dethroners of the banking industry.
Over time, they all disappear just as fast.
In 1994, Bill Gates described banks as “dinosaurs”, only to retract the statement thereafter (see note 1).
In 1996, Tesco said that banks are “a bunch of clowns”, and launched their version of banking (see note 2). But it wasn’t banking at all.
In 1997, Virgin entered the fray, with Richard Branson saying “…executives cross the Atlantic on a Virgin plane, listen to Virgin records and keep their money with a Virgin bank”. But it was a damp squib that was launched, struggling for years nibbling away at credit cards and savings products, but not really changing the game.
Even back then we spoke about telecom firms, retailer, car manufacturers and others eating the banker’s lunch.
We then finally did see a major new force in banking arrive: PayPal.
But they were just icing on the cake of the banking industry’s ingredients.
They weren’t replacing anything.
Then, when they got big enough, they too became a bank.
So they are disrupting but not displacing banks, and I am still waiting to get my PayPal deposit and checking account.
Today, we talk about the future being mobile carriers and Facebook and social finance being the future.
We even bring in Apple.
Just the other day, Techcrunch ran this headline: Apple’s Next Big Strategic Opportunity Could Be Mobile Payments
Mind you, it reminds me of this one from eleven years ago:
Source: Marketing Magazine, 1999
Will Apple kill the dinosaur banks?
I don’t think so as no bank has died, apart from a few small ones, and most banks have seen little disintermediation of their core service because, like oil refining, it’s a high risk and highly regulated area.
This is why all of these attacks on the banking system over the last two decades have been repelled:
Summary: no firm and no individual will fundamentally change the core of banking because it is built upon licences, infrastructures, agreements, global policies, governmental forces, regulatory management and more ensuring that the status quo is maintained.
In fact, the UK’s Office of Fair Trading (OFT) came out with a view this week that there are significant barriers to entry to new competition in banking.
They think it will change things ... but it won’t.
Wanna know why?
Well I remember a major reform to encourage competition in banking that was launched in 1997.
It was called the Wallis Financial Reform Inquiry, and changed the rules of banking in Australia to encourage new competitors and break the stranglehold of the “Four Pillars”. The Four Pillars were the big four banks in Australia at the time: ANZ, Commonwealth, National Australian Bank (NAB) and Westpac.
Obviously, this reform worked well as, thirteen years later, the biggest banks in Australia are, urmmm, ANZ, Commonwealth, NAB and Westpac. In fact, their stranglehold is greater as midsize banks, such as St George, got swallowed by Westpac and BankWest by Commonwealth.
This story is true of many other countries. For example, the UK had a Big Five bank group ten years ago: Barclays, HBOS, HSBC, Lloyds and RBS; today, we still have a Big Five: Barclays, HSBC, Lloyds, RBS and Santander, with Lloyds becoming the biggest with a third of all retail banking activity trading through their doors.
So, even with reform, it is unlikely to result in reform of the oil of financial refining and drilling as any radical changes to that system creates systemic instability.
So the real focus of our debate should be the vehicles that run on the oil of finance.
Then it gets interesting.
This is when we can really get into talking about apps and widgets, plugins and extensions.
Instead of trying to change the fuel, we start to think about to use the fuel to enrich and entertain, engage and experience.
In other words, when we talk about social currency and the issues of banking, I think we focus upon the wrong things. We should be talking about the layers on top.
Things like Facebook credits are here; PayPal is here; BillShrink and Blippy are here; Strands is here; Zopa is here; all the things in Finovate are here ... and more.
Things like Flattr:
... which is referenced as social currency, although it’s not really as it starts and ends with the oil: banks and money. Instead, like Blippy, it is adding richness to the oil refinery system.
Meanwhile, things like Giftflow:
... is a truly social currency, as it sits outside this system and is a pureplay community currency.
And there is a difference.
Community currencies were well defined yesterday, but one thing I missed out is Bernard Lietaer’s excellent discussion of what community actually means.
From Bernard’s book:
“The etymology of the word 'community' could have provided even more explicit information about the link, without all that hard field work by anthropologists. 'Community' derives from the two Latin roots: cum meaning together, among each other, and munis, meaning the gift, or the corresponding verb munere, to give. Hence 'community' = 'to give to each other’.”
