investment

Over in the latest Lib Dem Voice debate, on whether we should support FairTrade or not, the name of Dr Michael Hudson has come up in the comments, and I thought this was worth highlighting (H/T Disinter):

I am quite familiar with the work of Michael Hudson and Fred Harrison as they are both prominent advocates of Land Tax and the work of Henry George. Here Hudson is putting into much better words than I have so far been able to what I have been advocating since the run on Northern Rock or before about why the current bank bail-outs will not work and are aimed not at rescuing the real economy, ie us, our jobs and homes and personal wealth, but that of the lobbyists and the financial sector that keeps politicians in office, and in lucrative work of course after they've given up office!

Basically we need to have a biblical style Jubilee - the one in fifty years in which all debts were written off, those who had become indentured to landowners to pay off their debt are freed, and the origin of the happy cry of "Hallelujah". This would be better than the write-offs and government guarantees being so gleefully doled out by governments around the world. Banks, or some kind of Zombie fund, could take on the toxic debt and renegotiate them down to the value of the underlying asset - the home or perhaps the business - and turn the debt back into a performing asset rather than toxic debt - even potentially making a profit on the current market value of the debt.

This is something I've been working with trying to setup in Oxfordshire - using limited liability partnerships into which the debt, the property and the rental yield from the property are put to turn the nearly repossessed home into an affordable home for the occupant but also an income generating asset for the lender. But why is it just us off-beam unschooled economists who are promoting this sort of thing? Where are the adventurous young bankers coming up with this sort of thing? Oh yes, that's right, it's easier if they can just persuade our governments to bail them out and let the tax payer take the risks of their over-enthusiastic lending.

There has been a fair amount of comment on (mostly libertarian) blogs recently about "fake charities" - bodies that we are made to think are reliant on our individual, personal donations but which are in fact heavily subsidized by the state for promoting government objectives and messages. That is all fair - transparency is important, none more so than in the charitable sector which is legally constrained from engaging in political activity and if a "charity" is receiving a lot of its funding from the state (in whatever form including the National Lottery) and appearing to parrot government policy it risks confidence in the whole philanthropic ideal of the charitable sector.

However, I also notice that some of this criticism seems to be being, linguistically at least, sloppily targeted at the "Third Sector" generally. And I just wanted to say that there is a lot of good stuff, especially for libertarians, out here in the so-called "Third Sector".

I hate the very phrase "The Third Sector" - it seems to echo the whole "Third Way" idea that somewhere between the "First" and "Second" sectors (which are of course never referred to in this way) - government and private enterprise or vice versa there must exist this less-toxic-than-capitalism but less-interventionist-than-public-sector great thing that combines corporate 'efficiency' with 'social awareness'. Or something.

For a start then, what is termed the "Third Sector" should, to my way of thinking, properly be called the "First Sector" - chronologically I would say that charity and mutual co-operation predated either government or capitalism. Humanity got going as a clan through that sort of co-operative effort long before we were "ruled" in the sense we know it today or "corporatised". In that sense, the "Third Sector" is kind of like the "Oldest Profession" - it just exists, and has always existed, is part of the human psyche to help and be helped and to understand that economic incentives can benefit us all.

Then there's the oft misused term "Not For Profit" as if profit is a dirty word and a business that is "not for profit" epitomises this grand ideal that we can have capitalist efficiencies without the greed. "Not For Profit" is of course complete balderdash. To aim not to make a profit is to aim to fail. Or, in the context of this "fake charity" criticism to be so unsustainable as to need perpetual help from somewhere else. There are, of course, things in life that will not be likely to turn a profit, perhaps because they take on externalities that, costly as they may be, are unaddressed by other sorts of organizations. These are the proper targets of charitable and philanthropic giving.

But the other half of this "Third Sector" is made up of businesses, so called "social enterprises". Back in 2002 when I was standing for re-election to Oxford City Council, I had initiated a year or so previously some discussions about flogging off the city council's leisure facilities to a co-operative, social enterprise. As "public assets" they were clearly suffering from a combination of the "tragedy of the commons" and the "Cinderella service" compared with other statutory duties that consume most of councils' budgets, leaving these discretionary services to fight for the few remaining crumbs which were not really ever going to be enough to keep them remotely in shape or competitive resulting in further decline. They were a drain on the public finances being exploited by a really very small number of users - users that were more often than not the stereotype of more health conscious middle class residents who thought that supporting the council facilities was the "right thing to do" as well as being a good deal cheaper at the point of delivery than private gym memberships say. Typical "club goods" being dressed up as "public goods".

