Bank Soundness and Competitiveness

Competitiveness 

 

I just read the World Economic Forum (WEC) Global Competitiveness Report and the useful (and pretty) charts Bank of America derived from it.  Then I did some comparisons.

I picked two countries (randomly-lol) and overlayed their graphs. (Note that the third panel is my responsibility, not BoA’s.)  Argentina ranks hugely better against Brazil on two categories and marginally better or worse in four.  The only large outperform by Brazil is on Bank Soundness and yet Argentina fares dramatically worse in WEC reading of Competitiveness!

Although I could not find the weights in the report, clearly (and probably rightly) the WEC places a substantial weight on Bank Soundness in promoting country competitiveness.

The argument is probably solid.  Flimsy, flaky, shady banks are no good.  However, what does it say for the evolution of finance, banking and Fintech?  Could it be that a healthy crypto alternative might pick up where sound banks falter?

 

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Why the problem is not the block size but the blockchain size, the math and the philosophy

Bitcoin needs to support thousands of transactions per second, maybe millions. No amount of tweaking can make the numbers jive. I argue so in this post. At the same time, some of the fundamental design choices are naïve and unnecessary.  I start with this bold statement because, since I am not Mile Hearn, I do not expect anyone to read on without an initial teaser.

From SN seminal paper, bitcoin intended to have some characteristics that made it into a good currency, money, numeraire, or whatever you want to call it. Initially, it seemed that the design attained those characteristics, and indeed its phenomenal success suggests it did.

However, I think the design has not scaled well and is reaching a point where it cannot continue to grow and maintain the originally desired features.

The design assumed that the pure ‘progress’ (like Moore’s Law) would keep up or surpass the operating requirements of the btc network. Nevertheless, this is being proven unrealistic.  Even if Moore’s law continues, the scaling of btc has been and needs to continue to be explosive.

To be relevant, let’s say Bitcoin needs to account for 1% of the world’s transactions.  Roughly, if Visa processes 10k transactions per second, let’s say overall card transactions are ten times that and other transactions are on the same level, so there are today around two hundred thousand transactions per second.  That would be 17 billion transactions per day, i.e. 2.5 transactions per person per day on the planet.  This is back of the envelope, but probably not far from the right order of magnitude.

With those assumptions, Bitcoin needs a bandwidth of 2000 transactions per second (1% of two hundred thousand) just to be on the radar. And that is just 2015 rate, but it doesn’t take too much reading to see that other innovations (IOT, for instance) will add some zeros to the figure.

A naïve vision of Bitcoin as planetary (or even intergalactic) currency, then, is like the Jetsons’ view of everyday life. Cool in theory, but numerically unviable.

Again, an issue of the blockchain and its size. But there are economic and not just technical questions:

When I was a kid, they sold special “airmail” envelopes, made of lighter paper, because only critical mail was worthy of the expensive air delivery. Nowadays, all mail is airmail, even junk.

For the same reason, critical payments used to be the only handheld ‘real time’ transfers, while run of the mill transactions could take several days. Now payments are converging to real time, regardless of size, and cost is plummeting.  Special high value private networks that made sense before are merging into the internet following the same pattern.

Bitcoin’s current bandwidth, however, doesn’t even match the throughput of high value networks.  There are various proposals to bifurcate the rails, like sidechains, Lightning network, altcoins, etc. It seems as we are reliving a millennium of payments kludge history in just a year. In a world where Faster Payments is implemented in a few countries and private firms are marketing this service to many others however, a system that can only handle high value transfers is a weak competitor.

If I could send a little note to Nakamoto-san in 2008, I would tell (her/him/them/it?): “Think this through a little longer. Bitcoin is not ready.  Your fundamental ideas are sound, the implementation still is not. In six years your heirs will be squabbling over details because the whole thing is bursting at the seams.”

Next issue: Judas, Manhattan and my great grandfather

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Blockchain Inside Regulations Is NOT Innovation

I agree with the thesis of this article by William Mougayar.  However, in my view, a definitional point is in order to be fair to all involved.  Financial firms have innovated, or at least evolved their product lines.  As someone old enough to have had his tongue gummed up with stamp glue from mailing checks, things have indeed come a long way.

What is incompatible with regulated enterprises, though, is disruption. Regulators and their charges can hardly destroy their business model, after all.  As Shumpeter had pointed out way before we entered this current age of acceleration, creative destruction is not a gradual, but a traumatic phenomenon.  As for permissioned blockchains, I struggle to find parallels from the past, but I have this image of chariot makers adding speedometers to their horse drawn vehicles to compete.

 

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How does Leadership differ from Management?

This is a little off topic, but I was asked this question and I like my answer:

Leadership is about winning the minds and Management about carrying the bodies. In my experience, though, the two are so intertwined that they should be seen as one. If you try Management without leadership, you get no respect. If you try Leadership without management, you get nowhere.

 

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I need to retire my CFO (and stop buying love letters)

I am the CEO of Me&My Family Inc. We are in the business of growing our children and caring for our elders, producing fine vacation memories and advancing the cause of fine dining. Financial management is not one of our core competencies.

My wife, who is also, of course, the Chairman of the Board, has been serving as CFO. She writes checks and balances checkbooks; she runs spreadsheets to simulate future cash flows and models alternatives for card and home equity financing, saving for college and that condo in Florida.

Her other job as an accounting clerk at a big multinational is a blessing and a curse, as it gives her the know-how, but also the bad habit, of sophisticating our finances to death.  Me, I have bigger fish to fry. However, the Chairman is now fed up with all that clerical work and would like to get into loftier pursuits, like her soccer run, gardening and quality time with the CEO after the kids’ bedtime.