This goes back to why I keep saying that these are separate areas: commercial and community, as gifting does not assist in increasing wealth.
In fact, it is the core divide between Islamic and Christian faiths, as Islam promotes almsgiving and is anti-usury (interest), whilst Christianity has actively changed to encourage the seeking of material wealth by the individual at the expense of community.
You may say that’s extreme but I am struck by the extreme between Bahrain, for example, and Las Vegas.
You may say “poor choice” but for two years running I went to conferences back-to-back in both cities and one is full of virtue and decency whilst the other is full of vice and indecency.
Obviously, you can decide which.
For more on this area, you can also checkout the Gresham College speech I gave on this subject last year.
The bottom-line is that as we talk about the weaknesses and failures of the banking system, we are missing the point. The banking system is protected and will take decades to change, because it is like oil refining. That is why none of the services at the core heart of the banking industry: the deposit account, the checking account, the money transmission have opened up to real competition over the years.
Even with the mobile and wireless internet.
It will ... but that is like changing the oil industry.
First you have to find an alternative to oil, then you have to convert everyone off their old vehicles to the new fuel-based alternative. More on that tomorrow.
Meanwhile, there is plenty of scope to add functionality and enrichment to the core of banking.
These add-ons are far easier, and will allow social currencies to be built that suit our 21st century world of being more connected and interconnected ... and there are many products that are doing just that.
So should the focus be on building better tools upon the base of banking, rather than trying to replace the base?
Is it better to build more efficient vehicles that run on oil, rather than trying to get rid of oil?
This article links to four others this week, in a series challenging the future of banking. The series of articles are as follows:
William H. Gates III, multibillionaire chairman of Microsoft Corp., wants to manage your money. He also wants to process your checks and pay your bills, perhaps even arrange a loan.
To get there, Gates on Oct. 13 announced plans to pay a staggering $1.5 billion--a 40% premium--for Intuit Inc., the maker of the best-selling Quicken personal-finance software. If the deal passes regulatory muster, Microsoft would instantly land the top spot in that tiny but fast-growing market. More important, Gates sees Intuit, coupled with an on-line service Microsoft is creating nicknamed Marvel, as a springboard for building a vast electronic marketplace for home-based financial transactions. Banking is just one piece. Eventually, Microsoft hopes to offer everything from mutual funds to brokerage services over its network.
The prospect has many banks spooked. For years, they have dabbled, mostly unsuccessfully, with remote banking. Now, Microsoft and Intuit have sent a jarring message: Get wired or get left behind. "If banks don't heed this wake-up call, they won't need another one," says William Randle, senior vice- president of Huntington Bancshares.
Microsoft and Intuit insist they want to work with banks--not shut them out. "We have no interest in being a bank," says Scott Cook, chairman of Intuit who, upon completion of the deal, will become Microsoft's electronic-commerce czar. But many bankers view Intuit's purchase last July of National Payment Clearinghouse Inc., an electronic bill-processor, as an encroachment on their territory. And Gates has made no secret of his view that banks are "dinosaurs."
Supermarket giant Tesco is taking on the might of the high street banks by launching an "own-label" deposit account and credit card via its Clubcard scheme ... a Tesco source says that the scheme is only the first of many planned by the supermarket. "Tesco has watched the banks and thinks that most are a bunch of clowns," he says."Tesco can do a much better job. It has a much stronger customer base than the banks and could offer better services."
Much of last week was focused on the Long Now and Long Finance for me.
Working with a group of thought leaders that included Venessa Miemis, Thierry Touchais, John Hagel, Stefan Nusser, Michael Mainelli, Paul Saffo, Bruce Davis, Brett King, Nova Spivack and more, we debated big topic items all week.
And yes, there were some conclusions too, so here’s the Long Blog Entry on the Long Now and Long Finance at SIBOS 2010.
First, it’s difficult to get the concept across and make it meaningful. Someone said to me: “What are you doing this week?” and I replied: “Building the concepts for a banking system that will last for 100 years.” They snorted dismissively and said: “Who cares about 100 years, I’m just interested in the next 100 days”.
As a result of this comment, the week taught me about why the Long Now is important, as it is totally concerned with what we leave our children.
