A Modest Proposal for Overcoming the Euro Crisis, Version 3.0 – Policy 3 significantly amended

The Modest Proposal never ceases to evolve. Following the issue of Version 3.0, we have made some significant changes, primarily, on Policy 3 (the Investment-led Recovery, Rebalancing and Cohesion Program). Click here for the latest version. Comments welcome.


  • Well ,my position is known.

    If it covers the rebalancing of the energy flow between the main forces (institutions) on the broader economic frame ,it’s good.

    The specifics and the technicalities are for you economists (like we have a choice 🙂 ).
    Especially at page 10 and after ,it was a very good idea to give all these specifics about what is not. This is were all the controversial ,contradictory ,economic-political ,legal games are played.

    Visual flows ,short clear explanations respecting different kinds of perception.
    (You could also use some blue-ish red-ish and green-ish highlighting ,not only on titles and diagrams but also on important points – just a bit of subconcious training for faster interrelations ,not manipulation)

    What you are doing is optimising the whole thing. You made it broader with respect to other economies upon this earth and gave important specifics. What is not to like?
    Only be careful not to over optimize so that it loses its affect on reality.

    Otherwise ,keep walking…..

  • I have two questions about policy 2:

    (a) Why would anyone think the ECB would never be forced to monetize its debt? The Fed, BoE and BoJ have done it, not because they like it but as the least bad of their available policy options.

    (b) Why would anyone think the ECB can keep borrowing with ultra low rates? It will still represent a fractious weak political union (that is not unlikely to break up or expand in self-destructive ways), but now it will have to manage many trillions of debt. Why would Germany agree to such a “sharing” of sovereign risks?

  • As a European (British), individual private inventor, it behoves me to confine my comments to POLICY 3 – An Investment-led Recovery, Rebalancing and Convergence Program. In addition, as the French government in 1987 cited me as having the same technological foresight as Gustav Eiffel a century earlier, (Mention Honourable, Tour Eiffel de la Space Competition), I have already set into motion conversations which may, in time, enable me to present these additional comments directly to the Elise Palace.

    In so far as the revised policy 3 is set out, Yanis and Stuart Holland have made amendments that do start to address the underlying structural difficulties. I particularly agree with the point they make with regard to:

    “the volume of investments is severely circumscribed because of the convention that 50% of project funding be financed by member-states”. (Page 15, para 1).

    This matter of all funding being constrained to 50% has been a disaster for many reasons; a very good example being that, with no parallel institutional framework enabled to deliver the balance of funding; it has never been possible to emulate the great success of the United States SBA and NSA funding models, (where they will fully fund successful proposals). IMHO, that failure has, in turn, deeply compromised the long term growth of all European competitive private industry.

    As Yanis already knows, my honestly held critique of his previous proposals were entirely centred upon what I saw as the simple fact that the European Investment Bank, (EIB), had no visible experience, and thus related success, of investment right down at the grass roots of any national economy. Particularly, arms length, long term investment of free enterprise based equity capital into private sector creative individuals like me. The record shows that, since the late 1970’s I have been a detailed critic of the lack of private sector savings institutions making any attempt at such investment. Indeed, I would dare to suggest that it is the lack of such private investment institutions that has led us to where we are today; with the entire financial needs of the Western economies dominated by banks; rather than savings institutions.

    That we do not have ANY institutional mechanism, set of agreed rules; designed to make such long term equity capital investment, into new, free enterprise based, very small businesses and related job creation. Again, I have been told in writing that the Bank of England agrees with me with regard to the matter of capital.

    Europe is in need of tens of millions of new private sector jobs.

    With all that in mind, I applaud the proposed Investment-led Recovery, Rebalancing and Convergence Program; with some reservations that relate to my own previous experience with existing investment structures; particularly, Venture Capital.

    It is important for everyone to understand why I object to the use of the phrase Venture Capital. That venture capital, as promoted throughout the Western economies, is a mechanism that drives uncompetitive mergers and acquisitions that have brought us to a feudal mercantile economy that does nothing to address the underlying problems we face today.

    I would press everyone to accept the phrase; Free Enterprise, rather than venture capital.
    That once you all accept that small change; just two words, you will set into motion the re-invigoration of every national economy.

