The Subtle Tyranny of Blockchain

The Subtle Tyranny of Blockchain 

by Stefan Thomas, Aug 18, 2016

Re-learning old lessons about shared state

The past months have become a new chapter in the evolution of blockchain technology. Ethereum’s fork in the wake of the DAO hacks. Bitcoin’s almost-fork in the wake of the (still unresolved) block size debate. All of this is leading to the growing frustration and even disillusionment of key figures in the crypto-currency community.

I left the Bitcoin community in 2012 for very similar reasons. In 2011, I was part of the group that helped Gavin Andresen design the Pay-to-Script-Hash (P2SH) feature. The design wasn’t very complex, it was backwards-compatible and provided crucial building blocks for improving Bitcoin’s security and performance.

In a blockchain, everyone has to think the same.

Unfortunately, getting it deployed turned out to be very political. It was easy to extrapolate from this change to more advanced functionality still on the roadmap and get depressed about our chances to make important progress in the future. As the Bitcoin price rose, the number of stakeholders expanded and the amount of money at stake increasingly dominated the technical discussion.

Blockchains are systems of central state

With this context in mind, the recent situation with Ethereum is not surprising in the slightest. As a blockchain grows, the larger and highly vested userbase becomes more and more difficult to shepard. When combined with time pressure (i.e. the 27-day DAO split creation period), something had to give. There wasn’t enough time to get the sort of buy-in and preparation needed to safely hardfork a system like Ethereum.

At the root of the difficulty in updating blockchains is the need to maintain shared state. In any protocol, everyone has to act the same. But in a blockchain like Ethereum, everyone has to think the same. Everyone’s memory (also known as “state” in computer science terms) has to be exactly the same and evolve according to the same rules.

Shared state adds tremendous complexity and that has a big impact on developers: Blockchains are a pain to work with. Everyone who has done it knows what I’m talking about. The fact that blockchain has been largely ignored by major tech companies and embraced by the financial industry is partly because that industry has a relatively high tolerance for arcane and complex systems.

Harmony and consensus are valuable. If we didn’t agree on who is president or how much money is in anyone’s bank account, society would be unable to function. But harmony taken to the extreme becomes a detriment. In the Lego Movie utopia, “everything is awesome” only on the surface. Behind the scenes, there is tremendous diversity and a rapidly changing world, which doesn’t match the established consensus.

So how do we find the right balance between too much consensus and too little?

Xanadu and the Web

I expect that almost everyone is familiar with the World Wide Web. That’s probably where you are reading this very article. What you may not know is that there was a much older project, started all the way back in the 60s called Project Xanadu. Not only had Xanadu been around for longer, it also had a significantly more ambitious feature set than the Web. There would be no broken links in Xanadu and two-way links would be possible as well.

There are many reasons why the Web won in the end, but I believe its stateless architecture was critical to its success. Both Xanadu and the web are decentralized, but the web was much simpler. All it required was a minimal protocol and simple data format. No interaction was needed between websites, which meant that they could evolve independently from each other, and rather than waiting for the Xanadu creators to add a feature, many features that users cared about could be created just by changing a website or a client.

Instead of blindly replacing centralized functions with blockchains, we should be thinking about ways to avoid having those functions be centralized to begin with.

As active participants of the W3C and IETF, we’re always fascinated by the process by which the technology powering the web is updated. For instance, HTTP 2 was implemented under the name “SPDY” by Google who happened to control a number of web servers (Google Search, Gmail, etc.) and clients (Google Chrome). The fact that one corner of the system can be updated and good ideas can eventually spread to the system as a whole has been essential for the Web’s ability to keep pace with technological innovation.

A better way

What can the blockchain industry learn from Xanadu and the world of Web standards? Instead of blindly replacing centralized functions with blockchains, we should be thinking about ways to avoid having those functions be centralized to begin with. We need to build stateless protocols like the Web that can be incrementally improved upon in different corners of the system.

To illustrate what I am talking about, let’s consider the example of payments. Bitcoin is a replacement for existing centralized ledgers like the credit card networks. This is arguably a great idea. But Bitcoin still has a lot of shared rules that participants must agree to. I need to be on board with using proof-of-work as the consensus mechanism. I need to agree to the currency distribution function. I need to be ok with the block size limit. I need to accept the lack of anonymity.

By contrast, in adding one more layer of abstraction, the Interledger Protocol allows me to choose a ledger that has the consensus mechanism, the currency, the performance characteristics and the level of anonymity that I like and still seamlessly transact with someone who has made different choices in each of these categories.

“My ledger is going to be powered by love and rainbows!”

That doesn’t mean that Interledger doesn’t require any agreement —we still need a common data format for instance. However, these choices aren’t going to affect me economically or politically nearly as much, which makes it easier to compromise. And, crucially, we don’t share global state, so at least our thoughts can be — once again — our own.

Wall Street’s Protection Racket: Mandatory Arbitration

Wall Street’s Protection Racket: Mandatory Arbitration

By Pam Martens and Russ Martens: August 23, 2016 
http://wallstreetonparade.com/2016/08/wall-streets-protection-racket-mandatory-arbitration/

What people across Wall Street cannot figure out is why the Board of JPMorgan Chase, America’s biggest bank by assets, didn’t sack its CEO, Jamie Dimon, at some point between the bank’s first two felony counts in 2014 and its third felony count in 2015. Or, as two trial lawyers, Helen Davis Chaitman and Lance Gotthoffer point out on their web site, during the past five years as JPMorgan Chase racked up $35.7 billion in fines and settlements for “fraudulent and illegal practices.”
JPMorgan Chase’s abuses of its own customers are so vast that Chaitman and Gotthoffer had to create a Wheel of Misfortune to catalog the scams for ease of viewing by the public.
And here’s the worst part: those are just the frauds that the public is allowed to read about. JPMorgan Chase, along with other notoriously abusive banks on Wall Street, is allowed to force claims against it into a private justice system called mandatory arbitration. This system allows systemic abuses to avoid detection for years because claims made by both employees and customers are ushered into Star Chamber tribunals which lack the judicial protections afforded in a court of law.
JPMorgan Chase must be proud of its mandatory arbitration agreement for its employees because we found it at its web site. These are some of the salient points which show the stark contrasts between mandatory arbitration and a public courtroom proceeding where both the public and the press can observe the proceedings:

“The arbitrator, the Parties and their representatives must maintain the confidentiality of the hearings unless the law provides otherwise…

“The decision will be final and binding upon the Parties, and appeal of the decision to a court shall be limited as provided by the FAA [Federal Arbitration Act]…

“JPMorgan Chase reserves the right to amend, modify or discontinue this Agreement at any time in its sole discretion to the extent permitted by applicable law.”

Consider what happened to Johnny Burris, a JPMorgan Chase licensed broker in a branch near Phoenix, Arizona. In 2013 Burris complained that JPMorgan Chase was pressuring him to sell its own mutual funds to clients, rather than giving him the independence to select what he felt was in the client’s best interests. After Burris refused to sell the in-house funds, he was fired by the bank. After his charges went public, JPMorgan Chase had one of its own employees draft customer complaints against Burris and file them with FINRA, the self-regulator that also oversees Wall Street’s private justice system, according to the New York Times. During the arbitration hearing, the JPMorgan employee denied drafting the claims for the customers.
In 2015, the New York Times’ Nathaniel Popper wrote an article on the perversion of justice against Burris and quoted the customers, by name, denying that they had made the complaints or had even seen the text of what they were signing against Burris.
On December 18 of last year, the SEC appeared to validate the very complaints alleged by Burris, fining JPMorgan Chase $267 million and making it admit to wrongdoing. JPMorgan Chase paid an additional fine of $40 million to the Commodity Futures Trading Commission in a parallel action. Julie M. Riewe, Co-Chief of the SEC Enforcement Division’s Asset Management Unit, said the following in the SEC’s announcement of the fine:

“In addition to proprietary product conflicts, JPMS [JPMorgan Securities] breached its fiduciary duty to certain clients when it did not inform them that they were being invested in a more expensive share class of proprietary mutual funds, and JPMCB [JPMorgan Chase Bank] did not disclose that it preferred third-party-managed hedge funds that made payments to a J.P. Morgan affiliate. Clients are entitled to know whether their adviser has competing interests that might cause it to render self-interested investment advice.”

In other words, in the SEC’s eyes, had JPMorgan Chase simply disclosed its conflicts in its fine print to its customers, it would have been good to go.
In January, Public Citizen and other consumer advocacy organizations wrote to Jamie Dimon, urging the following:

“Our national public interest, consumer advocacy and citizen organizations write to urge you to drop the pre-dispute mandatory (or forced) arbitration clauses buried in JPMorgan Chase & Co. customer account agreements. Attached is a petition with more than 100,000 signatures from across the country calling for Chase and four other banks to promptly remove all arbitration requirements from your contracts with customers. These non-negotiable terms simply deny customers their access to the courts should they seek to pursue legal claims against your company. They also deprive your customers of important legal protections. The result is that consumers cannot practically and fairly resolve disputes with you or seek remedies for harm caused by wrongful conduct.”

A Federal agency, the Consumer Financial Protection Bureau (CFPB), proposed in May that financial institutions be forced to stop banning class action lawsuits through their mandatory arbitration agreements and that they submit arbitration filings and awards to the CFPB as a monitoring agency. Yesterday was the cutoff period for public comments on the CFPB proposal with over 12,000 comments submitted. Those for whom the status quo is working well have turned out thousands of comments falsely suggesting that this would be a windfall for lawyers rather than what it actually is, a means of restoring a little sunshine to the serial misdeeds of JPMorgan Chase and its fellow miscreants on Wall Street. State Attorneys General from 19 states filed a public comment praising the proposal by the CFPB.

Related Articles:
House Republicans Rig Hearing to Block Consumers from Going to Court
Wall Street’s Kangaroo Courts Perpetuate a Business Model of Fraud
The Dark Money Behind the Elizabeth Warren “Commie” Ad
New York Times Discovers Courts Have Been Privatized – 20 Years Too Late

Four more mega-banks join the anti-dollar alliance

Simon Black

August 24, 2016

Santiago, Chile

https://www.sovereignman.com/trends/four-more-mega-banks-join-the-anti-dollar-alliance-20120/

 