When we think in business, we think short. Usually the next month or quarter.
If you are in charge of strategy, then maybe you think about the next year or two.
If you’re really lucky you get to think about the very long-term, especially if you are in charge of grand schemes like building, construction, oil or the environment.
Even then you are thinking long-term about how to make money rather than long-term about legacy.
What legacy are you going to leave your children?
Your wealth? Your savings? Your house? Your memories?
Does it matter?
Well, it’s only when you think about your children, their children and their grandchildren that you start to personally think Long.
The Long Now asks: what is your footprint going to be on this planet?
Many of us might not be that bothered about the footprint we leave on this planet as we just want to exist and enjoy the Now, not the Long Now.
Luckily, a few folks think differently, and I’ve blogged already about those thinkers who created Pyramids and Cathedrals.
Second, the Long Now is important for more than just a few bricks and buildings. Think about the current construct of our world? Our world is made up of forces that shape decades and centuries through decisions made today.
All of these decisions and moments in time shape the future. That’s why the Long Now is really important.
We are shaping the next decades today as we reconstruct our financial system from its meltdown.
These are the fundamentals with which the Long Now grapples, so sure, focus on 100 days and let’s just screw the children, the planet and our futures.
Third, Thierry Touchais gave a fantastic insight into Long Now thinking as he talked about the environment in the future.
Climate Change brings our world into sharp focus because we all now accept that this is important.
If you think you don’t believe climate change is important, do you recycle?
Do you think about carbon credits?
Do you fly as cheaply as possible, or do you accept there should be a carbon tax on your flights?
Finally, Paul Saffo finished our week with a view that again brought into focus the sharp reality of the Long Now.
He outlined the legal perspective, and said that rules and regulations were political fashion statements made to last a term in office.
Directives and legislation were structures made of cement, but that would only live for decades and not centuries.
What is really important is to focus upon the bedrocks of the system: the Magna Carta, the Constitution, the Napoleonic Code.
These are the Schema that rule our legal view of the world and, if these are shaken, our bedrocks of trust are shaken.
And here’s the rub: the longer the system lasts, the more we trust it works.
If the system changed every year, you would trust nothing and no-one.
This is why Facebook is not a trusted global currency: they are too young and fragile.
PayPal can create a global currency: but it’s not proven for the long-term. It is still not wholly trusted as a global conduit.
Banks can offer global commerce and trading finance: it is trusted because banks have been around doing this for over five centuries (the oldest bank in the world still surviving is Monte dei Paschi di Sienna, established in 1472 and still going today).
But has that bedrock trust been shaken?
If Facebook is the political fashion statement, and PayPal is the regulatory directive, have the banks that are the Constitution of the financial system cracked?
That is the question we were really grappling with last week: Do we need a new Magna Carta, Constitution, Napoleonic Code for the Financial Markets?
Is this what the authorities are creating right now anyway?
And no, we did not get an answer.
But what we did get was some illumination and, between the dialogue, some progress towards a view regarding what would ensure a robust financial market for the next century?
SWIFT, Long Finance, the Financial Services Club, IBM and others have determined to continue this work, and it will be interesting to see where it takes us.
In the meantime, we had several blogs produced, two videos and numerous white boards full of ideas, so here are a few of the other contributions.
Blogs from other attendees at the Long Now SIBOS sessions:
The summary video (3 minutes 30 seconds), produced for Paul Saffo’s closing plenary.
This was a combination of the trailer of Sean Park's and Motherlode's "Financial Reformation" video and the "Future of Money" video produced by Venessa Miemis (Emergent by Design) and Gabriel Shalom.
The full videos are also worth watching individually.
The Financial Reformation by Sean Park (4 minutes)
Video on the Future of Money by Venessa Miemis and Gabriel Shalom (7 minutes 32 seconds)
Throughout the week, the guys from the ValueWeb provided scribing and visioning through their white board mindmap illustrations. Here's a small selection of just a few.
The six big questions I raised and blogged about before the show:
"Trust" in banks and the creation of virtual currencies were a continual source of debate, especially Facebook credits.
Then PayPal announced a partnership with Facebook to do just that.