    Europe is centred upon the idea that major corporations and government departments create jobs; yet everywhere we see and hear people, right down at the grass roots of every nation, simply repeating the words:

    We have no jobs.

    The rules I have set out are very simply designed to permit the creation of millions of very small businesses where they are adequately capitalised and free enterprise based; where the manager of the business will be the owner of the business.

    Such that the inventor, the designer, the creator; of the job creating very small business defines the challenge set to the employees; that they are free to fail or succeed.

    The primary difference being that with the use of free enterprise based equity capital, the funding, the equity capital, remains in circulation within their local community.

    That in turn brings me to the matter of how the rules will be funded. In The Capital Spillway Trust response to the Green Paper, Financing a Private Sector Recovery, I set out details of Vanishing Bonds. All that is different between what Yanis and Stuart have outlined, with regard to the difficulties of the banks and my proposals for vanishing bonds is that with a vanishing bond, the bank may be able to transfer their inappropriate holdings of debt instruments to a agreed central institution, which then transmutes them into vanishing bonds; which are in turn used to capitalise new very small businesses – that in turn deposit their new capital back into the retail banking system

    There is no need to use Euro Bonds to re-capitalise the defective holdings of the banking system.

    Vanishing bonds transmute dubious debt instruments held by the banking system into new small business customer capital deposits without any ECB involvement. In turn, they will, over a comparatively short timescale, serve to directly transfer unusable debt held by the banks back into permanent new prosperity within every local community.

    Conventional capitalism; particularly venture capitalism, has been discredited. It does not promote a free enterprise economy; instead it has led us to where the entire Western economy is in deep peril with many millions of citizens unemployed and disrespectful of authority.

    The answer is to start the long journey towards private savings institutions; now given a new mandate for long term, arms length, free enterprise based investment, under agreed rules; that will, in turn allow the ordinary private creative individual to take responsibility for the rest of the working population within their local communities.

    • @ Chris Coles

      “I would press everyone to accept the phrase; Free Enterprise, rather than venture capital.
      That once you all accept that small change; just two words, you will set into motion the re-invigoration of every national economy.”

      Repeat three times in the morning ,noon and evening before and after eating.


      Proper words that everybody can understand and positively accept make all the difference.

      I see the MP as refering to and setting straight the global flows ,the broader frame.
      I see your work as a frame within a frame ,closer to the activities of human beings wherever they are. It allows for personal flexibility and this is respectful.

      I also like your work because it brings back a healthy notion to the word competition ,or even better ,one does not even have to think about the word competition ,only development. A way of thinking more healthy and appealing to me.

      As for the vanishing bonds ,i guess they can have adaptive capabilities depending on the local characteristics and prevailing natural limitations and thus of businesses at every region (agricultural ,industrial etc.).

      I do not see why they can’t be used together with eurobonds (globalbonds).

      Could you give a more clear example of how one receives the bond and how it is paid back?

      Also couldn’t we have ready made templates for businesses? For example ,a person could choose between a vast list of businesses ,listed in order of need of the community. A template could be given that could ensure a relative success. Ofcourse if someone will want to create a new market ,one will be more than welcome to do so.
      The procedures of equity capital access and the characteristics of the vanishing bonds could differ for a new unmarketed project ,giving to it possibly more resources ,momentum and chances.

      Can it be done?

    • As this is a debate that is being carried on two web sites at the same time, I will answer both C1ue here on iTulip http://www.itulip.com/forums/showthread.php/22493-Modest-Proposal-for-Europe-Version-3?p=228967 and also the question posed by Demetris_(A) here above – both of which viewpoints would appear to be diametrically opposite; C1ue being much more sceptical than Demetris_(A).
      C1ue, you ask:

      “Why would any investor throw significant sums of money around to totally unproven ventures and on people with no particular track record?

      How does having community based investment change this in any way, except perhaps by shrinking the pool of interested venture seekers? And aren’t there risks also with having a smaller talent pool?

      Demetris_(A) asked, I might add enthusiastically:

      “As for the vanishing bonds ,i guess they can have adaptive capabilities depending on the local characteristics and prevailing natural limitations and thus of businesses at every region (agricultural ,industrial etc.).

      I do not see why they can’t be used together with eurobonds (globalbonds).

