Archive for the ‘competition’ Tag

Alternatives to Banking: re-inventing mutuality

Another day, another bank in crisis – this time it’s a German commercial property lender, Hypo RealEstate. (Very Germanic name, no?).  Expect more consolidation, as the few remaining well-capitalised banks take over the failing ones.

More consolidation means bigger banks means less competition means more scope for corruption in the banks that remain – and less opportunity for savers to protect themselves by diversifying between banks.

So will the regulators force the breakup of the banking monoliths that will emerge from the rubble of the crash? Along with the swarm of flying pigs?

Thought not. But these megabanks – BarclloysHTCSB in the UK,  CitiSachsFargone in the US will be even more vulnerable to thievery by their execs – and a worse deal for us, as consumers. And you can bet that they will resist the imposition of transparency with every sinew of their being. (I’m having a bit of a cliche morning, sorry).

But better, more effective competition will come from diversity. Breaking up the monoliths to create a lot of smaller versions of the same thing doesn’t achieve as much as creating new businesses, with new business models, to fill the space left by the banks that have collapsed.  Let’s think this through.

Banks provided a way for savers to put their money in productive assets, such as loans to businesses. Instead of lending our money directly, we put it (and our trust) in the bank, trusting bankers to make the complex judgements of creditworthiness about those to whom they lent it. But banks thought that they could de-skill the bankers who lent the money to real businesses and real people, using techniques like credit-scoring instead of human judgement, and they invented fake new skills with which they bamboozled us and themselves.

We don’t have to use banks to put our money into productive assets. We can invest directly in businesses: there are lots of informal community networks that do so successfully – or we could help friends and neighbours buy their own homes.  During the nineteenth century, many mutual societies were set up to do just this, but they were taken over and burned in the late twentieth century’s deregulatory madness. Mutuals are not collapse-proof, but mutuality is a good beginning. And in the twenty-first century, we shouldn’t recreate nineteenth century exemplars – because we live in technologically-different times.

Specifically, modern mutuals can and should be totally transparent.  The network-connected computer is much better than the quill pen for this.

Transparency in Contracts

I am – I am proud to declare – a Transparency Extremist.

A confidence only differs from a conspiracy in its motive; but if it is secret, how can we know?

As well as open-book accounting, true commercial transparency needs transparency in contracts; and this is  easy to implement. The law of contracts should be changed so that no contract is enforceable unless it is published; and the effective date of any contract cannot be earlier than the date on which it is published.

While we are at it, we should clarify competition law and its position on agreements between undertakings. Agreements between undertakings which distort competition in the EU Single Market are unlawful, whether they are in writing or not. Any unpublished, confidential or secret agreement distorts competition because competitors do not know what is in it: ergo, it should not merely be unenforceable but also unlawful, so that the parties to it are liable to the standard fines for anti-competitive behaviour.