By the end of Day One, we had lots of themes and the challenge was how to put these into practice. As a result, we asked team members to work on stories on Day Two about how to describe the Long Now.
Equally, we studied Long Now from many angles: political, economic, social, technological, environmental and legal. I've mentioned the last two above in the text, but here's the picture of the social and technological views:
And finally, if you're really into the Long Now and Long Finance, here's my own 50-page summary from all the blog entries to date: Download Long Now (PDF, 250Kb).
I'll post a couple of unique and exclusive items here in the next few weeks to celebrate First Direct's 21st Birthday, especially as the FSClub hosted their CEO to a dinner last night in this respect.
This follows our celebration of PayPal's 10th Birthday, so we're getting a reputation for celebrating the birthdays of disruptive banks.
Anyways, as a taster of this, here's an interview between Paul Say, Chief Marketing Officer at First Direct:
... and myself.
Chris Skinner: According to Paul Volker the last great innovation in banking was the ATM, but do you think being a bank without branches is innovative?Paul Say: When we launched back in 1989, it was absolutely revolutionary. We suddenly launched onto a market that was used to going to a branch Monday to Friday, a branch that was not open at weekends, that only opened around certain hours – 9 to 5 if you were lucky – and you had to queue up for your money. If you needed to see your manager, you had to make an appointment. Suddenly we launched this telephone banking service that was available 24*7, 365. You could phone us on Christmas Day and New Year’s Day. That was absolutely revolutionary at the time. Today, it is a hygiene factor. A lot of the things that First Direct does or starting out doing are now hygiene factors for banks, but certainly when we started out it was absolutely revolutionary.Chris Skinner: What is it that makes you different if it’s just a hygiene factor today?Paul Say: I believe it’s the magical rapport we create with our customers, and that comes down to the people. That’s not just the person who deals with your basic banking calls, it’s also the person who deals with your digital problems if you have issues with internet or mobile banking. It’s fundamentally born out of respect for the customer, and putting the customer in control. It’s giving the customer banking on their terms, helping them to do what they need to do with their money when they need to do it. I fundamentally believe that’s the magic that we create. You can’t bottle it. That’s why it’s not been replicated. Over time, people have hired people from First Direct. We see some our people join other organisations, but fundamentally they cannot replicate it in the scale we have achieved here.Chris Skinner: So is your innovation your culture?Paul Say: Absolutely. We totally believe that people matter more. It’s interesting that in the digital age, people are more important now than they’ve ever been before. For example, I was talking with a colleague the other day about a business problem we are trying to solve. We went back to some papers we wrote five years ago. Back then, we said we are not a telephone bank or internet bank, but that we are a digital bank, with the people to prove it. Digital is so much wider now as a term, and so much more meaningful. It embraces telephony, it embraces mobility, it embraces the internet, but it also embraces all the new platforms that are emerging, such as the iPhone and Android. I totally agree with that cultural point therefore, and also believe in the human element of this as well. There is a movement towards authenticity and, in this technical age, that’s really tough to create and particularly on digital platforms. Creating that emotional chemistry that you get as the takeaway from the experience of our call centre for example. You cannot just create that magic. On reflection, that’s the single biggest revolution that we created in the banking industry. It’s also the single biggest puzzle we try and solve day in, day out. Chris Skinner: How do you keep that culture to be different thought? For example, a lot of the banks measure call centre staff using metrics such as the number of calls they get through in a day with satisfactory closure within x minutes, and so on and so forth. How do you measure staff effectiveness?Paul Say: Those environments where you are being asked to hit certain average handling times, queues on the boards and so on, we have a similar sort of philosophy but we try to make it more playful and fun for people to achieve those standards. That comes through doing odd things. For example, it is appraisal time at the moment, and so we have Wig-Wams dotted around the building because we want people to go for a huddle with their Big Chief, so to speak. We just try to lighten the mood and make it less pressurised. We also empower our people so that if a customer conversation is getting complicated on the phone, we say that this is OK. That’s because the customer is the centre of everything we are trying to achieve here. So we have those standards and measures, but we take an adult approach to those metrics and standards and also try to make it fun.Chris Skinner: Do you think technology is the main driver of innovation?Paul Say: No, it’s an enabler