      Could you give a more clear example of how one receives the bond and how it is paid back?

      Can it be done?
      Let me open with two insights, one Japanese in origin, the other, a point made to me by a personal adviser to Margaret Thatcher in the 1980’s.
      The owner of an asset in Japan see themselves as holding the asset for the long term benefit of the following generations. That it is in their temporary charge and their responsibility is to pass whatever it is on, in at least the same state as when it came into their possession. That an asset is not to be cashed in for their sole benefit; instead treasured for the part that it plays in the wider viewpoint of the overall prosperity of their community.
      A senior partner in what was Price Waterhouse made a very simple statement when we met him in Downing Street in the very early 1980’s:
      “Don’t come to me with your problems; present me with your solutions”
      Here in the UK we have many Roman roads; familiar from their straightness and usually directly connecting major towns and cities. We take roads for granted; anyone, from a child just able to walk; right through to the largest vehicles may use the road. They are well understood; the design principles were laid down many centuries ago; they work.
      We have been using an investment model that does not work like any road we have ever seen; it crashes almost everyone that uses it.
      My viewpoint stems from always finding myself; each time I come to the same crossroads, as an inventor; unable to pay my way within the patent system. Thus in 1989, having filed for several patents and over the following 3 years I had tried to raise the funding, then had been summarily abandoned by the European Patent Office. So in 1992 I sat down and first of all presented a 170 page dissertation on my due diligence in attempting to raise the funds. That then followed in 1994 with the UK government creating their at that time preferred solution, Venture Capital Trusts. I did not believe VCT’s would work and so, following the dictum of a solution; I again sat down and created the whole concept of The Capital Spillway Trust as my view of why we needed change and what I believed would work as a carefully designed solution.
      Every nation, at every point in their history, will have a relatively small number of wealthy and sophisticated investors, and also a small number of very successful large companies. They are the pinnacle of the investment community. They are not what this debate is all about.
      This debate is all about the hundreds of millions of the rest of the nation. Several hundred million in the US, many hundreds of millions more in Europe; sixty million here in the UK. They are unsophisticated and not wealthy. Yet they have no option but to rely on the quality of the investment road structure for their prosperity.
      They quite naturally pool their savings and just as naturally, place their reliance for their future prosperity into trust; in turn; placed into the hands of the “Road” structure. Well, today it is perfectly safe to state; that the present investment road structure does not bring them prosperity. “it crashes almost everyone that uses it.”
      The unsophisticated saver must be able to rely upon two separate, yet closely interrelated aspects; their savings must be kept safe and their investments must bring continued prosperity.
      That creates a paradox in that anyone will tell you; you cannot make any investment and be certain of success; yet the investment must be kept safe. It was the recognition of this paradox that became the mother of the realisation; that the only investment mechanism that fulfils the dictum of both expected loss and safety is to pool all the communities savings and then to invest using equity capital. The reasoning being that if you place investment into the community; it must also conform to the Japanese dictum of keeping it for the long term benefit of the following generations.
      You do not water a garden with the expectation of receiving the water in your pail back at the end of the season; instead, you water the garden with the knowledge that unless you do; your crop will wither and die. That the water must return to your pail by a long and circuitous route.
      That we must learn to treat investment of savings in the same way. That if we invest, the savings have to remain in circulation within the local community. That investment is a community thing; for the long term benefit of everyone. That in the same way as watering your garden adds to the water in circulation, each small quantity added to the pool, creates more prosperity for the whole.
      Yes, this is ALMOST the same principles as socialism. With one tiny, but quite crucial difference; what I am proposing does not involve decisions by the community, it only involves decisions by the creator of the potential future prosperity, the new job creator.
      When you take your vehicle onto a road, you do not ask is the road safe to use; you just use it. You do not need an adviser to make that decision every time you take to the road, nor a government official who must make that decision for you. You do not expect to have to ask anyone’s permission to take to the road; for the very simple reason that every time you take to the road it is safe to do so. The same must be applied to the pooled investment of savings.
      Today, we are taught to fear the failure of the investment; when we should be treating it in the same way as watering the garden. A natural process that brings us all greater prosperity.
      When you use equity capital; as with ALL new business creation; that investment is spent on all the myriad inputs to the project, from office chairs to computers to wages for the cleaner to insurance to ……….
      All these inputs should be purchased from the local community; if the locality does not have any particular supplier, then someone else should set out to create one that does supply that need. That is how prosperity grows; from a combination of shared community investment and enterprise.
      Thus the only difference between a failure and a success is that at some point in the future, the successful investment starts to bring in more income than that it has already spent to reach that point.
      It is not a crime to try and achieve employment; yet, today, that is exactly the point you start to make when you question if the investment will succeed. By implication; if the investment might fail, it should never be attempted.
      That is like saying that I will not water the garden because it might not grow. When we all know that if you do not water it it will not grow.
      The rules I have set out are designed to allow anyone that believes they can create employment, growth, are given access to the equity capital they will need to enable them to try and succeed. That under these rules, if they fail, the savings of the local community remain in circulation within the local community.
      That the savings are never lost.
      Yet, they also define exactly the same rules for any successful investment; to return an income to the original savings pool. The water becomes equity capital; the crop becomes dividend income. The savings are never lost; instead remaining in circulation for the benefit of the entire community.
      All that I have defined is a very simple mechanism for a free society to create their own local prosperity.

