A Credit Utility

Introduction:

Here is a long blog that I have been working on for a while. It is remarkably poorly researched and mostly involves my random thoughts about a new way to organize the distribution of credit within society...I have looked for books/articles on this subject. But other than one book(from 1982 and out of print) and a article/public access interview with Leo Panich I have had little luck. I hope to read that book one day but until then enjoy these ramblings.

How Banks Work Now! (Sorta)

Thanks to Planet Money, I now have a basic understanding of how banks work, or at least how they work in their simplest form. Basically, they operate of the principle of leverage. Banks take money in from customers, pay them interest on their money, and in turn lend it out to others at a higher interest rate. Profit is made in the difference between these two interest rates.

In the words of Liz Lemon - its that thing that rich people do to turn money into more money.

At its most base form this is how banks work. Obviously it is much more complicated than this, with extremely complicated financial models to allocate risk, determine proper interest rates, as well as a number of other financial products that attempt to mitigate this risk, or maximize the total leverage/profit made by the banks.

An alternative approach.

A "credit utility" would treat credit as a public good. The utility would distribute credit in the same way that a Water Utility distributes water. In the same way, that water is deemed as too fundamental to be placed in private hands (at least some in some places), so to would the distribution of credit be treated as to important to be done for profit/private gain.

A "Credit Utility" would allocate credit, on a cost of service model. Costs to run the utility would be recovered through interest on the money lent. Models could easily be developed that apportioned the interest rates in different ways to create incentives for certain behaviors. (Paying loans back quickly, encourage smaller loads, means tested interest rates, etc). This looks great to me, no crazy financial instruments, no profiteering, just banks providing a service(credit) that is necessary in a capitalist system.

However, there are two large problems that need to be addressed for this to really work:

- How are decisions about lending reached (who gets the money)?
- How much money is lent in a given time frame?

Currently these questions are answered by market forces. With the argument being that profit motive, determines how best to allocate credit. This clearly has not worked.
The current crisis represent a fundamental failure of the market to allocate wealth properly. If a trillion dollars can get lent to people to purchase fictional pieces of paper that are in reality worth nothing, I would argue that the system is not particularly efficient. Arguing for the efficiency of markets that can erase ten years of wealth creation in a single day is ludicrous.

Establishing a "Credit Utility" would enable public control of the banking sector. Credit/Wealth could be distributed in a way that was for the benefit of people rather than for profit and "market forces". These decisions would be made in the political arena rather than behind closed doors, and in the public interest, rather than for the maximization or profit.

The mechanics of these decisions would be difficult to set up. However, would they be any more difficult than the thousands (millions?) of accountants, banking executives, wall street types currently required to run the current system. Would this be more efficient than the market allocating credit. I would argue that the bar on efficiency by the market has been set pretty low...so probably. If efficiency was lost the gains made by having public control of credit would far out way the costs of lost efficiency.

Hopefully, you will notice that I have been using the term public control and not government control. Simply transferring the allocation of credit in society from banks to government as it currently stands, while likely an improvement, would not mean true public control of credit. True public control, would require a fundamental re-ordering of society. :)

Conclusions

This idea is exciting to me because it is tangible, and no so far out from the current operations of society to seem unrealistic but at the same time leads to discussion about the fundamental problems with the banking sector, profit motive and private control of credit. If credit is necessary for the functioning of society as it is, it should be under public control.

Anyway, I plan to keep thinking about this idea...I like to think it provides a good spring board to other more exciting questions, most notably, if the efficiency point is moot (which I believe it is) Why should credit be distributed for profit/private good rather than in the public interest?

Neat Article on Housing Policy Choices

Here is a really neat analysis of housing/development in policy in B.C.

Create Housing Policies...

In particular, I enjoyed the discussion about how developer contributions act as a subsidy to rich established homeowners at the expense of first time buyers and renters.

(For those of you who don’t know what developer contribution (DCCs) are. A DCC is donation extracted by a municipality as a condition of new development; these funds are usually used for infrastructure upgrades, sustainability initiatives, or parks and other amenities.)

This seems like a good idea to me, however as the article explains it has the potential to work at cross purposes.

In short; if developers pay for amenities and other services property taxes remain low as these services do not need to be funded from general revenue. Low property taxes are of greatest benefit to established homeowners and people with larger more expensive homes. Additionally, these costs while paid for initially by the developer are ultimately reflected in the base price of new homes. This pushes up property values, a further benefit to established property owners and ironically the developer – who makes more profit the more expensive the home is.

This is a great example of trickle up economics at work.