but not a driver. For example, we recently started to use social media type technologies – community forums and that sort of thing – which is by no means radical, but nevertheless a technology innovation. We knew that customers had great experiences with us, and that was because they had real conversations with us and those conversations are two way, and that is what we wanted to provide in our social media delivery. So the way we look at innovation is that there is a brand dynamic that is key as part of that innovation. The brand dynamic for First Direct is that we create a magical rapport with our customers through great conversations. Equally, there is a cultural dynamic. So the technology must be married with the brand and cultural dynamics if it is to be appropriate and effective. For example, we have a campaign at the moment called Talking Point (http://www.interactive.firstdirect.com/enthuse.html). Talking Point allows our customers to talk live and unedited about money and much more, including First Direct. The cultural dynamic driving that idea is that there is an element of mistrust generally in the banking world right now, and we wanted to take our brand dynamics of magical rapport of great conversations, and marry it with this cultural dynamic of mistrust. The result is that we created Talking Point to allow people to search for authentic experiences with a financial institution they can engage with. That is giving us a position in the marketplace of transparency and authenticity. So I’m a big believer that technology is an enabler of innovation, rather than the single driver, as there are other factors such as brand and cultural dynamics. I also believe this because you can sometimes try too hard to apply technology to your brands, and customers can reject you if you try too hard. That is why it took us at least eighteen months to find a place for the whole world of social media, and it is because we wanted it to feel natural. We were not going to force the technology and that experience on our customers if it didn’t make sense in the context of our brand and the experiences they were having with us. Does that make sense?Chris Skinner: Yes, although it raises some questions too. For example, most banks apply technology for cost savings, but you seem to be looking for technology to enhance customer experiences.Paul Say: That’s right. When we launched text message banking for example, we knew there was something in SMS messaging on phones which was about alerting customers and keeping them up-to-date. We actually positioned text message banking as being like a sixth sense when we launched it. The fact that we would send you a text alert when you’re about to go overdrawn, for example. Isn’t that great, to have a bank that alerts you before you go overdrawn?Chris Skinner: But other banks would see that as bad, as they can make money out of customers being overdrawn. That’s why they won’t do social media or twittering or blogging, because it’s just marketing froth. It doesn’t make money.Paul Say: It depends what you see as being of value. If value is pounds and pence, then does it really shift the dial on its own? No it wouldn’t. But if you see it in the context of contribution in terms of brand equity and the company credentials that you create around doing this sort of thing, then there’s inherent value in that. There’s also value in terms of word of mouth. People start talking about you when you do things like this on their terms, not the bank’s terms. On the back of this, business comes. A key thing here is that recommendation is as good as writing the business, as people do work on word of mouth, particularly in this age. So don’t look at this just in terms of bottom line contribution, look at it in terms of your brand credentials, customer service experience credentials, and look at it in terms of how customers will talk about you outside of the bank, in terms of word of mouth and recommendations. First Direct really benefit from that. We are the UK’s most recommended bank and have been for a very long time. We do benefit from that, because we know that when people join us, they are joining us because they’ve heard great things about us or somebody has personally recommended them.Chris Skinner: That raises two things however. One is that if you are that successful, how come you are not Britain’s biggest bank; and secondly, if you have that expectation when customers join you, does it set the bar too high so that customers might be disappointed?Paul Say: On the latter point, we have a satisfaction guarantee. The first thing is that when people join us, we give them £100 as a warm welcome to thank them for switching, as it’s a bit of a hassle to change your bank. But we also put our money where our mouth is, as we promise that if they don’t like the switch then we’ll move everything to wherever they want to go afterwards and give them another £100 to say sorry. We’re absolutely confident that we can offer a satisfaction guarantee when you join us, because we know we are that good and we are willing to put our money where our mouth is to prove it. That’s not arrogant. It’s just that we are confident in the experiences that our people are creating with customers.Chris Skinner: So why aren’t you the biggest bank in Britain?Paul Say: I can best answer that by saying that, when we started out, we really played