      To create a true free market, capital based, local economy, with as much competition between the many suppliers to the local economy as possible; only requires we accept four primary rules:

      Only the job creator makes the decision to create a new job

      They receive adequate Equity Capital by abiding to strict, but open rules that leave them in complete control of their new business.

      Local savings are invested, as equity capital, back into the local community to provide the required capital to create the new jobs.

      All transactions are made to the rules of a free market.

      A simple, safe, investment road structure, that everyone can see will work; and that is not driven hither and thither by bureaucracy or powerful vested interests that only want to gain power over the unsophisticated saver or the newly created business.

      Returning to the question Demetris_(A) asked:

      “Could you give a more clear example of how one receives the bond and how it is paid back?”

      This is very simple.

      The local community creates a basic structure which I call a “Local” (add the local name), Capital Spillway Trust Fund. For example, The West Detroit Capital Spillway Trust Fund. Importantly, to avoid the suppression of competition, I believe that anyone with standing in any local community may file for such a local fund. So that, right from the outset, competition is encouraged; even between local trust funds.

      In turn, the local fund sets out to encourage anyone within their community to create new businesses that will in turn, create new employment.

      Now, take anyone that has the desire to create a new business. They see their chance. They have to create a business plan and get that signed off as being both legal and that the proposed accounts will balance. By that I mean they must be able to show their local community fund they are level headed, have a record of honesty and a commitment to their local community. That they have in place the required professional advisers, lawyers and accountants. NOTHING MORE THAN THAT. These are ordinary people taking the opportunity to better themselves and at the same time increase local prosperity. This first stage is not about finding fault, it is all about encouraging them to try and succeed.

      They create a formal company which in turn means they have a visible presence in the ongoing business community. For example, here in the UK anyone can, for a very moderate fee, look up the formal filings and accounts of every company ever formed here in the UK on the Companies House web site. http://www.companieshouse.gov.uk/

      Once they have the basic formal structure, then with every employee they must also file a company tax record for the Inland Revenue http://www.hmrc.gov.uk/
      and again the same for every new employee, they must file for what we call a PAYE, (Pay As You Earn), tax record number. Each employee has such a record and each company too. So all the formal structures for every community are already in place. No need for further legislation.

      All that I propose is that for every new employee tax record the new company receives, they pass that new employee PAYE tax file record number to their local Capital Spillway Trust Fund, who in turn pass that on to the central bank fund that has created the central fund of vanishing bonds. That triggers the payment, passed through the local Capital Spillway Trust Fund of, (here I will use the value I have proposed for the UK), £25,000 equity capital; ALL OF WHICH is immediately passed to the new company. No skimming.

      What is important to understand is that that transfer of value changes from a vanishing bond to equity capital as it passes through the local fund. The local Capital Spillway Trust fund retains 20% of the equity in shares, but passes the full money value onto the new company.

      Thus the local community have a small equity stake in the ongoing business, with the entire money value being invested into the new business. The investment thus is entirely free enterprise based.