That was fast.
Yesterday I told you how a consortium of 15 Japanese banks had just signed up to implement new financial technology to clear and settle international financial transactions.
This is a huge step.
Right now, most international financial transactions must pass through the US banking system’s network of correspondent accounts.
This gives the US government an incredible amount of power… power they haven’t been shy about using over the last several years.
2014 was one of the first major watershed moments when the Obama administration fined French bank BNP Paribas $9 billion for doing business with countries that the US doesn’t like– namely Cuba and Iran.
It didn’t matter that this French bank wasn’t violating any French laws.
Nor did it matter that only months later the President of the United States inked a sweetheart nuclear deal with Iran and flew down to Cuba to attend a baseball game with his new BFFs.
BNP had to pay up. A French bank paid $9 billion because they violated US law.
And if they didn’t pay, the US government threatened to kick them out of the US banking system.
$9 billion hurt. But being kicked out of the US banking system would have been totally crippling.
Big international banks in particular cannot function if they don’t have access to the US banking system.
As long as the US dollar remains the world’s dominant reserve currency, major banks must able to clear and settle US dollar transactions if they expect to remain in business.
This means having access to the US banking system… the gatekeeper of the US dollar.
But having watched BNP Paribas get blackmailed into paying an absurd $9 billion fine to the US government, the rest of the world’s mega-banks knew instantly that their heads could be next ones on the chopping block.
So they started working on contingency plans.
Blockchain technology provided an elegant solution.
Instead of passing funds through the US banking system’s costly and inefficient network of correspondent accounts, blockchain technology provides an easy way for banks to send payments directly to one another.
I cannot understate how important this technology is.
Blockchain may very well be what neutralizes the US government’s domination of the global financial system.
And while there’s been a lot of momentum in this direction (hence yesterday’s letter to you), even I’m surprised at how fast it’s moving.
Today, four of the world’s largest banks announced a brand new joint venture to create a new financial settlement protocol built on blockchain technology.
Deutsche Bank from Germany, UBS from Switzerland, Santander from Spain, and Bank of New York Mellon have joined together to launch what they’re naming the very un-sexy “utility settlement coin”.
Like Ripple, Setl, Monetas, and several other competing technologies, Utility Settlement Coin has the potential to end the reliance on the US banking system for cross-border payments and financial transactions.
Banks will be able to send payments to one another directly without having to transit through the Wall Street financial toll plaza.
(Global consulting firm Oliver Wyman estimates that the cost of clearing and settling international financial transactions at up to $80 billion annually.)
This has enormous implications, especially for US banks.
The Federal Reserve, for example, has already warned that financial technology could pose stability risks to the US financial system.
And they’re right.
If foreign banks are able to transact directly with one another without having to go through the US banking system, then why would they need to park trillions of dollars in the United States?
They wouldn’t.
Adoption of this technology could cause a gigantic vacuum of deposits out of the US banking system.
US banks would take a big hit. And the US government would have far fewer foreign buyers to sell its ever-expanding piles of debt.
Make no mistake, the adoption of this technology is a game-changing development with far-reaching implications. And it’s happening very quickly.
If these mega-banks can hit their milestones, they’ll launch commercially in eighteen months.
Mark it on your calendar– that may be the end of peak US financial dominance.

We already have a utility settlement coin: it’s called the euro

Izabella Kaminska

| Aug 2, 2016

http://ftalphaville.ft.com/2016/08/24/2173166/we-already-have-a-utility-settlement-coin-its-called-the-euro/

 

Four banks have stolen loads of column inches on Wednesday with news that they are developing “a new form of digital cash that they believe will become an industry standard to clear and settle financial trades over blockchain, the technology underpinning bitcoin”.
In the fanfare, however, lots of common sense has been abandoned.
The big idea here (allegedly) is that banks will use a “utility settlement coin” to bypass the need for costly and inefficient fiat liquidity from the cbank.

The utility settlement coin, based on a solution developed by Clearmatics Technologies, aims to let financial institutions pay for securities, such as bonds and equities, without waiting for traditional money transfers to be completed. Instead they would use digital coins that are directly convertible into cash at central banks, cutting the time and cost of post-trade settlement and clearing.

Except none of this is new. And none of this is really all that pioneering. In fact, we’d argue, it’s more of a step back to the logic that brought us the euro than it is a step forward. As we’ve noted before, the Target settlement system underpinning the euro was from the outset supposed to fulfill two objectives: to allow the European central bank to transmit its monetary policy decisions to the money markets and to develop a sound and efficient payments and clearing system by introducing a real-time gross settlement systems and one overarching common clearing currency (a.k.a the euro).
Prior to the introduction of the euro as the go-to “bridging currency” for the multi-currencied eurosystem, cross-border international settlements in Europe were mainly settled using the dollar as a “bridging currency”. As Patrick Mcguire at the BIS recounted in 2004, throughout the 1970s and 1980s, almost all trading of convertible currencies used the US dollar as a conduit currency. When the euro was introduced US dollar transactions shrank by about 15 per cent. And yet, because demand for higher yielding eurodollar deposits didn’t go away, these excess dollars were instead put to use financing US dollar borrowing by non-banks, primarily in the United States.
In short there is a viable argument to be made that the creation of a eurozone master settlement currency (aka the euro) augmented cross-border imbalances in the global monetary system. So there’s that to consider when flouting new master settlement currency systems as controlled by new bank cartel systems.
But there’s also the RTGS issue.
Since time immemorial, banks have used private techniques to square or “net” intraday obligations between themselves to cut the cost of having to source final settlement currency every time they transact. As a result these processes have minimised the capital intensity of their operations. Under such systems if and when imbalances between the banking system and the central bank did pop up they did so either because of unexpected demand for banknotes the banks couldn’t print directly or because somewhere in the system they had double-counted something or over-extended credit which had no chance of being squared ahead of a regulatory check. In the latter situation such imbalances resulted either from temporal lags in the squaring system due to administrative errors or an inability to liquidise existing assets quickly enough to make reserve requirement (aka a liquidity issue) or simply because the system as a whole was operating on an unfunded basis (implying bank-specific or system-wide solvency issues).
The difficulty of predicting who would might be caught short turned it all into a bit of an arbitrary game of musical chairs.
In a bid to prevent banking panics or price instability scenarios, central banks would punish whatever banks drew were left holding the short straw at pre-determined times — denying them liquidity unless they had viable assets to pledge. The fear of being caught out created a mutual incentive amongst all banks to act prudently.
All this changed, however, when real-time-gross settlement (RTGS) systems were introduced to the world of central banks in the 1990s. To avoid the nasty problem of some banks finding themselves without a seat in the liquidity musical chairs game, the system moved to a continuous settlement system instead. Thanks to digital technological tools, it was now believed banks could finally have the best of both worlds: the low risk scenario of a real-time clearing system, where system imbalances never amounted to much because everything was squared on the go, as well as the low capital cost of a netting system, because the instantaneity of the system meant the overall daily imbalance of the system was so small it needed hardly any reserve capital at all.
The problem with RTGS systems, however, was that even one teeny tiny delay could snowball into a system-wide freeze. To keep the system flowing, liquidity had to be dispensed to members on an on-demand basis. As a result whatever liquidity banks needed, they got. And banks determined how much “final settlement currency” was consequently in circulation at any given point rather than the central bank.
For the most part banks would only be punished if they had badly forecast their liquidity needs. Credit quality, some might say, became an after thought.
Fast forward to 2008, and it’s fair to say things started to go wrong. Over time, the quality of the underlying assets which could be used by banks to raise emergency funds began to lose their market appeal and trust. The story of what happened next is well known. The one thing we’ll add is that by injecting permanent liquidity into the system against government-issued bonds to cope with the distress, central banks arguably intensified the capital costs of the clearing system. The sheer volume of additional idle reserves made this inevitable. We’d also add that central banks may have inadvertently broadcast via this process that Tbills were now a better and more universal form of final settlement unit than central bank reserves.
So how does the introduction of a new real-time clearing conduit-currency combat the capital intensity of the current settlement system? We’re not sure it does.
What the proposal really amounts to is the introduction of a parallel clearing system that claims to be less capital intensive than the underlying system, and which can as a consequence minimise the amount of flow which needs to be transacted through the capital intense system. Except rather than being based on a netting system it’s based on a zero-reserve RTGS system run on a blockchain, with the ultimate objective of phasing out the need to settle through the central bank reserve system altogether.
All this sounds lovely in theory. Except… if what’s really plaguing the market is an overall loss in faith in unbacked bank reserves, then just substituting a final settlement system which has finally been backed with something of significance (government bonds) for one that is backed by nothing isn’t going to solve the capital intensity problem of the clearing system or the real capital shortage issue in the market (a.k.a the scarcity of safe assets).
Moreover, if the expectation is that a “utility settlement coin” will be so good at squaring value within its own parallel closed system that it will never need to source additional intraday liquidity from the central bank to cover unexpected logjams (something we think is super unlikely in a competitive system)…we’d note, that doesn’t necessarily free up spare capital either.
If any potential liquidity jams are to be dealt with by the blockchain issuing its own liquidity against high quality collateral encumbered in a self-governed multilateral escrow account, that doesn’t solve the capital intensity issue either.
If, however, the blockchain plans to issue liquidity against nothing at all, then the question becomes why bother calling this a clearing system at all?
To wit, Bloomberg’s Matt Levine nails the real innovation in play:

Having a pseudo-currency does not solve problem 1, though of course there is much discussion of blockchains to record entitlements to securities. Having a pseudo-currency also does not solve problem 2: You don’t get your dollars any faster; you just get your pseudo-dollars faster. (To get the dollars faster, you’d need to speed up the Fed’s central-ledger technology.) But for many purposes — for example, just doing more transactions with other banks — the pseudo-dollars are just as good as dollars. If every bank signs on for this, then they can go out and buy more securities with their pseudo-dollars, and rarely need to bother with the Fed.
This is what blockchain is: It’s banks developing better and faster systems to agree with each other on what they all own. (I mean, the bitcoin blockchain is a wilder and woollier thing, but too scary for many banks.) That seems good! I have no real complaints! It is all just, like, 20 percent less magical than it is usually made out to be.

This we think supports our overall point. For a final “pseudo currency” settlement system to properly trump the capital intensity of today’s central banking system, the pseudo currency being unleashed must be deemed universally acceptable by all banks everywhere not just a subset of four banks. That’s a big ask in a world where those carrying over international imbalances at the margin demand Tbills for final settlement rather than bank reserves.
And even if one specific blockchain-based pseudo currency could convince all the world’s banks to accept it over all other reserves, there’s still another paradox in play. The less capital intensive a pseudo currency is, or the easier it is for one bank faction to produce it over another bank faction (like err Irish and Greek banks vs German banks) the less likely it is to be a universally accepted pseudo currency. Universal “final settlement” status isn’t necessarily something that can be engineered, especially in a world where Tbills are still the preferred balancing unit.
Bitcoin’s proof of work mechanism may be a hugely capital intensive waste of energy, but it’s also the thing which keeps it honest and endows the scheme with some known value set.
That a handful of banks feel inclined to create and treat a psuedo-currency as a final settlement unit between themselves, says nothing about whether the rest of the world will agree with them on that categorization. After all, the top of the money hierarchy tree isn’t determined by a “final settlement unit’s” capacity to balance a bunch of arbitrary numerical inputs in ways that a computer deems appropriate (the euro achieves that job fine). It’s determined by a final settlement unit’s ability to create real value so as to give rise to a socio-economic system which benefits as many people as possible (something the euro currently certainly does not do).
Related links:
The eurodollar as an economic no-man’s land – FT Alphaville
Brexit, the Target2 angle – FT Alphaville
Big banks plan to coin new digital currency – FT

Eight pitfalls to avoid in the helicopter money debate

Eric Lonergan

19th August 2016

http://www.philosophyofmoney.net/eight-pitfalls-to-avoid-in-the-helicopter-money-debate/

 

Learn first, then teach

Professors Stephen Cecchetti and Kermit Schoenholtz are the latest to opine on the subject of helicopter money. It is worth quoting from their opening paragraphs, it frees me up to respond quite bluntly:

“We are wary of joining the cacophony of commentators on helicopter money, but our sense is that the discussion could use a bit of structure. So, as textbook authors, we aim to provide some pedagogy.”

I wish they had heeded their wariness – they give textbook authors a bad name.

To provide some structure to future discussions, I will set out eight of the pitfalls many economists make in initially considering helicopter money. Cecchetti & Schoenholtz are no exceptions – they fall for all eight.

1. They don’t define ‘helicopter money’ (on this occasion a trip to wikipedia will suffice). The closest Cecchetti & Schoenholtz come to doing so, around halfway through the article, is to assume what they set out to prove: “As we understand it, helicopter money is a fiscal expansion that is financed by central bank money rather than by bonds”. Oh, I guess it is fiscal then. 