Ultimately, despite the good intentions of policies like developer contributions the most powerful interests will benefit the most. In this situation, a policy intended to force developers to fund municipal services/amenities serves to subsidise rich homeowners and push up property values (And developer profits).

Coleman Stove

While mostly a love fest of our current Housing Minister and Langleyite Rich Coleman the subtext to this article is interesting. This is especially true given the near daily announcements of new social housing units being purchased by the province and the City of Vancouver.

To me the article is implying that the model for social housing used by the province is shifting away from the standard model of mixed low income/social housing spread throughout the City, and towards larger housing projects specifically geared towards "hard to house" individuals.

This seems worrisome to me. The concentration of social housing in this way is ghettoization. It forces all the “undesirables” to live in certain areas while protecting everyone else (and property values) from unpleasantness

This seems the opposite of the solution to me. Neighborhoods should represent the makeup of society more broadly with social housing spread evenly throughout the City. Social Housing should not be dictated by market forces or specifically designed to protect property values and the sensitivities of rich people.

Fartisan Politics

Two of my favorite things combine for humorous results, also it only took a week for my attempt at a serious blog to descend into childish jokes. 

Fart Interrupts City Council Meeting

I am working on a serious post as well, its below this one as I started on it first

Beggar thy Neighborhood

Recent events in the City of Surrey have got me thinking about a my recent trip to the U.S. While there a friend and I got into an exciting chat with an elderly gentleman. We discussed politic's generally, including the views of novelist Jack London and "Obomamania". I belive the word socialism even came up a few times, which is always a little frightning while in the United States.

One of this mans more interesting incites was that one of the best methods to get a true read on government policy is to follow the tax law. This is something I have heard before and makes a great deal of sense to me. Practically speaking taxation is one of the most powerful policy instruments government has. More importantly it is one of the few that they seem more than willing to use in recent times.

Which leads me to the City of Surrey and Mayor Watts' recent annoucment about the creation of "Economic Development Zones" With the creation of these special zones, Surrey will be offering special conditions to developers including tax exemptions and reductions in amenity requirements to develop in specific areas.

This is obviously bad. The extraction of amenities from developers is one of the more positive things that municipal government does. While far from adequate these contributions ensure that  developers at least pay some of the costs for ensuring a livable city (parks, community centers, new infrastructure etc..)

Nothing really new or exciting here just politics on the part of Ms. Watts/aid to developers that don't need it. However its interesting to look at this in a larger context. Does having a number of smaller municipalities as opposed to one larger body, as in Toronto/Montreal, lead to a "race to the bottom" in terms of competition for development. 

With the power of the development industry/profit motive its hard enough imagine any positive results from development with out institutional incentives on the part of local governments also contributing to the problem.

City Housing Advocate - Advocates for Houseing

Here is something funny to read, from NPA bloggers City Caucus

City Staff Promote Political Rally

This is an opinion I don't understand. Why is there a backlash against people who work in govenerment having opionions related to thier job.

I would expect the Economic Development - Manager for COV to advocate for lower buisness taxes, just as I would expect the Housing advocate at the City of Vancouver, to advocate for more money for social houseing. But for some reason this is wrong and "political".

Frightingly enough the bureacracy is one of the more representative institutions that we have, this is how it is suposed to work, but no somehow working for the government means that one must be apolitical and have no opionions related to the work they do all day as if this were some how possible.

So silly but forgettibly partizan things often are, City Caucus is a fun blog to read however if only for the anger it generates and humerous/alarmist photos.

cheers

Affordable Housing in Vancouver

Hey all my first blog post and that article that inspired me, here is an interesting article from Vancouver City Councilor Geoff Meggs about the upcoming demolition of some of the last affordable housing in Vancouver (89 units at 4500 Fraser)

http://www.geoffmeggs.ca/2009/02/26/frustration-despair-about-affordable-housing/

I am currently shedding a single tear for poor old Geoff and crew who just couldn't do anything to help the people living in these homes and I sincerely hope their upcoming round-table discussion on affordable housing goes great!

Their feigned impotence and glad handing of Vancouver City Council on this matter is vomit inducing. Saying they say they don’t have legal authority to deny the permit when they set the bounds of that legal authority is ridiculous. Similar permits are denied because people don’t have the right number of fancy rocks near their stream beds and salmon wading pools. The City of Vancouver’s authority in these matters is quite explicitly spelled out in the Vancouver Charter/Local Government Act, so they need not worry about legal authority.

Additionally they certainly could of delayed the demolition as Geoff himself pointed out, but alas the “developer would loose to much money”. Which I will leave to speak for itself.

Anyway, thanks for listening to my rant, I’ve been reading ever more news about Civic Politics in Vancouver and getting increasingly angry so hopefully there will be more.