      On the other hand, the new business owner may not pay themselves anything other than a very minimal income from the company and they must either go on to create a successful company paying a minimum 8% dividend on the full 100% value of the investment back to the local fund; or, they must repay the full value back to the local fund; before they may take anything other than a minimal income from their company.

      Again, they may also, (I have proposed within a decade), buy the local fund out entirely, but then again to agreed rules.

      All this and much more is set out in both The Road Ahead from a Grass Roots Perspective and The Capital Spillway Trust Response to the Green Paper, Financing a Private Sector Recovery. http://www.chriscoles.com

      Creating new employment for others in your local community is not any form of dodgy enterprise; it is the simplest way of creating new prosperity. The more you try, and invest, the greater the local community prosperity.

      Every penny so invested is immediately deposited back into the banking system as equity deposits for the new business. So all the value of the vanishing bonds becomes new deposits into the banks.

      The vanishing bonds simply act as a mechanism to transfer value, prosperity, out of the banking system and into the local communities; yet, at one and the same time; keeping the value still circulating within the banking system.

      Importantly, the banks have no control over the value so transferred; the control of the value is passed to the adventurous new business owners, the local employers, the new job creators; for the long term benefit of each local community.

      Honest, legal, new job creation; anywhere; by anyone with the courage to try.

      “The business venturers freedom to create new long term jobs must be underpinned by investing capital being available to allow them to try, to venture.

      Such ventures are surely the great river sources of the nation’s vitality?”

      So; why not?

    • Well ,i like it.
      The example with the garden i loved.

      You keep the flow in the community ,very easy for anyone to have their eyes on the flow so as to ensure transparency and a very simple procedure overall that makes the banks revert to their original purpose.

      It is actually very reasonable and very natural.
      Hey ,you can not have the patent. Nature has it. 🙂

      If i understand correctly ,vanishing bonds are the idea of business equity as the initial instrument of the bank. They have nothing to do with conventional bonds. And they (banks) ,can transfer their toxic waste as true business capital through the vanishing bonds. Also a mechanism for “catharsis”. Correct?

      Something else.

      1) You didn’t answer my question about ready – made business templates to assure a relative success to the new businessman. Is this possible?

      2) Also when someone tries to manipulate that system ,is it easy to find him? As i read that one does not have a second chance to start a business. Are there mechanisms in place to make serious that the new businessman was indeed the culprit?
      If something like that is not possible ,(because today is surely not) ,maybe a second chance should be considered but with other people watching one’s endeavours? That is to give one the benefit of the doubt. Most will say they are innocent anyway.

    • “the bank may be able to transfer their inappropriate holdings of debt instruments to a agreed central institution, which then transmutes them into vanishing bonds”


      How did the central institution accept the toxic debt? The central institution will pay for the debt of the bank every time it receives money from a fund?

      or in other words ,

      when the fund receives money from the successful business owner ,part of the money will be used for the repayment of the inappropriate debt holdings that are now with the central institution that converted them to vanishing bonds?

    • Demetris_(Λ)

      I do thank you for your continuing questions and comments. I will try and answer them all here below, each time starting with your question.

      “If i understand correctly ,vanishing bonds are the idea of business equity as the initial instrument of the bank. They have nothing to do with conventional bonds. And they (banks) ,can transfer their toxic waste as true business capital through the vanishing bonds. Also a mechanism for “catharsis”. Correct?”

      Not quite. As I see it, the vanishing bond is THE instrument of the process of the transfer of existing, (but questionable), prosperity within the banking system on into new small businesses so created. Indeed, that was why I called them a vanishing bond; they vanish as they transfer the prosperity; a new form of financial changeling if you like.

      Once the prosperity leaves the central bank, it is from then onwards entirely under the control of local Capital Spillway Trust fund and then immediately thereafter, the new business creator who then deposits it into their new bank account. The banking system thus transfers their toxic waste off their books yet gets the money back, as you say very effectively; in a cathartic action. Thus this is not an instrument of the bank; but to be treated in exactly the same manner as any other small business bank deposit. In that way, they have to treat the new business banking customer with respect. If you left the process in the hands of the banking system, as their own instrument; they would have a very strong interest in subverting the process to their own ends.

      I certainly did not set out with the idea in mind that there will be any additional market for vanishing bonds. But then that will be for others to decide.