The then Labour leisure services spokesman on the council, notwithstanding the Labour movement's supposed sympathy with the co-operative movement, made some very public denunciations in the local media and in council that I was planning on "privatizing" the leisure facilities, and, by implication, that I was hell bent on someone profiteering from them at the expense of the residents who would have to pay more. As an aside I notice that the current Labour council in Oxford, strapped for cash, has just done exactly that - a huge U-turn for which I don't expect I'll ever receive an apology! Only now they haven't got a public receipt for the assets; rather they have given them away for a period in return for promises of investment. Okay, so that's a trade off that those off us who no longer have access to the full and dismal financial picture of the services cannot judge.

But the point is, as social businesses, whatever ownership form they take - co-operatives, industrial and provident societies, community interest companies, friendly societies, they all have to be functioning, profitable businesses if they are to continue to exist for long enough to dispense the social benefits they seek to achieve. Some of us in the Social Enterprise sector like to call them "more than profit" businesses. The profit motive is still the lifeblood of what we do, because it is only that that enables us to be generous and of social benefit rather than a social drain on precious resources.

Social enterprise is for me a political priority. It is the primary way in which we can wrest functions from the state and return them to the realm of voluntary co-operation. Of taking them out of the hands of those who seek power over us and into the hands of real people, working with each other to meet their own needs between themselves.

And excuse me, but in a world where private corporations get favourable deals from government and contracts and bail outs and protectionist regulation, if there's any little pots of money on offer to help make get genuine social enterprises off the ground (often made all the more frustrating by the demands of statists to jump through regulatory and reporting hoops) and be sustainable and in the process reduce the size of the state, I'm certainly not going to apologize for taking it. It's not our raison d'etre, but it could make the difference between getting off the ground or remaining a frustrated good idea. But the fact is that in many cases, the best source of money to get such things going, start up funding, actually comes from the real charities like Esmee Fairbairn, established with a specific aim of finding market solutions to social needs by genuine philanthropists.

Last year there was an almighty row, aided and abetted of course by politicians taking opportunist (but unrealistic and possibly illegal) positions ahead of elections, about huge rent rises in the five year Covered Market rent review process. A modicum of peace was restored when the city council pledged to spend the paltry sum of £50,000 on some painting and decorating. Today we learn that the cash strapped spending slashing council has withdrawn the funding and, quite rightly, some of the traders in the market are pretty pissed off.

Image copryright SteveBell @ Flickr (I hope I'm allowed to use this!) Not only that, but today we also learned that retail property is at the head of the rush downwards with average values now below those when the rent review period began in 2003. So not only has the council managed to snag peak of the market rents but has now slashed the only sop to the traders it offered.

It's time to realize that the City Council is incapable of being a good landlord to such a sensitive building and it local trader tenants. For many people in Oxford the Covered Market is the jewel in the crown of local retailing. Many suburban centers have lost their fresh food outlets- butchers, green-grocers and so on - and on top of that the market can offer a range of products that only the center of gravity of a city could realistically support.

Whether the Westgate redevelopment goes ahead and when is also critical, as that will move the center of gravity of the city westwards, alongside the redevelopment of the whole south western quarter of the city, and the Covered Market and the surrounding streets need their landlords to plan investment now to try to maintain footfall at that end of the city center when the time comes. It will be a fair trek on foot between Waitrose and the new car parking attached to the Westgate center and the High Street, and the further reduction in scheduled bus services stopping in the High will make things even worse.

Instead of reining in its expenditure on its estate, which is largely to the east of St Aldate's and Cornmarket - the area that will be most affected by these changes over the next few years - the City Council needs to find a way of taking the lead in investing in this part of town. We all know they cannot afford to do so themselves in the current climate as they are slashing away at any expenditure they can so they need to change the way their interests in these properties are handled so that they can attract outside investment.