2. They don’t outline a clear distinction between fiscal and monetary policy (it’s not self-evident!).

3. They observe that helicopter money is just like ‘combining bond-financed fiscal expansion with … QE’. No one that I am aware of who has thought for long about helicopter money thinks that, subject to certain conditions, it is not economically equivalent to QE combined with tax cuts. That is the start of an interesting conversation, not the conclusion.

4. When they analyse central banks balance sheets, economists become second-rate accountants, and accountants become … actually, it totally depends on the accountant. Suffice it to say, the IOR is not really an interest rate, bank reserves are not liabilities at book value, tiered reserves are a game-changer, and QE with expected losses is not fundamentally distinct to lending to banks at interest rates below the IOR. 

5. They think that because reserves pay IOR in certain jurisdictions this means a fundamental tenet of economics – that money is different to debt – is no longer the case. This is an analytical error. The IOR does not fundamentally change the nature of money. Money is not debt, which is why we have monetary policy and independent central banks. 

6. They ignore crucial legal and institutional distinctions. When it comes to helicopter money, the Fed, the ECB, the Bank of England, and the Bank of Japan all face very different sets of institutional requirements and constraints. In the Eurozone, the legal and institutional case for helicopter money appears strongest. 

7. They don’t realise that central banks are already doing helicopter money – just opaquely.

8. They haven’t read these articles (below) which are essential reading, and have typically pre-empted, and refuted, what they are about to assert as clarification.

By falling for each of these eight pitfalls, Cecchetti & Schoenholtz, have, in their own way, made a pedagogic contribution.

References

Paul Krugman Helicopters dont help
My reply A brief reply to Paul Krugman on policy equivalence
Nick Rowe Helicopter money is permanent
Martin Sandbu Monetary helicopters hover back into view
Martin Sandbu Helicopter money: if not now, when?
Adair Turner Demystifying monetary finance
Simon Wren-Lewis Money and Debt
Simon Wren-Lewis Helicopter money and fiscal policy

Earlier posts from this site that are also pertinent:

Legal helicopter drops in the Eurozone
Does the central bank’s balance sheet matter?
Accounting as religion
The economics of language
There are two types of negative interest rates

Something fishy at NZ Reserve Bank...

August 17, 2016

 

To: the secretary of Hon. Bill English, NZ Deputy Prime Minister

 

Dear Gabrielle,

thank You for the forwarded answer of the Minister English. The fact that NZ banknotes are repayable-on-demand is somehow surprising and make me think if those are legal tender or something else, like chips in a Casino.

Another question arise: with what can the Reserve Bank "repay" for banknotes ? Here is an insight from Wilelm Buiter: "...fiat money is an asset of the holder but not a liability of the issuer." and "...base money does not have to be redeemed ever, it does not constitute an effective liability...". More from him: " [The bank's] monetary liabilities are liabilities only in name, as they are irredeemable: the holder of base money cannot insist  at  any  time  on  the  redemption  of  a  given  amount  of  base  money  into  anything  else  other than the same amount of itself (base money). "
http://www.economics-ejournal.org/economics/discussionpapers/2007-8/file

Now, something fishy is going on, don't You think ? Else the liability is consolidated in the Treasury asset side of the balance or... the real profits of the Reserve Bank are masked by an accounting trick and there is an ongoing gigantic fraud against the NZ people.

I explored the issue in this document:
Seigniorage: The Honest Government's Guide to the Accounting of the Revenue from Money Creation
http://leconomistamascherato.blogspot.it/2016/07/banknotes-and-currency-are-liability-of.html

If The Minister would like to answer again and more appropriately on the issue, please let me know.

Kind regards,

Marco Saba

President at IASSEM


Answer:

August 18, 2016

Dear Marco Saba

On behalf of the Hon Bill English, thank you for your further email.  I have passed this on to the Minister for his information and consideration.

Thank you for writing.

Yours sincerely

Katy Greco-Ainslie

Private Secretary

Hon Bill English

Deputy Prime Minister

Minister of Finance

Minister Responsible for Housing New Zealand

 

 See also:

Chit-chat with Bill English, Deputy Prime Minister of New Zealand on seigniorage

Court of Genoa: technical assessment on the creation of bank money

Court of Genoa: technical assessment on the creation of bank money

The plaintiff's lawyer. Marco DELLA LUNA

In the Italian Civil Court of Genoa, on August 18, 2016, there was a hearing in the case on the failure to take account of the creation of money by Banca Carige.  

The Carige attorney is Paolo CANEPA (brother of the magistrate Anna CANEPA, the "Magistratura Democratica" union secretary), from the law firm ROPPO & CANEPA, who had attended DE BENEDETTI in the case of the LODO MONDADORI against Silvio BERLUSCONI, the former Italian PM. 

The lawyer asked that the case be estopped for total groundlessness, invoking the temerity of the counterparty. The Court refers to the next hearing, October 4, 2016 at 10.15 AM, ahead of Hon. Luigi COSTANZO, President of the Chamber as well as Deputy Chairman of the Court, to decide on the appointment of a forensic accounting expert.

  The lawyer Marco DELLA LUNA, representing the plaintiff, constituted by a British financial company and Marco SABA, argues that the emergence of the revenues from the creation of money by commercial banks, in the case of CARIGE more than euro 25 billion, as well as to rehabilitation of the Italian banking system, would lead - through subsequent taxation - to the safety of the Italian state budget.
 
A question arises: if everything is in order, why the management of the Genoa bank CARIGE is opposed to the inquiry ?

