Mellon Bank Discourages Cash from Markets

[Shakespear]

Re: Mellon Bank Discourages Cash from Markets

Handling paper is a lot more work than typing on a keyboard.

[Chris Coles]

Re: Mellon Bank Discourages Cash from Markets

By my estimate, here in the UK we are under-capitalised by some £450 billion, right down at the grass roots of the nation. (A figure that was fully accepted by the most recent meeting of the SME Innovation Alliance). Taking the same concept to the USA brings a figure of $2.25 trillion. The first corresponds to the need for the creation of roughly 1.2 million new very small businesses employing an average 5 employees; the second to 6 million new small businesses employing 5 employees.

What we are observing is the result of a financial system totally dedicated to the supply of working capital via retail banking; and absolutely NO system in place to constantly replenish the EQUITY CAPITAL needs of a free society.

[Starving Steve]

Re: Mellon Bank Discourages Cash from Markets

What is really interesting is the belief that by passing $US to a strong bank, the value will somehow be protected. That flies in the face of every aspect of the failure of the US to retain value in their currency and illustrates how uneducated the average US citizen is with regard to the underlying financial problems in the US economy.

It isn't that people aren't aware of the underlying financial problems of the U.S. economy, it is that people are trapped with cash. The stock market has been a loser. Bonds pay zero. Savings accounts pay zero. Gold is very over-valued. And real- estate is rather soft, if not deadly to household wealth. Commodities stink. Banks don't want liquidity. And the general economy is headed south. Foreign currencies are all garbage except for maybe the Chinese yuan if you live in China.

Give the folks credit. They know things ain't right with anything.

I strongly suspect this is a de-flation because the banks won't lend either. They are scared, just like everyone else. No-one knows what to do, because we have never experienced anything like this before....But if the past twenty-five so-called, "lost years" in Japan are any indication, this is a slow de-flation with central banks adding liquidity, from time-to-time as necessary, in order to keep the air from rushing-out of Greenspan's bubbles too fast.

[mmr]

Re: Mellon Bank Discourages Cash from Markets

Among the many challenges that would have to be overcome in moving from a debt-based financing system to an equity-based system are these obvious ones:

- Many savers just don't want to take the sort of risk associated with equity investment where, by definition, they would take the first loss if the business in which they're investing fails.

- Equity investment, especially in start-up businesses, takes actual effort on the part of an investor in terms of researching the business in which they would invest, and potentially partnering with the business owner to contribute to the business' success.

It will clearly take a significant shift in the mindset of average investors to move toward an equity-based model and, basically, to overcome the laziness that the current system permits. Many investors have become so accustomed to the idea of government-guaranteed, "risk-free" returns on certain debt products (money market funds, mortgage securities, bank deposits) or the idea of getting rich through the publicly-traded stock casino that they may be almost incapable of thinking in any other way.

Hopefully more of them will move in the direction that you propose as it becomes apparent that there is no such thing as a guaranteed risk-free return.

[Chris Coles]

Re: Mellon Bank Discourages Cash from Markets

Starving Steve

"It isn't that people aren't aware of the underlying financial problems of the U.S. economy, it is that people are trapped with cash. The stock market has been a loser. Bonds pay zero. Savings accounts pay zero. Gold is very over-valued. And real- estate is rather soft, if not deadly to household wealth. Commodities stink. Banks don't want liquidity. And the general economy is headed south. Foreign currencies are all garbage except for maybe the Chinese yuan if you live in China."

This morning on the good old Beeb, BBC Radio 4 Today, we heard an oft repeated fact; that young people caught in trouble with the police say that they would not have got into trouble in the first place if they had a job. Yet, as you so very clearly show us Steve; you did not list any form of investment related to the creation of new; particularly very small; free enterprise businesses. Years ago, I made the comment that all companies, just like human beings; live full lives and die. We replace the human race, indeed the numbers year on year increase; yet no one has taken on board the absolute necessity to also replace and increase, year on year, the employment of the people.

mmr, your comment is equally of interest for another reason.

Among the many challenges that would have to be overcome in moving from a debt-based financing system to an equity-based system are these obvious ones:

- Many savers just don't want to take the sort of risk associated with equity investment where, by definition, they would take the first loss if the business in which they're investing fails.

- Equity investment, especially in start-up businesses, takes actual effort on the part of an investor in terms of researching the business in which they would invest, and potentially partnering with the business owner to contribute to the business' success.

It will clearly take a significant shift in the mindset of average investors to move toward an equity-based model and, basically, to overcome the laziness that the current system permits. Many investors have become so accustomed to the idea of government-guaranteed, "risk-free" returns on certain debt products (money market funds, mortgage securities, bank deposits) or the idea of getting rich through the publicly-traded stock casino that they may be almost incapable of thinking in any other way.

Hopefully more of them will move in the direction that you propose as it becomes apparent that there is no such thing as a guaranteed risk-free return.