A Property Investment Partnership would fit the bill. The City Council, and any other landlords who want to participate to keep their estate's value up when all the changes happen, contribute the properties as owner partners, the tenants put in their rent as occupier partners and we go out and find an investor partner or several to put in whatever capital is required.

Ownership is not ceded to anyone else in the long run, the new facilities improve footfall and therefore takings, which is reflected in a higher yield from the whole development, since traders' occupation payments are based on their turnover rather than mere "rent" changing that from a fixed cost to a variable cost at this time of great pressure on retail. Everyone wins. You could even throw in other facilities such as a customer loyalty card, selling small shares to the customers so they also become partners in the thing they value so highly.

Let's face it, the city has finally realized it cannot possibly finance its leisure centers properly and has now given them away in a U-turn since castigating me for suggesting it in 2002 (which would have saved them millions over those years, enough to finance all the projects they are slashing to make ends meet today). So it has no excuse now for not looking at more imaginative ways of dealing with the rest of its non-core operations. And failure to invest now risks their long term future income faced with all the challenges I've already mentioned - which would surely be, foreseeable as it is, maladministration if it comes to pass.

Money is not wealth. Wealth only exists in real things that people produce and you consume, or more properly take pleasure in owning. Unless you are a very sad person whose pleasure is in counting and admiring a pile of bits of crinkly notes, money is only valuable insofar as it allows the person who has it to buy things, goods or services that add to their store of wealth.

For most people, money is just a unit of accounting that tells them they have sold their labour (or something else) for a certain amount of wealth’s worth that they can use later to buy some real wealth. It gets over the problem of so called “coincidence of demand” – that at the time you sell your labour or goods you may not in that instant want something the person buying it from you has to offer.

In a world of uncertainty, it is prudent, if we are able to, most of the time at least, to hold a little bit of money in reserve so that we can eke it out and survive if for some reason we are unable to get more of it before we need to pay our bills, buy more food and otherwise fulfil the basic needs of life. That’s just what prudent companies do to ensure they can pay you every month and buy things to sell before you come along to buy them.

But really “saving”, putting something away for that ever-looming “rainy day”, is where money (“cash”) falls down as an asset class. And in doing so it does immense damage to us all – our financial fortunes, our environment, our society.

In the context of establishing our idea of a “Community Finance Partnership” a friend and I have been reading up on various community finance networks that sprung up at the time of the Great Depression. And I believe I have finally had an epiphany in my understanding of “usury”.

Many of the groups and systems I have been looking at, formed during the Depression to help make up for the lack of circulating currency which was making a bad situation worse, worked on the understanding that charging or paying interest was itself the major problem that had led to the “credit crunch” of the time.

Interest bearing cash tries to turn money from being a means of exchange and unit of account into something fundamentally different – a store of value. It encourages the hoarding of cash balances, which are then not available to be spent in the real productive economy.

The charging of interest on loans means that the borrower has to acquire more money than they borrowed in order to pay off the principal and the interest. We have a tiny amount of non-interest bearing “money” in our system. In the UK, prior at least to the recent troubles, this amounted to only about £50bn – in the form of issued notes and coins. All the other purchasing power in our accounts was created as interest bearing debt and so over 97% of our purchasing power needs repaying at some point, with interest.

The JAK bank in Sweden, which has its origins in a similar Depression-era Danish venture, calculates that up to between 30% and 40% of everything we spend goes on paying this embedded interest committed to by all the borrowers in the supply chain of the goods and services we are purchasing and have been created in the past. This represents a huge transfer of wealth from those who have little, to those who own the financial institutions that create this debt-based purchasing power.

In such a system also, inflation is virtually guaranteed, as it helps those in debt (most often governments telling us they are acting in our name) reduce the value of their debt by reducing the purchasing power of those who hold current purchasing power unencumbered by debt. This is a transfer of wealth from those prudent enough to operate within their means to those who don’t.

It is a vicious cycle at the centre of our economic lives that allows the rich and powerful, including states and bankers, to manipulate our purchasing power for their ends rather than ours. If we did not have to finance this 30-40% embedded interest then, not only would our purchasing power hold its value better, but we’d have 30-40% more of it, for the same amount of labour sold, with which to purchase real wealth and get closer to financial independence.