Whistleblower: a cozy relationship between Deutsche Bank and SEC

Deutsche Bank whistleblower rejects award because SEC 'went easy' on execs

Eric Ben-Artzi, a former risk officer, told the agency to give his share of $16.5m award to Deutsche and its shareholders after ‘disappointing’ investigation of bank

Ben-Artzi blamed the result of the SEC’s investigation on what he says is a cozy relationship between Deutsche Bank and the regulatory body. Photograph: Luke Macgregor/Reuters

Jana Kasperkevic in New York

Thursday 18 August 2016 22.34 BST

A Deutsche Bank whistleblower has turned down his share of the $16.5m whistleblower award, stating that the Security Exchange Commission (SEC) did not do enough to punish the executives responsible for the bank’s wrongdoing.
Eric Ben-Artzi, a former risk officer, went to the regulators after he was fired by Deutsche Bank for raising alarm over the bank’s inflated valuation of its portfolio of credit derivatives. According to him, by imposing a $55m fine on the bank but letting the executives off scot-free, the SEC has instead punished the bank’s “rank-and-file” employees and shareholders.

Are financial whistleblowers worth it? Study says yes – to the tune of $21.27bn

“I request that my share of the award be given to Deutsche and its stakeholders,” he wrote on Thursday in an opinion piece published by the Financial Times. (Ben-Artzi was eligible to receive $8.25m, according to the FT.) He noted that financial award was a “powerful incentive” when he first decided to help SEC and that he is not “at liberty to reject” the award since portion of it belongs to his lawyers and his ex-wife.
Ben-Artzi said that the result of SEC’s lengthy investigation was “disappointing” and that “top executives retired with multimillion-dollar bonuses based on the misrepresentation of the bank’s balance sheet”.
The reason why Deutsche Bank was only subject to a $55m fine is that its top lawyers have long been “revolved” in and out of the SEC, according to Ben-Artzi.
“Robert Rice, the chief lawyer in charge of the internal investigation at Deutsche in 2011, became the SEC’s chief counsel in 2013,” he wrote. “Robert Khuzami, Deutsche’s top lawyer in North America, became head of the SEC’s enforcement division after the financial crisis. Their boss, Richard Walker, the bank’s longtime general counsel (he left the bank this year) was once head of enforcement at the SEC.”

Elizabeth Warren to SEC chair: you make a 'disappointing' Wall Street cop

Ben-Artzi added that Mary Jo White, the current chair of the SEC, has known both Rice and Khuzami for as long as 20 years. She “bears the ultimate responsibility for the Deutsche fine”, he wrote.
“We brought all of the charges supported by the evidence and the law, which were unanimously approved by the Commission,” Andrew Ceresney, director of the division of enforcement, said in a statement provided to the Guardian.
White’s ties to the banking industry had previously drawn ire from Massachusetts senator Elizabeth Warren. Last year, Warren sent White a 13-page letter telling her that she found her performance as Wall Street’s top cop “disappointing”.

Ben-Artzi, who was fired by Rice, said that being let go ruined his Wall Street career. He now works as vice-president of risk analytics at BondIT, a fixed-income portfolio management company.
Sherron Watkins, who blew the whistle on accounting irregularities at Enron, previously said that more than a decade later she was unable to get a job in corporate America.

“I have this label ‘whistleblower’ which is synonymous with troublemaker,” she said in 2014, before praising SEC’s whistleblower program. “That’s sort of the story of even the most well-known whistleblowers ... You are out of your industry. That’s why I welcome this program, because you have to reinvent yourself and it’s not always easy. Rarely do people have the notoriety that I have, where I am on the lecture circuit. It’s a problem.”
In his op-ed, Ben-Artzi said that while he needs the award money “now more than ever”, he will “not join the looting” of the Deutsche Bank shareholders.

One whistleblower gets $30m in the bank, but others count the personal cost

“I never intended to turn a job in risk management into a crusade, but after suffering at the hands of the Deutsche executives I will not join them simply because I cannot beat them,” he wrote.
He added that he would happily collect the award if the money was “clawed back from the bonuses paid to the Deutsche executives, especially the former top SEC attorneys”.

Earlier this year, while awarding its second largest whistleblower award at $17m, SEC noted that the award program is instrumental in encouraging people with insider knowledge to come forward. By June, the SEC whistleblower program had awarded more than $85m to 32 whistleblowers. According to an analysis by the Wall Street Journal, more awards are coming. SEC settlements with State Street Corp and Bank of New York Mellon Corp could lead to a number of whistleblower awards totaling $100m, according to WSJ.

Public coverage of the award announcement often leads to more tips being sent to the SEC. Yet as Ben-Artzi’s op-ed shows, the results are not always to the whistleblower’s liking.
According to the Financial Times, Ben-Artzi is the first whistleblower to refuse an award since the program was launched in 2011.

Swiss Central Bank Joins the Plunge Protection Team

Swiss Central Bank Holds $5.3 Billion in Amazon, Apple, Google, Facebook and Microsoft Stocks

By Pam Martens and Russ Martens: August 15, 2016 
http://wallstreetonparade.com/2016/08/swiss-central-bank-holds-5-3-billion-in-amazon-apple-google-facebook-and-microsoft-stocks/

Wall Street Bull Statue in Lower Manhattan

At the end of the first quarter of this year, Switzerland’s central bank held $119.7 billion in publicly traded stocks. The Swiss National Bank’s (SNB) web site indicates that it is now allocating 20 percent of its foreign currency reserves to stock investing. Twelve days ago, SNB made its quarterly filing with the U.S. Securities and Exchange Commission showing large positions in individual U.S. stocks.

In just five tech names, SNB held over $5.3 billion with $1.489 billion invested in Apple; $1.2 billion invested in Alphabet, parent of Google; $1 billion in Microsoft; $803 million in Amazon and $741.5 million in Facebook.