to a part of the community who were completely disenfranchised by their banking experience. So therefore, we grew very quickly, because a lot of people decided “I’m going to switch, and it’s worth going through the pain of switching”. We continue to occupy that place in the marketplace, the switchers. In fact our target market is affluent, professional people, which is a very niche marketplace of the total switcher market. So we’re not growing by ten market share percentage points every year. What you find is that we deliver small organic growth, but when we bring people in we build the relationship and deepen the relationship with them. Therefore, we grow their product holdings, and that is our real focus. Rather than just acquiring new customers for one single product, we would rather acquire one customer for many products. The result is that we have a group of very profitable customers banking with us, who have extremely high levels of satisfaction and therefore recommendation of our services to their peers.Chris Skinner: Finally Paul, back to technology and innovation. What do you think will be the key technologies for changing the customer experience in the future?Paul Say: Well, we bought some iPads for the team here to trail, and when I took the iPad home my three-year old daughter picked it up. Watching her interaction with it made me realise that the whole principle of keyboards will be redundant soon. It certainly will be for my daughter as she’s already using touch screen; she’s using her fingers; she’s interacting directly with the screen, rather than through a keyboard. So creating touchscreen interfaces and experiences for our customers is going to be a really interesting area and a critical one to explore. The other area is any technologies that help to create a human engagement. The fact that you’re touching the screen is a human engagement, as it’s creating a chemistry between you and the experience of the brand that you might be interacting with via the device. That humanness, and bringing that humanity into the digital world, is going to be the next space.Chris Skinner: What about video as a channel, as I know you’ve trialled that?Paul Say: We’re pondering that right now at two levels. Absolutely, the idea of talking to a screen is going to be a place that we’re going to have to embrace and confront in the future, but there’s one thing about First Direct that is key here, and that is the mystique about that voice you hear on the end of the phone. As a brand, creating a visual representation of First Direct on the phone does raise the question: is that a good thing? In particular, as people create pictures and have a visualisation of the person on the telephone they are talking with, and where they are. That’s all part of the experience o f First Direct, and I wonder if we might erode the mystique and some of that magical rapport as technology moves forward.Chris Skinner: I guess you’ll just have to give everyone 3D avatars to get over that one Paul. Meanwhile, thank you for your time today and I wish you well with your future innovations.Paul Say: Thank you.
After my post last week about my latest presentation with an audio file, my keynote in Bahrain this week was going to be a variation of the presentation. Due to being unable to fly to Bahrain, I mentioned on Monday that most of the day had been spent editing a video file for the conference to be able to present my keynote.
This 'aired' for the first time this morning and so here is the video version for the blog:
And the original slides, in case you missed them:
And an audio file to go with it if required:
Bearing in mind that this was made with a cheap ($200) HD video camera, free video editing and slide management software and cheap ($59 per year) hosting services, it's an extraordinary way for anyone to create and become their own media channel in the 21st century.
Mind you, they could improve the looks of the anchor hosts a bit, couldn't they?
I haven't posted a presentation recently. Been a bit lazy, so here's a bonus.
My latest presentation on the future of (retail) banking:
And an audio file to go with it:
This is a keynote presentation I gave at this year's European Banking Forum:
... an event we've partnered with for the past few years, and which enables banks and vendors to network in a convivial, exclusive and private conference. Next year's is already in plan in Brussels for March 2011, and is well worth a look for those interested in the future of banking.
In the last of three reports on the Long Now of Finance (Part One and Part Two), the last part of the day focused upon new ways of banking and supporting 10,000 year thinking, with Bernard Lietaer opening the session with a dialogue around using demurrage to encourage this.Demurrage is a hard thing to grapple with, as it gets into discussions about fiat currencies and usury which are far beyond the ken of a mere blog on banking ... or it is today anyway. If you want to know the ins and outs of all that stuff then go checkout a book like: “The Creature from Jekyll Island : A Second Look at the Federal Reserve” (ooh, that’s fun!), but the gist of the conversation goes something like this. You plant a tree as an investment in the future.
When is it best to chop down the tree, and what is the tree’s value in a hundred years (remember the story about New College, Oxford from yesterday)?