Money is a human creation, and the way it operates can be changed by human intervention. If we do not change it now, in the process of rebuilding the financial system that has just crashed, we are doomed, absolutely inevitably, to repeat this crisis in the future. And we should not be afraid to demand such change. After all, it affects the vast majority of us negatively at the moment and only benefits a tiny minority. It is a test of our democracy if you like that we must rebuild the system in a way that works for the majority rather than against the majoroity.

A week or so ago Mike Killingworth challenged us on Liberal Conspiracy to show what "Lovable Banking" might look like in response to the daily emerging news that we've been shafted regularly by the banking system since, oh, at least 1695. Some of you will know that I have long taken an interest in things like local currencies and mutual finance and perhaps also that I've been looking into the use of the Limited Liability Partnership structure as a way of building multi-stakeholder less toxic alternatives to purist shareholder capitalism.

Well a couple of weeks ago I was contacted out of the blue by a chap, Frank Churchill, also in Oxfordshire, who has been looking at similar structures. In his case originally I think as a less toxic alternative to developing world microcredit systems (did you know that the effective interest rate including all charges and so on on Grameen or Kiva micro loans can get as high as 80%!) and as a way of monetizing voluntary work - mainly involving carers. We've both been steadily battling along on our own on this, trying to understand the structures and build solutions to common issues around them - in my case, mostly things like affordable housing and supporting local businesses.

And so we've got together and are, hopefully, on the verge of setting up a "think and do tank" (to coin a strap line from another - less popular amongst liberal economics followers - organization, the New Economics Foundation; but don't let that put you off - some of the issues are the same but we believe the responses are more mutual and liberals than theirs) in the form of a "Community Finance Partnership".

The Limited Liability Partnership structure was created, ironically perhaps, to get the professional firms such as accountants and lawyers out of being personally liable for the debts of their partnerships - the vast accountancy partnerships in particular were worried about the sort of "Enron scenario" of being held liable for multi-million pound lawsuits and were threatening to move their registered offices away from the UK if we didn't give them limited liability. But inadvertently they have created a beautifully simple mechanism for bringing all the parties to an enterprise - the providers of capital, landlords, customers, workers and suppliers and so on - in, if they wish, to share in the risks and the rewards of pooling their contributions to the success of that business as partners.

A partnership agreement can involve different classes of partner receiving different shares of the profits depending on the worth of their input to it - just as a co-operative structure does. Companies may be partners, or even other LLPs as well as individuals. And the partnership itself is tax transparent so each partner is responsible for accounting for the profit or loss in their own tax affairs. Some of you will be aware that I think limited liability in general is a Bad Thing that takes the personal responsibility away from business owners, but in this case it matters very little since every connection with the business could become a partner and share that responsibility explicitly.

The Community Finance Partnership can we believe fulfill a great number of roles, offering a portfolio of products for consumers and a steady return based on those to investors - the aim is to produce an index-linked rate of return in the form of a "rent payment" for the use of the capital partners' (investors) funds. "Customer partner" products might include interest free mortgages - called Property Investment Partnerships, personal loans such as with Credit Unions and business finance "repaid" through a portion of the successful businesses' turnover.

One "flagship" product we are hoping to develop is the idea of a local complementary currency, probably in the form of a Nectar-like loyalty card system that businesses with a base in the geographical area can buy into and which would be able to monetize currently unpaid work like volunteer carers whose value to the local community and especially health services is enormous. The possibilities are almost limitless. For example another idea would be to finance the equivalent of PFI schemes - for example if Oxfordshire County Council wants to rebuild some schools, but with local investors sharing in the reward. And such a structure could be used to provide the mutual finance system for universities I mentioned earlier today.

Think a cross between a loyalty card system, a credit union (more on the US or Irish style than the British), a mutual building society but with the ability to lend to business and not just on homes, and possibly a friendly society offering local mutual insurance and pension products. It's early days yet, and we're still working up what each product would look like in financial terms and the sort of prospectus we'd be able to offer investors, but I'm very excited about it! We think the time is ripe for a return to more human scale financial institutions that people can become a part of on a local more human scale.