The thing is big shot CEOs have it easy, because scale lets them afford armies of financial optimizers who distill the tons of noise coming from their economic activities into the fine spirit of financial charts, interest maximization and perfect forecasting.

On the contrary, I, and most other consumers, face the bleak choice of trying, with scarce time and poor tools, to emulate the work of a CFO’s department or accept abysmally sub-optimal end results by letting things slide.  Not that my great grandparents did any better: they only had the cookie jar as a financial tool. At least their lack of choice saved them from insanity.

Over time, very large multinational and governments first developed, and/or purchased from banks, services to optimize their finances. Then, as technology improved, medium and small businesses got them too. High net worth individuals have long had a version of the same under the form of private bankers or family offices.

Isn’t it time that everyone could have a similar service, albeit without all the PowerPoint presentations or the wood paneled bank offices? That automated Nirvana would not be easy to achieve, all the more since the needs vary so much across demographics.

Let’s review what a financial service for today’s ordinary (NOT average) person would be:

  • Help me choose the most convenient (i.e. less expensive or more profitable) option.
  • Automate activities that can be algorithmically programmed, i.e. pay according to my wishes, accept or reject debit requests.  But not just that: BE my personal banker, for real.
  • Have a budget based on past experience plus my stated goals for the year and my lifetime. Have a forecast of how I am doing and will likely do versus budget if I stay the course. And revise my budgets accordingly,
  • Keep me informed of relevant issues. Help me be paranoid where I need to be (fraud alerts) and easygoing where I can (decide what I allow others to access of my stuff),
  • Show me these things in a language that I can easily grasp and use for decision making.  Understand in almost natural language what I want. Learn from me, at my pace and under my conditions, to customize on my terms, like my personal banker or corporate account officer would,
  • Scour the world (wide web) in search of best offers I decide I need, but do not try to sell me any crap,
  • Let me reach you (bank) whenever and wherever I want with the best quality of interaction. Read here “make the service mobile first”,
  • Respect my privacy above all else.

Now I know some of this stuff is present in some banking offers. I won’t make a necessary incomplete laundry list. Look for some out the hotbed of financial innovation that is the UK. It is still not all there and it is not commonplace.

Regular users should not even have to know it’s there, like my wife is not even aware her car takes care of the engine’s temperature and keeps tires inflated at the right pressure. That some of the above is cutting edge is highlighted by the modest expectations in this recent article (Three Online Banking Traditions That Are Extinct.)

It doesn’t help that banks sometimes profit from their customers inability to optimize their balances or choose the cheapest loan available.

Someday, however, this will sound as quaint as the service of love letter writing that could be purchased in Gabriel Garcia Marquez’s Colombia. I hope I get to see this soon.

 

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Which Fedcoin?

More FedCoin thoughts.
Actually I eerily coincide with Robert on most points, except for monetary policy.
If anything, the more transactions become frictionless, the less any monetary authority will have room for maneuvering. The minute the interest rate is not of my liking (and I like nothing worse than a negative rate) I would jump into bitcoin (or ECBCoin or SwissCoin) and arbitrage out. I have to give it some more thought to the implications.

 

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cryptonomics

David Andolfatto, Vice President of the St Louis Fed, published a most interesting post yesterday Fedcoin: On the Desirability of a Government Cryptocurrency. Andolfatto’s post is itself in reference to JP Koning’s Fedcoin piece of last October. Back then, I wrote a bit about that on a private email list that is usually devoted to topics relating to blockchain protocol design. I thought the Fedcoin thought experiment was interesting fodder for our monetary intuitions. Still do. So here it goes.

A central bank backed blockchain payments network for a national currency like the USD is a neat idea. It would, first of all, put digital cash on the map for good. And digital cash that trades at parity with an economy’s well-established unit of account is a far more useful medium of exchange than a volatile cryptocurrency like bitcoin. Andolfatto:

And so, here is where the idea of…

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Evit is the root of all money, or is it?

Since I again was gratified with intelligent content on David Andolfatto’s  excellent blog Macromania, I hung around in and wandered back to an interesting post (Evil is the root of all money).

Although the post is over two years old, I commented and am reposting the comment here to keep it where I can refer to it again.

Thanks for this post, David.  Even if ancient, I enjoyed it.

However, I would like to comment.

I do not believe that evil is a necessary condition for the rise of money.

Let me I propose that complexity is sufficient for the rise of money and the rise of money is necessary for complexity (and, hence, development).  I see no need to deal money in my exchanges with my wife, i.e. I do not charge (nor account) for taking out the trash, nor does she for her wonderful cooking.  You may argue this is out of the absence of evil among us and you may be partially right, but the lower complexity pays a very large part as well.

But let’s take a relatively small community of 676 (26×26) people, Aaron to Zzorah.  Let’s assume each can split their work time between two products each and that they all live twenty-two thousand days (Moody Blues?)

Not even the most anal retentive individual could lay out a matrix of 1,352 products times 22,000 days, run linear programming  to optimize it and schedule all agreements and communications as a plan.  And I am making no allowance for uncertainty.  Money allows everyone to make choices along the way and communicate them to the community in a way that is unnecessary in a world of cooking and taking out the trash, but that is way better than stumbling blindly with a sheep in search of a seller of rice or haircuts.

In fact, evil may be the root of all barter, since we need to haggle over the fairness of reciprocal giving in the absence of altruism, but once trading is established, it is complexity that brings money into existence.  That a giant round stone, a piece of paper or a handful of Kilobytes are better or worse than an oral unwitnessed promise, it is a matter of technology.

Finally, I would like to point your attention to Nick Szabo’s clever piece Shelling Out — The Origins of Money to elicit your thoughts, since I assume you know it already.

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