A level playing field

Feb 12 2014 07:16
LAST week I ended my essay with the idea that Fin24 readers may like to get creatively involved in how we could create greater stability in economies the world over.

Until now, economists have failed to tackle these issues. As I wrote in an earlier essay, it is likely that this is because economists are trained to forecast and to manage the unruly economic machine, rather than design it.

They are not trained in financial services, nor how to create better financial services for the public and the institutions.

So this leaves the field open to the rest of us to make suggestions on what we want from our financial services industry, bearing in mind some simple and well-proven guidelines and principles that have been long accepted by economists and/or stability engineers.

I have been lobbying the Bank of England (BoE) and the International Monetary Fund for years to look at some new ideas which have now been outlined to Fin24 readers. At last they have agreed to look at one of them.

Basically, it is the wealth bond idea.

Recently one of the 2013 Nobel Laureates, Robert Shiller, put the same basic idea forward and gave the same basic reasons. Maybe that has grabbed their attention.

The difference is that the BoE and IMF are reportedly looking at the idea of creating bonds that are index-linked to gross domestic product or to the real rate of economic growth instead of average earnings/incomes growth (AEG).

I am being assisted by feedback from more than 20 supporting readers, and maybe now also by any feedback from Fin24 users.

Here is a covering note we have drafted for the BoE and the IMF:

This paper has been prepared in partnership with a significant body of interested and professional people from a wide range of financial backgrounds. All have one common interest - 'to stabilise the volatility of the financial markets' and so provide an engine for sustainable growth.

Draft abstract

This paper discusses government debt restructuring in a three-sided environment of mortgages, business debt, and government debt. It also looks at the matching sales side of funding debt for use as investments to ensure the best possible marketplace for the debts.

Done properly, by using the right index as a reference point, this will create a level playing field for investments and borrowing of every kind, thus removing elements of unwanted volatility, uncertainty, and opportunities to ‘acquire’ wealth from the community through arbitrage and hedging by the top 0.001%.

The new models will largely remove asset price bubbles and crashes simply by their existence. People will become confident in their finances at every level, and more confident in the economy, which will then become significantly more predictable and easier to manage.

A key part of this three-sided plan involves the restructuring of government debts along lines similar to those currently being proposed/studied by the BoE and others, but using an index-link to what people use for the repayment of debt (income) and to plan their retirement (income).

In both cases, the touchstone can be an index of average incomes. Doing this levels the domestic economy’s playing fields.

Such an index is easy to understand, and is also one to which people can readily relate. It is less likely than GDP or real economic growth to be subject to manipulation and to delays and revisions. It can be compiled by an independent body, making it more trusted and more useful by eliminating delays.

The second part of the overall plan involves restructuring of mortgage finance using the same index but still creating space for variable interest rates.

The third part, business finance, can be restructured using a combination of both models.

The practical issues of implementation and acceptance by financial institutions as well as the public have been deeply researched, but are not a part of this paper.

All aspects are subject to discussion and revision, which is the ongoing process that has been used for more than a decade to arrive at this depth of knowledge and research.

By using this link, readers are able to see 15 essays in Fin24 all of which support this viewpoint; but that does not mean that something has not been overlooked.

Do you have any questions or suggestions on how to present these ideas? Please make your comments by sending us an email, commenting below or on Twitter #EconomicStability.

 - Fin24

* Edward Ingram has a strong and growing support base. One American has started a petition asking President Barack Obama and/or his senate committees to look into these ideas. Ingram says: “Why not here in South Africa? The ideas are universal.”

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edward ingram  |  economy  |  money



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