Both Apple and Microsoft are among the 30 stocks that make up the Dow Jones Industrial Average (DJIA), a heavily watched gauge of the U.S. economy’s health. The Swiss National Bank owns over $1 billion in two other names in the DJIA: $1.17 billion in Exxon Mobil and $1.032 billion in Johnson & Johnson.
Swiss National Bank positions of $500 million or more that are components of the DJIA include: AT&T ($862 million); General Electric ($823 million); Verizon ($739.6 million); Procter & Gamble ($718 million); Pfizer ($644 million); Coca Cola ($582 million); and Chevron ($557 million).

Switzerland’s central bank has invested zero dollars in two DJIA components — the two big Wall Street banks, Goldman Sachs and JPMorgan Chase.
The Swiss National Bank is just one of more than a dozen central banks that are now investing in publicly traded stocks – a policy that looks like a train wreck in motion to quite a number of Wall Street veterans.

We checked SEC filings for other central banks that are known to be buying stocks but could find only one other listing: the Bank of Israel. Instead of breaking down the names of the stocks, number of shares, and dollar value of the individual position held as done by the Swiss National Bank, the only public filing from the Bank of Israel tells us simply that it is using three money managers to make its U.S. stock investments. Those money managers are: UBS Asset Management Americas Inc.; BlackRock Investment Management (UK) Ltd.; and State Street Global Advisors Ltd.

We could find no total dollar amount indicated for the Bank of Israel’s investments in U.S. stocks in its SEC filings but in 2013 Bloomberg News reported that the Israeli central bank had spent “about 3 percent of its $77 billion reserves on U.S. stocks,” or approximately $2.3 billion. On June 27 of this year, Reuters reported that Israel’s Monetary Policy Committee had approved investing as much as 10 percent of Israel’s foreign currency reserves in stocks.
Another major central bank plowing into stocks is the Bank of Japan. On April 24 of this year, Bloomberg News reported that the Bank of Japan “ranks as a top 10 holder in more than 200 of the Nikkei gauge’s 225 companies…”
If one adds the stock holdings of massive sovereign wealth funds, which are also deploying government money, to the growing stock market participation of central banks, alarm bells start to go off. Forbes contributor Adam Sarhan wrote the following earlier this year:

“Over the past 7 years, we have seen unprecedented action from global central banks all aimed at keeping stock prices up. It’s normal to see global central banks adjust monetary policy, up or down, based on economic conditions. But it is not normal to see global central banks print gobs of money every day to stimulate markets and it is definitely not normal to see them buy stocks outright. I’m not a lawyer but it raises the question: Is it even legal? I’m sure the BOJ is not alone in this questionable activity. The U.S. Fed refuses to be audited. One is compelled to ask: Why?”

Economist Ed Yardeni also voiced concerns on his web site in April, writing:

“In the long run, it’s hard to imagine that having the central monetary planners buy corporate bonds and stocks with the money they print can end well. In effect, the central banks are turning into the world’s biggest hedge funds, financed by their own internal primary (money-printing) dealers and backstopped by the government — which can always borrow more from the central bank or force taxpayers to make good on this Ponzi scheme…”

Wall Street On Parade has written a great deal about “dark pools,” those regulator-lite trading venues that are operated by the big Wall Street banks and function as in-house stock exchanges. Until we start to see more granular data at the SEC on exactly what central banks are buying and selling on U.S. stock exchanges, consider it just more “dark pool” activity and one more reason for the public to view these markets with a cynical eye.

Former JPMorgan Banker Convicted Of Insider Trading

by Tyler Durden

Aug 17, 2016 12:33 PM

http://www.zerohedge.com/news/2016-08-17/former-jpmorgan-banker-convicted-insider-trading

In one of the few cases of insider trading leading to an actual conviction, earlier today, a former Wall Street investment banker was found guilty for engaging in insider trading by tipping his father off to unannounced healthcare mergers, a victory for prosecutors after an appellate ruling made pursuing such cases harder. Sean Stewart, who previously worked at JPMorgan and Perella Weinberg was found guilty by a federal jury in Manhattan on all nine counts he faced, including securities fraud.

Stewart, 35, a Yale University graduate, was one of 107 people accused of insider trading since 2009 by prosecutors under Manhattan U.S. Attorney Preet Bharara. His trial was Bharara's first since a 2014 appellate ruling narrowed the scope of insider trading laws.

Stewart is scheduled to be sentenced by U.S. District Judge Laura Taylor Swain on February 17.

In a case profiled previously, prosecutors said from 2011 to 2014 Stewart provided his father Robert tips about five mergers, including INC Research's acquisition of Kendle International Inc, so his father could make lucrative trades before the deals' were announced. According to Reuters, Robert Stewart, 61, in some instances had a friend he met working at a real estate firm, Richard Cunniffe, conduct trades in his own accounts, because of concern he was too close to the source. The trading enabled the elder Stewart and Cunniffe, 62, to make $1.16 million, prosecutors said.

Sean Stewart testified in his own defense. He displayed no emotion as the forewoman read the verdict, which came after more than a week of deliberation. 

Robert Stewart, Sean's father, previously avoided prison for his role in the insider-trading conspiracy. In May, he was sentenced to four years’ probation, including one year of home detention and 750 hours of community service. Under a plea agreement with the government, he’ll forfeit the $150,000 he made from the scheme.

Stewart pleaded guilty in August to insider-trading conspiracy, just three months after both Stewarts were charged. Prosecutors, with the support of U.S. probation officials, had asked for a prison sentence of at least 2 1/2 years. U.S. District Judge Laura Swain in Manhattan, explaining her rejection of a prison term, cited Stewart’s role as primary caregiver for his wife, who has an “unusually serious” health condition that wasn’t discussed publicly.
Cunniffe cooperated with the government and made secret recordings to implicate the Stewarts. In one recorded meeting, the elder Stewart said his son once chastised him for failing to trade on a tip, quoting him as saying, “I can’t believe I handed you this on a silver platter and you didn’t invest in it,” prosecutors said.