Let’s say that you have $100 today, and you can invest that $100 in planting a tree which, in one hundred years, will retail at $1,000 based upon today’s pricing. So you now think the tree is worth that to you in a hundred years.No.In a hundred years, using interest based analysis of net present value and assuming you get a positive interest rate of 5% per year, then the tree is worth about $7.60 in a hundred years, based upon the deferred costs of your investment.In other words, you are losing 5% per year by having your money tied up in an illiquid asset because you could have been earning 5% interest on that cash by putting it into other more liquid assets with faster, shorter-term returns.This means you are punished for investing in long-term assets and incentivised to invest in short-term earning vehicles.It is the nature of usury, interest and today’s financial market offerings.But it doesn’t have to be.According to Bernard, if you use demurrage, you can turn this on its head.
What is demurrage?
Normally, it is talking about a fee related to shipping costs but, in this context, it is the carrying cost of money. Here’s one definitive view from answers.com:Demurrage is a cost associated with owning or holding currency over a given period of time. It is sometimes referred to as a carrying cost of money. For commodity money such as gold, demurrage is in practice nothing more than the cost of storing and securing the gold.Now it’s not a well known field or term, but it is focused upon making it worthless to keep your cash in short-term things and incentivises to invest in long-term things by exchanging your cash for something else of value, such as a basket of commodities.So here’s Bernard’s idea.You take your money and swap it for a Terra.Terra is a complementary currency designed for long-term investing, and 100 Terra = 1 barrel of oil + 10 bushels of wheat + 20 kg of copper + 1/10 oz of gold + 1000 carbon emission units and so on.The fact is that here, you are investing in commodities that have lifelong values, so you lose nothing but gain.This is why, when we see a ‘flight to safety’, it’s always oil, gold and commodities that fly through the roof in value. Meanwhile, the storage cost of your basket of commodities is passed to the issuer of the Terra currency who pay a demurrage fee.The result is that you have a currency exchange that is: inflation proof by definition; automatically convertible without new international treaty; and provides a pure medium of exchange and planning currency, rather than a store of value.
Returning to our tree example therefore, the 100-year old tree is now worth $168,903.82 in a hundred years time, rather than $7.60, based upon the payment of a demurrage fee of 5% per annum.
In other words, it works the opposite way to the usury based system and encourages long-term investing.It is also complementary to the commercial world of investing, and Bernard totally believes in this proposition. I’ve known Bernard for over a decade, and he knows his stuff. After all, he’s worked and invested alongside George Soros and was formerly a Belgium Central Banker who came up with the idea of the euro, or the ECU as it was back then. He knows his stuff.But ...... after a decade, his idea still has not got all the buy-in it should have.This is because people’s behaviours won’t change unless they have to, and because the thing he’s talking about above is darned complex.That’s why fund manager Edward Bonham Carter said: “if you ask people to think about the world in thirty years, they won’t because it’s not in our nature to do that.”Professor Sir Roderick Floud cast doubt on Bernard’s contentions too, stating that we over-estimate the extent of market volatility and underestimate the benefits.The debate raged on, and will do so a long time into the future. The Long Now of the Financial Future that is.The learning for me is that there is a way to evolve and morph capitalism for the future to protect us from the crashes of the past and to invest in a sustainable, long-term protection for the planet. However, it’s just so complex and difficult that most politicians, regulators, bankers and investors don’t understand it, won’t invest in it, can’t see that far ahead anyway and need a good kicking if anyone wants them to focus upon it, e.g. force them to do it.I guess that’s why Edward Bonham Carter’s comment that: “there are a lot of clever people out there. The challenge is to get them working on the problems before the dumb people get there”, got the biggest laugh of the session. For more on Bernard’s projects and thinking, go to www.terratrc.com and www.lietaer.com.For more on the Long Now, go to www.longnow.org.For more on Long Finance, go to www.longfinance.net.There are also a number of excellent white papers available for free download here including: “The Road to Long Finance: A Systems View of the Credit Scrunch”:
In their discussion paper, Michael Mainelli and Bob Giffords have laid out a provocative analysis of the global financial crisis in an attempt to widen the debate. The authors have worked hard to raise some new arguments, dismiss some old ones and change the priorities for others. They point out the dangers of an over-zealous regulatory reaction and of trampling over competition in the name of emergency measures, and they argue that a healthy system must be more diverse. Their key point is the importance of competition in open markets to prevent "too big to fail is too big to regulate", and they encourage more radical investigation of Long Finance.
