[p2p-research] Umair Haque : The Finance 2.0 Manifesto

Wed Apr 8 18:12:03 CEST 2009

The nine points will be/have been reproduced on the blog,

Michel

On 4/8/09, Dante-Gabryell Monson <dante.monson at gmail.com> wrote:
>
> Hi Michel, Marc, did you see this post by Umair Haque ?
> The Finance 2.0 Manifesto
> http://blogs.harvardbusiness.org/haque/2009/04/manifesto.html
>
>
>
> -------------------------------------
>
> The Finance 2.0 Manifesto
>
> 6:55 PM Wednesday April 1, 2009
>
> *Dear G20 <http://www.londonsummit.gov.uk/en/>,*
>
> It's confusing. Should you tax bankers' bonuses, or limit their pay? Should
> you nationalize banks, or let public-private partnerships bid for bad
> assets? Do markets need morals<http://www.telegraph.co.uk/news/newstopics/religion/5084464/Gordon-Brown-draws-on-religion-to-warn-markets-need-morals.html>— or just better regulation?
>
> The answer is: all may be necessary, but none are sufficient. *It's time
> to reconceive finance for the 21st century.* Here's why — and how.
>
> *Where are all the customers' yachts?* It's a time-worn Wall Street inside
> joke <http://www.powells.com/biblio?isbn=9780471770893>. It says: our
> customers don't get richer, but we do. But that joke isn't funny anymore<http://www.youtube.com/watch?v=BCF19XxtZ1Q>:
> today, it's true at the macro-level. Society doesn't get wealthier — but
> bankers do. Where is our economy's value? Like customers never get any
> yachts, our economy has been drained of value because finance 1.0 is toxic.
>
> Bankers have got society, communities, and depositors by the throat. When
> they create value, they make money. When they destroy value — they *take*money.
>
> *Banks don't need to be bailed out of bad debt. Society needs to be bailed
> out of a toxic kind of finance.* As Misha Glenny<http://www.guardian.co.uk/books/2008/apr/06/society>has pointed out, there are two kinds of business models Mafias run:
> protection rackets, and smuggling rings. Today's financial system has
> devolved from the latter to the former. Yesterday, banks smuggled assets into
> the shadows <http://en.wikipedia.org/wiki/Shadow_banking_system>. Today,
> they're blackmailing society with the threat of withholding their unique
> privilege of creating money. Conversely, investors are blackmailing
> society <http://www.nytimes.com/2009/04/01/opinion/01stiglitz.html> with
> the threat of shorting, well, everything, by withholding capital flows.
>
> *Finance 1.0 has the same relationship with society as Godzilla does with
> cities.* Every once in a while, both surface from the depths and lay waste
> to everything in sight. The 21st century is when that abusive relationship
> must get a radically innovative intervention. Why? As Ken Rogoff and Carmen
> Reinhart have noted, banking crises are the rule<http://www.economics.harvard.edu/faculty/rogoff/files/This_Time_Is_Different.pdf>— not the exception. In other words, 1.0 banking systems will always and
> everywhere, given the chance, loot<http://blogs.harvardbusiness.org/haque/2009/03/heres_why_we_should_let.html>their depositors, their communities, and society. And that tells us in no
> uncertain terms: yesterday's finance cannot power sustainable growth.
>
> *Finance 1.0 isn't fit for economics 2.0.* The last few centuries — and
> especially the last few decades — have seen plenty of financial product and
> service innovation. But there has been little meaningful mangement,
> organizational, or institutional innovation. For example, as Niall Ferguson
> has pointed out, the modern central bank was effectively invented
> centuries ago<http://www.aeaweb.org/annual_mtg_papers/2007/0106_1015_1201.pdf>.
>
>
> Finance 1.0 is built on a long-obsolete set of organizing principles. Those
> are out of dangerously out of sync with the hyperconnected, radically
> interdependent economics of the 21st century. The way that we define,
> allocate, and utilize money, credit, value, and wealth is not fit for 21st
> century economics.
>
> *Today's bankers, investors, and traders will never build a better
> finance. *Why does Wall Street's business as usual seem to be gaming the
> rules, gambling away other people's money, and cooking the books to hide the
> losses? Because Wall Street's operating system has a single instruction: my
> job is to rip your face off<http://www.nytimes.com/2003/04/20/books/business-ethics-and-other-oxymorons.html>.
> Those who can rise swiftly to the top. Wall Street, in other words, selects
> economic Jack the Rippers, rewarding and empowering those who prey on
> society, communities, and people.
>
> *It's time to put Wall Street's business as usual out of business*. Let's
> end finance 1.0's abusive relationship with the world. Let's send the
> charlatans formerly known as the masters of the universe back to the
> used-car lots their lemon-selling was meant for. Godzilla, meet Mothra<http://www.youtube.com/watch?v=BfW4VaYJhdw>.
>
>
> *Here are nine paths to igniting the next financial revolution.*
>
> *Edge funds.* An edge fund is the opposite of a hedge fund. Where hedge
> funds are opaque, edge funds are transparent. Where hedge funds are closed,
> edge funds are open. Where hedge funds are run for near-term gains, edge
> funds are in it for the long run. Where hedge funds create artificial book
> value, edge funds create value that accrues to real people and society.
> Where hedge funds focus on long and short transactions, edge funds focus on
> relationships. Think Marketocracy <http://www.marketocracy.com/> on
> steroids.
>
> *Macro and microcurrencies.* A currency tied to national interests