      “Something else.
      1) You didn’t answer my question about ready – made business templates to assure a relative success to the new businessman. Is this possible?”

      To be honest, I deliberately left this unanswered. Let me say I am passionately dedicated to the idea of as wide a range of new entrants as possible. I truly believe in the innovative capacity of the human mind. No one should be given ANY opportunity to try and decide who tries, or what they try, as long as it is reasonable and honest. The moment you introduce a template; next you have a new army of bureaucrats delineating the template. What we need is as many as possible trying every way they can to succeed. All they need is the basic idea for the business and then get on and try to succeed; any way they can.

      “2) Also when someone tries to manipulate that system ,is it easy to find him? As i read that one does not have a second chance to start a business. Are there mechanisms in place to make serious that the new businessman was indeed the culprit?
      If something like that is not possible ,(because today is surely not) ,maybe a second chance should be considered but with other people watching one’s endeavours? That is to give one the benefit of the doubt. Most will say they are innocent anyway.”

      Again, this is a very good question. Now you can see why I created the whole concept of a local fund, (and also why the community may create competing local funds). By involving the local community, they have, right from the outset, every reason to keep a quiet eye on their new charges. Classic local peer pressure. The local community become a small but significant shareholder in each new small business. Yes, you will always have someone try and game the system; all you can do is fall back on a set of agreed rules for the consequences. However, the moment you relax the rules, then you will lose control of the system. So I will stick to the original idea, if you do not abide by the rules, you are out. Period! Also, they will be surrounded by a lot of others working their butts off to get their new business off to a good start, with every new entrant having every interest in working with their local community; both for customers and suppliers. Local peer pressure should be perfectly adequate for the majority of cases.

      ““the bank may be able to transfer their inappropriate holdings of debt instruments to a agreed central institution, which then transmutes them into vanishing bonds”


      How did the central institution accept the toxic debt? The central institution will pay for the debt of the bank every time it receives money from a fund?
      or in other words ,”

      Here I can only give you my viewpoint. As I see it, the best way forward for the first stage is to assume the central bank will pay to any interested bank a very tiny nominal sum for the toxic debt instrument. It is always important to have some form of financial consideration in the transfer of an asset. So the central bank buys the initial instrument before conversion to a vanishing bond. In which case, then the individual banks may discover that it is VERY much in their interest to buy in for themselves such debt instruments to pass them on as they will see banking deposits at full value in return. Indeed, it has come to mind recently, that any large bank might find this is a better thing to do for themselves; without the involvement of the central bank. (Though one has to assume the agreement of the full regulatory authority).

      “or in other words

      when the fund receives money from the successful business owner ,part of the money will be used for the repayment of the inappropriate debt holdings that are now with the central institution that converted them to vanishing bonds?”

      No. Certainly not as I see it. The local fund receives the money only as a part of the process of the transfer of the value. They in turn have to be fully involved in the receipt of the issue of the appropriate share certificates, entirely the responsibility and cost of the new business founder; which reflect the retention of the 20% of the ownership of the new business within the local community, and also the new business founder to sign up to the rules of the system. (The new business founder must comply with the requirements to get hold of the funds, so the incentive for successful process immediately passes to the new business founder).

      So the central bank or central fund is out of the equation once the transfer of the value is made onwards to the local fund. Indeed, it may be that the central bank will ask to be paid to take the toxic debt instrument on in the first place, while the banking system will have a very real interest in getting their hands on the new business banking deposits.

      On that aspect; it will be certainly of great interest to see how that plays out as the system gains forward motion.

      I hope these answers have been useful and always welcome any such questions.

    • I must add:

      Again, the nominal value of the central bank fund is to be diminished in direct consequence of the repayment of the value back through the system from the successful businesses creating dividends that then spark the purchase of the shares by the local savers, at least several years after foundation of the business. With the 4% 25 year working capital notes, the central bank receives the interest and capital repayments directly; so their fund vanishes as the income arrives. That has been designed to allay anyone thinking this is just another scam for a government to borrow money. Over time, the central fund vanishes while the overall prosperity has been permanently transferred to the local small business communities.

    • Thank you for your explanations.
      I wish the right people accept this ,for i would like to see it in action.