Following on from yesterday’s blog about 10,000 year thinking, how does this relate to or work in finance?The idea is to fund long-term projects. The sort of massive projects that no-one knows how to fund. The sort of project that governments shy away from as politicians only have four-year lives and thinking past the next term in office is hard for them. The sort of thing like building a Pyramid or a Cathedral, something that is long lasting and changes humanity forever. Who today would think about building such a thing? Back in the heady Egyptian and religious fervour days of old, building a huge monolithic testimonial for prayer and worship was the thing to do. But then, back then, you were rewarded with something other than finances.Today, no-one would build such things.However, there are other things we could, and probably should build, such as flood protection barriers, and the Long Now guys used the example of two countries to illustrate this. One that thinks and funds Long and the other Short. The Long thinking is in the Netherlands.
The Dutch Government spent €450 million building the Maeslant barrier to protect the reclaimed land across the Coast of the Netherlands.
Rather relying on a boy to stick his finger in the dyke, the Dutch government decided they would fund such a project because, if catastrophe ever struck and the land was flooded, it would pretty much wipe out the most important parts of Holland.So if you’re Dutch, a €450 million spend on an event that may never happen makes sense ... because if it did, the cost could be, let’s say, €60 billion. What could cost €60 billion?The devastation and disaster caused by a major flood of the Dutch coast.And this is also the cost of the sinking of the major American coastal city, New Orleans, in 2005.Hurricane Katrina cost the USA over $80 billion.
That’s €60 billion. If the USA had thought long, they would have spent the $1 billion it would have cost to build the flood defences for the southern coastline, and saved themselves $79 billion.
That’s the thing about Long Finance, it thinks long-term.It recognises that the investment of millions today will save billions tomorrow.For each euro or dollar spent today, it recognises it will save 100 times that amount tomorrow.So long-term finance thinks long and invests long to save when the short now happens.Stewart Brand, author of the Whole Earth Discipline, then expanded on this commentary further by quoting from the classic book by Robert Heinlein: Time for the Stars.
In the book, released in 1956, Heinlein recounts the work of the Long Range Foundation (LRF), a foundation that thinks the way outlined above:
“The charter goes on with a lot of lawyers' fog but the way the directors have interpreted it has been to spend money only on things that no government and no other corporation would touch . . . To make the LRF directors light up with enthusiasm you had to suggest something that cost a billion or more and probably wouldn't show results for ten generations, if ever . . .”The key to the LRF is that they only invest in things so expensive and so far out that it wouldn’t be investable for a government. However, by adopting this strategy, they have become the most profitable company in the universe, making shedloads of cash thanks to those investments paying off when the inevitable disasters, catastrophes or just plain bets pay off.Oh yes, there are long bets too. For example:“Over a ten-year period commencing on January 1, 2008, and ending on December 31, 2017, the S & P 500 will outperform a portfolio of funds of hedge funds, when performance is measured on a basis net of fees, costs and expenses.” Predictor: Warren BuffettBut that’s an aside. The bottom line is that Long Finance and Long Banking looks at uninvestable projects, the big ticket items, and takes them on board precisely because they are good for the long-term health and protection of mankind. That’s the nature of the Long Now.
Brian Eno likened it to the story of New College Oxford which, being British, was actually established in 1379 and isn’t new at all.
The College’s Great Hall has this fantastic arched ceiling with oak beams across.After five hundred years, the beams inevitably were rotting and decaying so badly they needed to be replaced.So the Dean of the College asked the groundsmen if they knew of anywhere to source some similar beams?“Oh yes”, the head groundsman said. “Five hundred years ago, when they built the college”, he told the Dean, “the founders planted a forest of oaks of the same wood as the one’s used in the ceiling just over there.”In other words, they had had the foresight to realise that, at a point in the Long Future, the ceiling beams would need replacing so they planted trees for just such an occasion in the Long Now.
That’s thinking Long, and this is what Long Finance is focusing upon.
I realise all of this sounds a bit tree-hugging or academic, but it's also critically important for those who care about an agenda that focuses upon more the just the right here, right now.
And, just in case you're wondering, yes, the College used the oak trees for their new ceiling and have since planted another small copse of oaks for the next time it may be needed.
A final thought on this tomorrow but, for now, think the Long Now.