> determined by a political elite? That's so 20th century 16th century. A
> better financial system needs better currencies. Finance 2,0 will be built
> on microcurrencies <http://anz.theoildrum.com/node/4633> and
> macrocurrencies<http://www.chinadaily.com.cn/china/2009-03/28/content_7625684.htm>:
> currencies which operate hyperlocally and transnationally. Why? Because
> people shouldn't have to bear collective responsibility for bankers looting
> or regulators cahooting. In the 21st century, the quiet tyranny of economic
> collective responsibility is intellectually bankrupt: it is fundamentally
> unjust, deeply inefficient, and vastly value-destructive.
>
> *Social banks.* Despite what marketers tell you, banks do not exist to
> maximize profits. They exist to maximize the safety of deposits. We've been
> taken for a very expensive ride. Next-generation banks will be structured as
> social enterprises <http://en.wikipedia.org/wiki/Social_enterprise> —
> because the incentives to safeguard deposits and reinvest profits for the
> common good perfectly converge to a dominant strategy for long-run value
> creation.
>
> *Fair markets.* Markets are free like a fish is a shark. Anyone can play —
> but only at the risk of being manipulated, looted, and defrauded by the
> deepest-pocketed. The anonymous arms-length transactions orthodox economics
> lionizes are, in practice, just a hyperefficient mechanism for
> front-running <http://en.wikipedia.org/wiki/Front_running>, predatory
> trading<http://zerohedge.blogspot.com/2009/03/exclusive-aig-was-responsible-for-banks.html>,
> and bid rigging <http://www.democrats.com/node/3170>. Next-generation
> markets aren't just free: they're fair. They are markets where information
> about reputation, reliability, and relationship thickness are hardwired into
> the DNA.
>
> *Stakeholder communities.* Institutional investors are so 20th century.
> Centralizing control over our biggest corporations in the hands of a bunch
> of old dudes asleep at the wheel was as good an idea as the spork<http://en.wikipedia.org/wiki/Spork>:
> interesting in theory, useless in practice. Tomorrow's radical innovators
> are already updating corporate governance for the 21st century, by letting
> communities of stakeholders shape managerial decision-making. Think
> mega-Etsy.
>
> *Whisper bullhorns.* Why is trading such a great business<http://www.nakedcapitalism.com/2008/04/goldman-had-more-loss-making-trading.html>?
> Because traders have access to info that you don't. Why can't everyone get
> in on the whisper circuit that powers prop desk profits? Because no radical
> innovator has taken on the challenge yet of amplifying the secretive whisper
> circuit into a blaring bullhorn. But imagine if the rumours that drive share
> prices up and down on trading desks were Twitterfied. The result would be a
> financial revolution: the market power Big Trading enjoys would vaporize
> faster than you can say "insider info."
>
> *Googlizing financial instruments.* What business is Wall Street really
> in? The business of hoarding information<http://blogs.wsj.com/deals/2008/07/24/mean-street-how-to-insult-an-investment-banker/>:
> to seek a so-called informational edge. Of course, markets don't work if
> everybody's hiding info — they only work when people are revealing it.
> Google can help me find a tennis racquet, Match can help me find a date, and
> Last.fm can help me find some tracks to rip — but who can help me find a
> better place to put my cash that effortlessly? No one. And that's a massive
> reason why we're stuck with a 1.0 financial economy.
>
> *Anti-ratings.* Your credit is rated mercilessly. But does anyone rate
> lenders — not to mention brokers, banks, and investors? Today's crisis would
> have been far less severe if consumers had access to knowledge about who was
> a trustworthy lender — and who was going to sell them the financial
> equivalent of a roadside bomb. Credit ratings alone cannot create more
> efficient financial markets — doing so requires better information about
> both buyers and sellers of every kind of financial product.
>
> *Open source modeling*. Every bank built the same models. Every bank built
> the same flawed models. Every bank built the same flawed models on similarly
> erroneous assumptions<http://www.quantnet.org/forum/showthread.php?t=1733>.
> How dumb is that? Incredibly. Unleashing the power of open source to
> vaporize this black hole of incompetence is going to be a tremendously
> powerful path to innovation. The peer review, voluntary contribution, and
> always-on negotiation at the heart of the open source model create powerful
> incentives for quality — which is exactly what the hare-brained quants at
> banks lacked.
>
> *Finance 1.0 cannot power growth 2.0<http://blogs.harvardbusiness.org/haque/2009/01/davos_discussing_a_depression.html>
> .* Yesterday's finance cannot power tomorrow's prosperity. Bailouts,
> taxes, nationalization, regulation are what your discussions this week are
> focused on. These can limit the depth and intensity of the crash. But what
> they cannot do is build a radically more efficient, productive, and
> effective financial system.
>
> That requires a better kind of finance altogether — one designed not merely
> to make the worst among us richer, but to make us *all* authentically,
> meaningfully wealthier. That's why finance 2.0 is the future.
>
> Luv,
>
> Umair and the Edge Economy community
>
> PS — Fire away in the comments with questions, criticisms, or your own
> paths to revolutionizing finance.
>
>

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