This is something I've been meaning to write for months, but was particularly prompted to do so by a program on BBC last week about surviving the house price downturn. One guy had built himself a property portfolio worth about £8m (about £5m of which was debt) from a standing start renting a single room in a three bedroom house share five years ago.

He stated, correctly of course, that any numptie can make a killing while everything's rising, but it takes skill to do so in the uncertainty we are now in. His current ploy is to drop leaflets on people in areas where negative equity may be about to bite offering stretched home owners the chance to sell out quickly to him, at a deep discount, but continue renting the same home and with a guaranteed option to buy back again at a pre-agreed premium when things look better.

This sort of thing has long gone on, particularly in the "right to buy" market - albeit with some differences - unscrupulous bucket shop lenders go round offering to lend those who would not get a mortgage enough to buy their council home who then have trouble with their mortgage payments, they offer them a "rent-back" deal which is only just less than the mortgage payments so what they were paying £70 a week for as a council house in which they had no equity was now costing them double that still with no equity.

Anyway - many of you will know that I "run" a group called Oxfordshire Community Land Trusts , which is a mechanism for delivering more affordable housing for the "intermediate market" - those stuck above the income levels that would justify the deep subsidy of social rented housing but below a level that they can afford to get on the ownership ladder. Basically it works by the CLT owning the land and not crystalizing out the gain in land value on every transaction. People pay what they are judged to be able to afford rather than related to the home they need - I would pay nearly full market rates for a one bed flat whilst a family on half my income would get their three bed needs met on half my payments. But I would get twice as much equity as they do. Effectively we are all subsidizing each other through the Mutual Home Ownership Society that takes on the long term debt for the development and which all the residents join.

And earlier in the year we were asked whether this was still an attractive option in a falling market. Obviously it changes the landscape somewhat. Now perhaps more of a problem is that people who could afford to buy outright are unable to get mortgages through no fault of their own. Indeed this could be a boon to the CLT market, because we could find ourselves with more better off residents who would therefore be able to subsidize even lower income houses (it all works on averaging out the total payments you see).

But also by tweaking the model, from a development model to an acquisition model, I believe we could help out those over-stretched households currently prey to the man I mentioned above and with a long term benefit to the success of future CLT projects. In this scenario, the CLT would buy up houses and convert them into mutual ownership. The occupant instead of having to rent from the profiteering speculator landlord would get to keep whatever equity their current circumstances allow them to commit to with the CLT effectively holding the balance. As circumstances change, the household could buy back extra equity (without themselves actually having to borrow anything - Mutual Home Ownership looks more like rent from the occupants' perspective).

What we need to make this happen is access to funds - not necessarily large funds - just a revolving facility that allows us to step in quickly when a household is in distress and lenders start to take action against them - we get them the money to pay off all or most of their distressed borrowing and then the Mutual Home Ownership Society borrows against its commercial facility to take on the house itself with the household's new calculated affordable commitment.

Who has such funds? Well, local authorities have a duty nowadays to try to prevent homelessness, not just deal with it after the fact. Such a scheme has got to be a more efficient use of public money than say, Vince Cable's idea of getting councils to reward previous speculative build by buying direct from builders and converting them to social rented housing (I don't think it's a bad idea - just that mine is better!). Even existing lenders might find it more attractive to convert the loan to a MHOS than to repossess.  In the longer run the CLT ends up with more freehold land that would eventually, when the housing on it has reached its planned end of life be theirs to redevelop in the interests of the local community at that time and in the meantime the distressed owners get to keep their existing home, albeit with lower equity levels and lower debt levels.

Dare I even suggest that this might be a better way to spend $700bn than rewarding the bankers who helped cause the problem in the first place?  Julia Goldsworthy , get in touch if you want to know more!

There's been much talk, most of it at least tacitly approving, of the restrictions or bans imposed in the past few days on so called "short selling" company shares. Most of you probably don't know that my first career, straight out of school., was as a trader on the stock exchange, followed by stints in several stock-broker firms mostly in private client advice and fund management, before I got into IT - which was as a result of my city experience. That's all a bit apropos of nothing really. After all, you'd be right in thinking that if I had been successful in this first career I might now be funding a think tank or something. But it gives a little background to my knowledge of this issue.