      I hope people begin listening in Britain and elsewhere and not keep avoiding any change as everybody does in the world these days.

    • This question was asked on iTulip http://www.itulip.com/forums/showthread.php/22493-Modest-Proposal-for-Europe-Version-3?p=229172#post229172

      As I feel it is very important to finally settle the reason why I am passionate about the use of equity capital, I repeat my answer here also.

      [QUOTE=c1ue;229133]I, as an individual investor, certainly want to invest in success as does every single other investor.

      However, that isn’t my point.

      My point is that in order to return the capital invested in new ventures for future new ventures, the rate of return times the rate of success is what matters.

      For VCs, the rate of return they target is 30x or 40x of investment with the expectation of very high failure rates.

      For community ventures, unless it can be demonstrated that the failure rates are far lower, then the rate of return targeted must be similarly high. Otherwise while the successful ventures either return the capital invested (and why not with at least some inflation adjustment?) or pay 8% dividends, the failed ventures if any significant percentage will destroy the trust in short order as they will return nothing.

      This is why I am asking the details.

      I do not disagree in any way that funding of startups is in general a positive activity – but using people’s savings to do so when there is very real risk of loss makes the willingness of people to give up control of their savings in order to do so much less.

      By the time I had finished last night it was past 01.30am and even as I dropped down into sleep it came to me that everyone needs to fully understand why venture capitalism and conventional banking do not work when the aiming point is the increase of the prosperity of the wider nation; and what is so different about the use of equity capital.

      Let me start by presenting you all another analagy. Imagine a house builder that, for every thirty or fourty houses they set out to build, almost all of the houses started were then summarily destroyed; right down to the foundations. Many would not even be fully finished before the process of destruction would begin, and certainly, the majority of the materials used would be reclaimed. Even those houses built that had, for a time, occupants, would also be destroyed with the new occupants being summarliy dumpted on the street. You would think the builder quite, quite, mad; wouldn’t you? Well, that is venture capitalism; most of the tries are summarliy destroyed. As C1UE above shows us, they adjust their business plan to take full account of that business model.

      The underlying fault within both venture capitalism and conventional banking, (importantly, when there is no other balancing investment mechanism), is that it is entirely one sided; the “system” always wants its money back; just like the builder that, having got the house to the final stages of the roof, then wants all their materials back on the lorry to take to the next building site.

      Conventional banking’s central concept is that, when a saver deposits a £, $ they are permitted to multiply that deposit six or seven times. They thus are ALWAYS in the mindset that they must ALWAYS get their money back.

      What everyone has missed is that if you only use conventional banking, then ALWAYS, the banking system becomes more and more prosperous, while the wider nation becomes more and more drained of prosperity. Every penny depositied becomes a much larger loan which in turn again, has to be fully repaid, with interest.

      (I am deliberately ignorring the difficulties the industry is in at the moment as that is merely another symptom of the overall problem).

      The lost understanding of the use of equity capital is that the investor NEVER gets their money back. It always becomes a part of the increasing prosperity of the wider community into which it is invested. Yes, you may buy or sell your “shares”; but that original investment remains in circulation.

      The house you build remains. If it is not quite up to standard, its intrinsic value will decrease, yes, but the money spent on the build remains in circulation. The butcher, the baker, the candlestick maker; all have prospered just a little bit from the overall transaction.

      Without a well understood set of rules for the long term investment of a substantial part of the peoples savings, as equity capital, back into the adventourous individuals who will step forward to try and increase their own prosperity, and thus by their efforts; the ongoing prosperity of the nation; without that input, the economy OF ANY NATION will, continously, decline in direct relationship to the systematic removal of prosperity by the short term banking system.

      You simply cannot have any form of long term prosperity for the nation without the use of equity capital to use; to create the foundations for the growing small business community, right down at the grass roots of the nation. By leaving the initial investment in place, the input of the additional prosperity remains in circulation.

      Of even more importance, if you believe in the freedom of the people; the investment MUST be made under the rules for free enterprise. The founder of the new business must be both the manager of the business and the owner of the business. You must leave them free to make their own decisions as to how the business grows.

