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POLICY OPTIONS FOR GENUINE FINANCIAL REFORM
Tarek El Diwany
Istanbul, 12 September 2013
Speaker notes are included in this version. Choose View >> Notes Page
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Some Theology
– What is our purpose?
– To whom are we accountable?
– How should we measure success?
– How should we regulate?
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Wealth Creation versus Wealth Transfer
Wealth Creation Wealth Transfer
For personal gain
TradeInvestment partnershipWaged labour
TheftInterest-bearing loanGamblingDebasement
Not for personal gain
Community workCaringEducating one’s family
GiftEndowmentInterest-free loan
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DISCOUNTING AND THE ENVIRONMENT
Given the following two forecasts, which method should be adopted under standard discounted cash-flow analysis using an annual interest rate of 10%?
• Normal farming produces 100 profit per year for ever
• Intensive farming produces 150 profit per year for 15 years followed
by desertification
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80,000 20,000
100,000
Rent and purchase payments
Debt-free Home Finance
Home Finance Provider
Home Buyer
Developer
title
Subscriptions
Investors
Distributions
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Toll-road BOT
SPV
Subscriptions
Turnkey delivery
Investors
Milestone payments
Road users
Distributions
Toll payments
OperatorManagement agreement
SponsorTransfer of
title at end of concession
Contractors
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Capital Equipment Leasing
SPV
Subscriptions
Equipment Supplier
Title to equipment
Lease contract
Investors
Purchase price
Client
Distributions
Rental payments
AgentService
agreement
Third PartySale of
equipment at end of lease
period
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BANK
PERSON A PERSON B
cash £10 £ 10 equity
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BANK
PERSON A PERSON B
£100 money
cash £10
loan £ 100
£ 10 equity
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Turkey CPI and M2 (% annual change)
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
0
50
100
150
200
250
m2 change %
% annual
change
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UK Home Prices and Lending (% annual change)
1971
1973
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2009
2011
-20
-10
0
10
20
30
40
50house price change
adjusted net change in lending
% annual c
hange
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Transition to an Interest-free Money Supply (1)
Implement programme of public education on need for reform
Separation of current accounts from risk-bearing investment accounts
Establishment of a state-funded bank lending on an interest-free basis
Adopt defensive restrictions on foreign capital movement
Imposition of maximum rate of interest, gradual reduction over time
Increase in M0 through government debt buy-back with simultaneous increases in statutory reserve ratios
Encourage use of capital risk sharing products in investment accounts
Gradual increase in backing of M0 with selected real assets
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Existing Reform1 Reform 2
Bank assets
Cash 10 60 60
Loans to public sector
50 0 0
Loans to private sector
40 40 0
Total 100 100 60
Bank liabilities
Owners’ equity 10 10 10
Deposits 90 90 50
Total 100 100 60
Transition to an Interest-free Money Supply (2)
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A New Institutional Framework
Individuals
100% Sight Deposit Banks
Investment Institutions
Public Sector Welfare Trust
Corporations Government
Public Sector Monetary
Trust
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Cost of Bank Bail-outs as % of GNP
Sources: B. Lietaer from The Economist 27/9/2008, Working Papers no.1620 World Bank 1996
Country % of GNPSweden 1992-96 3.6Spain 1977-85 16.8Venezuela 1994-5 18Mexico 1994 19.3Japan 1997 24Chile 1981-83 41.2Thailand 1997-2000 45Malaysia 1997-2000 45Argentina 1980-82 55.3South Korea 1997-2000 60