Short sellers, per se, are not the problem here it seems to me. Indeed the stock exchange relies on players prepared to go short - that's what market makers are effectively obliged to be prepared to do when they make a price.

Short selling is also an important way of the market getting the information it needs to make accurate value assessments. Longer term shareholders may have more emotional reasons than pure profit to resist pressure. Even perhaps just inertia. Sometimes even tax considerations. Short selling is also a way in which holders of stock can increase their returns on the stock by renting it to the short sellers. Little risk to them.

In my day, you could short sell, effectively, for fourteen working days. The London Stock Exchange used to work on a fortnightly settlement cycle. So for example a deal you do tomorrow, if tomorrow was a new cycle, would not need to be settled until the Monday in the middle of the next fortnightly cycle. If you went short tomorrow, you could, potentially, buy back for cash settlement (a special, premium service for urgent trades that was settled the next trading day) as late as the Thursday night before settlement day - so giving you fourteen trading days to see the stock fall and buy it back.

Nowadays everything is more or less "cash settlement" with positions settled the next working day - hence the self limiting requirement to borrow stock to deliver on short positions.

No, there's nothing wrong with short selling. Once you realize that the secondary market is stocks and shares is a big gambling den in any case, how can you outlaw one type of gambler and not another.

The real problem, it seems to me, with the run on HBOS shares for example, blamed on "short sellers", is the idea that some market players, hedge funds were cited, were "hunting in packs". Now, it is conceivable that even if there's nothing wrong with the fundamental financial health of a company, such a "pack" could be strong enough to provoke a run on a stock simply by weight of numbers. This, however, would be market manipulation. It would be legal, ethical, and even just plain sensible, to suspend trading in a particular share, or even in the whole market, if there was such illegal manipulation going on, or suspected. If a suspension was unwarranted, there should still be the equivalent of a "stewards inquiry" to determine if there was manipulation, a cartel operating, and if so how to punish them.

If the fundamentals were bad for HBOS, and actually I suspect that they were worse than the financial watchdogs have been saying - otherwise opening their books would have been enough to disprove the rumours - then the short sellers simply administered the coup de grace a bit more humanely perhaps than dragging it out for weeks more uncertainty.

I very much suspect that some hedge funds and private equity fund managers do aggressively hunt in packs occasionally. The fact that the secondary market is a gambling den makes it likely. That needs investigating. Market procedures for suspending trading in a market in which the true value of a company has become impossible to assess immediately need looking at. But having a go at the short sellers, who could, after all, just be the people maintaining liquidity in a particular market, is simply creating a scape-goat. The authorities should be ashamed.

I've just been watching some old editions of the Dragons' Den on the "Dave" channel. They've just had on a woman who was running a company making and selling little carry cases for fresh fruit for kids. A good enough idea I'd have thought.

But the Dragons seemed to be completely flummoxed by her business model. She was trying to get investment in return for a five per cent stake in the company. Currently the company gives all of its net profit to charities. The proposal was that the company would give 5% of its future profit to the investor and 95% to charity. They could not get their heads round this.

Understand this - a social enterprise is not itself a charity (usually). It is a trading business that has to make money. It so happens that it decides, or is even set up legally in some cases, to distribute or reinvest that profit for social ends rather than simply to whoever owns the company. If it takes in investors, sure, they get an equity stake and the profit apportionable to their equity stake is distributed to them.

Where's the beef? What is there not to understand?

There were other objections - one Dragon thought he would never be able to sit on the board of a company in good conscience where the other members were deciding what charities to donate all their profit to while he was going to walk out with his five per cent in his back pocket. It's certainly an issue - but perhaps he could have thought that without his investment the company would have far less to give away to its charities. Another said she quibbled with the valuation the owners put on it, but she didn't want to argue with them because likewise, she'd be talking down the amount distributed to charities.

But in principle, I don't see the problem if there's a decent valuation, and the investment could clearly make a difference to future profitability, and the investor gets his or her fair share of profits out the other end, why a capitalist cannot invest in a social enterprise if that's what the enterprise has decided would be the right way for them to raise new capital.

I normally quite respect these Dragons. On this, I'm afraid I just thought they displayed a big lack of understanding - most of them were twittering on about it being more efficient for them to give directly to charity and the charity get the tax breaks.