      When you invest equity capital, you are saying; I believe in the long term prosperity of the nation and the abaility of the industrious and adventureous who are trying to improve their community; to create new employment, to add new jobs for the young people coming out of eduction. Equity capital is YOUR commitment to the long term prosperity of the wider nation, YOUR NATION!

      Please, think about that.

  • Hi Prof,

    I suggest to put an overall diagram. I made it myself. Akin to a circular flow. One thing that i noticed, is an implicit assumption that EIC/EIF projects will generate enough and sustainable growth. But not really understand how profits will be generated in total. For example provision of public goods are exactly publicly provided because cannot generate profits. (future taxes perhaps to pay EIB/EIF?? ) Second, you propose more or less to (euro-)nationalize banks for some period of time, where by recapitalization and liquidity provisions, will again start operate as loan injecting machines. Though, you assume a simultaneous occurrence of confidence reversion.

    Time and space constrained, i would say that your proposal seems sensible and much more functional from what already exists. But what’s the difference of allowing a helicopter drop of money ( which possibly is a precondition for your proposal to work after a sever jolt ) other than masking it through different forms of loans and bonds ? Both seem to me can achieve the same result. Boost of aggregate demand, finance of debts and bank recapitalization and possibly (a desired) inflation, “Old Keynesian wine in a new bottle” Remember? And I am not really convinced for southern countries will gain in competitiveness.


  • Really, the time for fancy financial architecture seems to me is over for good. Bank debt conversion into risk capital and massive increase of share capital with govt. participation would take care for a start of a hugely oversized banking system (US$ 62 trillion in Euro for the 27 Eurostates, absolute madness!) that needs to be redimensioned and more importantly STRICTLY REGULATED with no prop desk dealings etc. but strait-forward and stringently monitored deposit and lending business.
    And then we shall have to think about another kind of economic growth then what we had in the last 30 years. It seems to me that Yanis is not that dissimilar to all those technocrats that think the system is OK just poorly run. I do not believe this for one minute. This crisis of capitalism (based on asset bubbles and the corresponding leverage) is a travesty of what is basically the basis of modern society. On top and as the Rio +20 conference will show WE DO NOT HAVE THE RESOURCES FOR 8 BIO PEOPLE to continue as in the past (converting resources into waste just for the sake of economic number crunching eco growth!!!) This will almost by necessity lead to disputes over scarce resources and possibly worse – WAR.
    In this sense Yanis proposition are for my gusto too short of substance and in a somewhat more sophisticated and certainly honest way more of the same. Oh…these economist…can they not be something more than just economist


  • Yani I would like to have a comment of you on Munchau’s latest article “How to build a fiscal union to save the eurozone” ( http://www.ft.com/intl/cms/s/0/24c71e96-a5bd-11e1-b77a-00144feabdc0.html#axzz1w6BD3CuN ). Could you explain the main similarities and differences between your Modest Proposal and Munchau’ s “four elements” of a “direct resolution path to a fiscal union”?
    It seems to me that he would take Modest Proposal’s ECB-bond for “dept redemption bond”, deeming it “unrealistic” and “inadequate basis for a fiscal union”, or am I wrong? What would you answer to his criticism?
    From my point of view, the problem is that Greece doesn’t actually have much time left. I am absolutely convinced that Greeks cannot pay this year’s taxes.This is not a rhetorical or theoritical opinion. I’ ve just filled in the tax return of me, my brothers, my father and my father in law. The resulting taxes are really unaffordable for us, especially after the recent reductions in our wages / pensions. We have decided to pay only as much as we can and ask for an arrangement for the rest. And you should have in mind that we all have a job, don’t owe money to banks and live in our own houses (built by our families bit by bit between 1970 and 1980 with year after year savings, not loans; that was real austerity). What is going to happen with those of the 1.100.000 unemployed that are supposed to pay tax on the basis of the previous year’s income, when they still had their jobs, or with them that have a job but pay rent money or installments? Tax revenues will soon collapse, causing a rapid rise of the budget deficit beyond every forecast. This will be the next bifurcation point, and we are talking about months not years.
    If Eurozone cannot survive a greek defeault this year, something determined must be done immediately. There is no time for a “futile fudge”. On the other hand, you could believe C. Langard and consider me as another of the millions of tax evaders, that live their Heaven in Greece . . .

2 Trackbacks