A large part of my thinking with the original ideas for The Capital Spillway Trust came from the belief that it is wrong to ask any particular individual to take the whole risk of new business creation; that the answer was always to combine the smaller funds of the savers so that the risk is spread across the majority. Indeed, that was the underlying principle of the old fashioned "Savings Institution" which in turn, was usually an insurance company. So the "savings" funding was not geared to job creation per se, it was geared to the possibility of the need for insurance. So insurance companies had income; that in turn needed to be invested ........

Over many decades, the original principles have been so slewed towards the needs of government to borrow money to cover their inability to raise sufficient tax to cover their grossly excessive costs; and with insurance companies who, interestingly, cannot issue their own bonds like a bank, particularly an "Investment Bank"; all the rules had, long ago, been slanted towards the saver being encouraged to place their money with a bank of one form or another and in turn, the banks, were encouraged to "Prime" their "Offer" to ensure a constant flow of such funding...

Now, today, we have the worst of both worlds; the banks, having become dominant, were encouraged to grossly over-leverage their issuance of their bonds; flooding the governments with excessive debt; while on the other hand, the job creation mechanism, through new business creation to create new jobs; has effectively come to a complete stop. We have many millions unemployed.

And, mmr, you make the very pertinent point that it will take a long time for a new confidence to grow towards returning to the original concept of the role of equity capital in that process.

That point in turn was why I structured The Capital Spillway Trust response to the Green Paper, financing a private sector recovery; around the new idea of what I describe as a "Vanishing Bond". My reasoning goes as follows.

There are no spare savings; everyone has been encouraged to place ALL of their money, (including their day to day spending), into the financial services industry, in turn again, to ensure the stability of the need for many years of further government borrowing from the "Banks". Ergo, there is no desire to suddenly change the rules to disadvantage the existing system, from either side, banks or government.

However; the banking system has created a rod for their own back by issuing all those grossly over-leveraged bonds; they know, deep down, they are NEVER going to be able to see the receipt of the full face value of those bonds. The money simply does not exist to enable that. Yes, all governments, (here in the Western economies), are trying desperately to achieve that goal; but everyone knows they are simply putting off the inevitable.

What is required is to TRANSFER a large proportion of the value of those over-leveraged bonds back over into new business and thus new job creation.

We all know now for certain that "Trickle down" does not work; and NEVER will work. PERIOD.

What I propose is that instead, we ask the bearers of those over-leveraged bonds to place them into a new fund, specific for their nation; UK, US, Europe... whatever and allow the bonds to be converted into Vanishing Bonds to be used as I have already set out to permit the immediate creation of millions of new, free enterprise businesses; where the mechanism, the "trigger" for the investment; is simply the creation of a free enterprise job; where the manager of the new business owns the new business.

The "return", back to the original bearer is at first sight, moot. However, please bear with me as I explain.

The only way the system I propose will return value is through the Establishment of a successful new free enterprise business that either pays a minimum 8% dividend on the full investment; or the founder repays the full investment plus. Moreover, at that point, it will be the "local" saver that then REPLACES that original investment with their savings to receive an minimum 6 & 3/4% dividend, (where the "local" Capital Spillway Trust fund receives 1% of that dividend to cover their local fund costs and The Capital Spillway Trust receives 1/4%).

So the original over-leveraged bond bearers will only get back their principle as a single cash payment IF any of the investments succeed.

Now let us take the situation of an existing bank, (for example), with over-leveraged bonds on their books.

If they sit on them today, they are bound for a "haircut" of perhaps as much as 60% of their face value. There must be a high chance, the full value will vanish.

However, if they go along with my proposal; the money so used is ALWAYS used for new business foundation and thus MUST BE placed, BY THE NEW BUSINESS FOUNDER ..... into a new business bank account. The full face value of those over-leveraged bonds will immediately transfer from their books as a potential bad debt into new capital deposits for new businesses so created.

Again, the same applies for the working capital I also propose for the use of 25 year notes at 4% pa. In the case of the UK, £25,000 equity per job created, £50,000 working capital per job created. That is £75,000 for every new job so created; converted from doubtful value into new cash deposits at the retail counter of the banks.

What will occur is the immediate TRANSFER of prosperity, from the doubtful value of over-leveraged bonds into real deposits of real value that do not have a ratings agency rating hanging over its head.

The Capital Spillway Trust investment system will remove both problems at a stroke; doubtful value bonds become fresh new deposits; lack of available savings for new investment becomes instant new prosperity right down at the grass roots of the nations.

Millions of new customers with a fair wage in their pockets to spend.

Savers will only place their "savings" into a company, founded by someone within their own "local" community; that is clearly, visibly; succeeding. By the way, also employing their local community; perhaps their own children and other family members. Their savings become integral to their success of their own local community.

On the other hand, the employees also know that their job is predicated upon the investment of the local savers in their community. Both sides have a new respect for the process of new job creation; where their ongoing success requires they both stick to their side of the ongoing bargain.

And best of all, job creators become integral to every successful local community. You will need to encourage them to enable your local community success.

So; WHY NOT, try some new thinking??