Meet the Man Who’d Revolutionize Money, From the Inside Out

Gabriella Lovas

Jeff Black Jeffrey_Black

August 17, 2016 — 6:00 AM CEST Updated on August 17, 2016 — 12:53 PM CEST

http://www.bloomberg.com/news/articles/2016-08-17/meet-the-man-who-d-revolutionize-money-from-the-inside-out

Frank Breitenbach.

Photographer: Martin Leissl/Bloomberg

• Campaigner for ‘Vollgeld’ says it’s time to reform credit
• Banks would lose centuries-old power to create new money

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Frank Breitenbach would like to pull apart the global financial system, while he’s still in it.
And then put it back together again, only this time without credit bubbles, crises and bailouts.
It’s an old idea that’s receiving fresh impetus in Europe as populism makes political gains and concern grows about the stability of financial institutions: Remove from banks the power to create money, and give it back to the state. Exclusively.
The proposal has appeal even among some insiders, like Breitenbach. He couples his day job as a vice president at KfW IPEX in Frankfurt, a state-owned provider of export financing, with his role as a member of Monetative, an initiative to return the system to what’s known in German as Vollgeld, which roughly translates as "whole money."
“There is too much liquidity in the market now and it’s more or less the same situation we had right before the 2008 crisis,” Breitenbach said in an interview on Aug. 12, noting that he was giving his personal views, not those of KfW. “I have the feeling that another financial crisis will happen.”
Vollgeld’s solution would be to hand central banks complete control of the money supply. Commercial banks would be required to back their loans 100 percent with deposits -- whether they come from savings, capital or their own borrowings.
In other words, lenders would be barred from creating money out of nothing -- an inherent attribute of the fractional-reserve banking model that’s been dominant since the Middle Ages.
Advocates of Vollgeld say the change is necessary to prevent the credit booms that helped cause the last financial bust, and possibly the next. Central banks would be able to ensure the real economy has the liquidity it needs, and no more.

“The amount of money that the central bank will pump into the system should be in line with economic growth,” Breitenbach said. “It’s the central bank’s task to take control over the amount of money” in the system, he said.
While Vollgeld has only a handful of supporters in Germany -- Breitenbach says his organization has about 100 members -- elsewhere it’s gathering more steam. A Swiss version has succeeded in gathering the 100,000 signatures needed to hold a plebiscite on the subject, and a vote is expected around 2018.

Chicago Plan

That would be 85 years after the first version of Vollgeld was floated, as part of the Chicago Plan of banking reforms by leading U.S. economists including Irving Fisher in the wake of the Great Depression. Those ideas were never implemented, but the continued drag on growth and prosperity from the 2008 financial crisis is feeding new interest.
Vollgeld’s counterpart in the U.K. is Positive Money, a group that also advocates central-bank financing of government expenditure known as “People’s QE.” A version of that has been backed by Jeremy Corbyn, the leader of the opposition Labour party.
Adair Turner, former chairman of the U.K.’s Financial Services Authority, and former Deutsche Bank Chief Economist Thomas Mayer, have discussed similar ideas.

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That’s not to say Vollgeld will arrive any time soon. For a start, Breitenbach acknowledges that either it would have to be introduced in the entire 19-nation euro area or a decision taken to break up the single-currency bloc. Aside from the stability concerns over implementing a new system, there’s no guarantee that the region’s citizens would trust unelected monetary officials any more than their commercial counterparts. That’s especially true in Germany, where the European Central Bank is viewed with particular skepticism.

Confidence Question

There are other snags. Responding to the Swiss initiative, the government said Vollgeld wouldn’t prevent liquidity or solvency problems emerging at lenders. It also pointed out that allowing the central bank to issue money without a corresponding rise in assets might undermine public confidence in the central bank, or in money itself.
For Breitenbach, keeping depositors’ money safe and stemming a source of bank runs will nevertheless be a huge advance in stability. And it doesn’t mean destroying the financial system as we know it.
“I don’t see the contradiction between the Vollgeld system and being a banker,” he said. “The only difference is that the banks have to collect savings before lending. ”
That’s a critical difference, and one Breitenbach argues the general public will find surprising. He says few are aware that it’s actually the commercial banks that have the largest role in money creation, not the central bank. Reverse that, and greater stability ensues, goes the thinking.
“The Vollgeld system is actually much easier to manage than the system we have right now,” Breitenbach said. “Most people think we already have this system.”

Chit-chat with Bill English, Deputy Prime Minister of New Zealand on seigniorage

My email was:

July 23, 2016

To: Hon Bill English, Minister of Finance of New Zealand

On seigniorage as liability of the Reserve Bank to the Treasury

Dear Hon Bill English,

the NZ Reserve Bank buys  banknotes and pays  the  production cost
(including  a margin)  for  each  order  of  notes.  Banknotes  are
later  sold  to  trading  banks  at their face value and in turn the
face value of currency in circulation becomes a liability of the
Reserve Bank toward the NZ Treasury (seigniorage on the principal).

In fact, the correct definition of seigniorage is the difference in
value from the cost of production of the monetary medium (coins,
banknotes, electronic currency a.k.a. deposits) and is face value. In
countries where banks are NOT sovereign, the seigniorage must be
returned to the body sovereign (local Treasury Department).

Questions:
- Do you have a recorded asset in the Treasury books matching the
Reserve Bank liability over currency in circulation ?
- If not, why ?
- If it is not the Treasury, who is the current net beneficiary of
this Reserve Bank's liability ?
- Is it a NZ entity or an alien body ?
- Do you believe in aliens ?

Thank You for Your kind attention and I look forward for Your answers.

Marco Saba
President at IASSEM, Italy

The answer:

Chit-chat with Bill English, Deputy Prime Minister of New Zealand on seigniorage