Could we see in the near future international banks operating everywhere via blockchain?

Office of the Comptroller of the Currency Issues Interpretation of 12 U.S.C. § 25b

Press Release

WASHINGTON—The Office of the Comptroller of the Currency (OCC) today issued an interpretation of 12 U.S.C. 25b, which codifies preemption standards and establishes procedural requirements for certain preemption actions by the agency.

Federal preemption derives from the Supremacy Clause of the U.S. Constitution and has been recognized as fundamental to the federal government and the operation of the federal banking system. In the landmark case of McCulloch v. Maryland, the U.S. Supreme Court held that under the Supremacy Clause, states “have no power, by taxation or otherwise, to retard, impede, burden, or in any manner control, the operations” of an entity created under federal law.

Federal preemption permits national banks and federal savings associations, many of which operate across state lines, to operate under a uniform set of rules to support nationwide banking. The agency has concluded that the federal banking system, and its customers, would benefit from a comprehensive interpretation of these provisions, which sets out a consistent framework for compliance.

Source: Office of the Comptroller of the Currency

In a 5G world, can an individual be their own bank?

A thought ….

That Covid-19 has sped up the exposure of workers to the possibility of automation replacing them is a saying that is becoming almost cliché. Television commercials remind us that we are “all in this together” and that we should wear masks and safely social distance. Meanwhile, telecommunications companies are promoting 5G technology that when fully deployed will help alleviate the downsides of working from home with a technology that moves data faster and can help connect all your devices and appliances so that you can better manage the data flowing through your home. But what if, in addition to connecting your mobile phone to your refrigerator which may allow you to determine whether to buy more milk, that 5G also helps to turn you into a micro bank by taking a real-time audit of the assets in your possession and using them as a basis for issuing your own coin?

The thought came to me today while conversing with two friends about the probability of Facebook becoming its own “nation.” Facebook, the world’s largest social media platform, is backing a group that plans to issue a cryptocurrency next month called Diem. Diem will hopefully help people send money around the world almost instantaneously. Unlike other cryptocurrencies, Diem will be a “stable coin” meaning it will be backed by reliable fiat currencies like the U.S. dollar or the euro.

But what if we could take the Facebook macro-model and make it micro to you? For example, with 5G-driven internet of things and block chain technology, why couldn’t a real time audit of a person’s possessions be taken and instead of the individual issuing digital fiat currency or even stable coin, the individual could issue their own personal currency. Tom Steyer, for example, could digitally tally up his cash, land, securities, and other holdings and issue a digital certificate that could be used in the digital marketplace. A man of his wealth could take a position in a number of different currencies but should he choose to engage exclusively in the digital world on his own dime, he could do so without any rules or regulations that come along with currency issued by a nation-state, a social media platform, or a corporation.

The advantages to such a scheme compound when more people with the material means decide to go digital and trade either the social media platform’s coin or, if affluent enough, their own coin. This would be true personal banking.

Federal Reserve Bank of Atlanta creates commercial real estate index to assist risk assessment.

The Federal Reserve Bank of Atlanta yesterday announced the development of a new commercial real estate index designed to provide banks with a better assessment of momentum and risks in the commercial real estate market. The press release has been reproduced below.

Source: Federal Reserve Bank of Atlanta

9 November 2020

The Federal Reserve Bank of Atlanta announces the release of the U.S. Commercial Real Estate (CRE) Momentum Index which combines economic and real estate market data for more than 300 metro areas to provide insight into the momentum of change in CRE markets across the country.

A new interactive market analysis tool will enable users to track the CRE Momentum Index over time to identify CRE trends and assess market risks for the four major property sectors—apartment, office, retail, and industrial—as well as view the underlying variables that affect the index’s movement. One of the intended uses of the tool is to help small and medium-sized banks more quickly identify and accurately gauge risk as they are actively engaged in commercial real estate lending.

The CRE Momentum Index combines publicly available economic data such as employment, e-commerce, retail sales and others, with third-party, market-specific data such as occupancy trends and construction forecasts. The tool also provides a running quarter-to-date analysis as data are released in order to improve tracking in between quarterly data releases.

“Exploring both economic and commercial real estate dynamics in tandem helps users understand the movements in commercial real estate markets, and it is particularly helpful to look at these dynamics by property type,” said Lauren Terschan, senior data analytics and real estate specialist in the Atlanta Fed’s Supervision, Regulation, and Credit division, who helped develop the tool. “By looking at changes in overall market momentum, this tool will help users track market undulations and help identify potential risks.”

According to NAIOP Research Foundation, commercial real estate contributed more than $1.1 trillion to the U.S. GDP and supported nine million American jobs in 2019.

“Commercial real estate is a hugely important sector to the overall economy and contributes significantly to job creation, investment and lending,” said Brian Bailey, CRE subject matter expert in the Atlanta Fed’s Supervision, Regulation and Credit division, who developed the index’s methodology. “It is critical that industry participants, lenders and regulators have an excellent understanding of economic drivers and risks, and we believe the CRE Momentum Index will help with that understanding.”

The CRE Momentum Index is available in the Data and Tools section of the Atlanta Fed website.

Contact: Karen Mracek | 470-249-8348

What Biden could learn from the movie Wall Street

I suspect that for many fans of the movie, Wall Street (1987), Gordon Gekko’s statement that “Greed, for the lack of a better word, is good. Greed is right. Greed works.” is as anticipated as Sigourney Weaver’s line in Aliens (1986) (“Get away from her you bitch!”) or Jack Nicholson’s “You can’t handle the truth!” line from a Few Good Men (1992). While lacking the build-up of the lines uttered by Weaver and Nicholson, Michael Douglas’ delivery of the line had a come out of nowhere effect that gripped me with its crassness and truth.  Arguably the “greed is good” line would be great fodder for populists such as U.S. Senator Elizabeth Warren, Democrat of Massachusetts or her fellow adopted New Englander and senator Bernie Sanders, the Democratic Socialist of Vermont.

It was another line, however, more metaphysical in its tone and cerebral that caught my attention: “Money is transferred from one perception to another.” The line took me out of the more solid quantitative world of stock prices, mergers, and profit and placed me in the abstract.  While the Gekko character, played very well by Mr Douglas, was a realist, he took me behind the veneer of hard currency and added more insight to my developing view on what money and banking really is. 

Money is more than a unit of account, a medium of exchange, or a mechanism for storing wealth.  Money serves as a proxy of an individual’s captured energy.  The more energy an individual generates, whether via labor or thought, and can be extracted by an employer or tax collector, the greater the value of the individual and the compensation the individual is owed in the market. 

Banking is not just about collecting deposits and making loans.  Banking is an information search process.  Banking facilitates the transfer of captured energy from one perception of economic reality to another perception of economic reality.  The information that the “banker” searches for is information that can increase the value of his money; increasing his money’s ability to be transferred to multiple perceived realities.  The more realties that money can take you to, the greater your wealth.  And the greater the amount of information, the optimal your returns on money.  As Gekko shared with his protégé Bud Fox, “The most valuable commodity I know of is information.”

The banker’s search for information is what built America.  He was aided by merchants and traders who sought out new markets and in exchange for the banker’s financing shared with the banker information about the opportunities that could increase the value of the banker’s coin.  This is where Mr Biden’s narrative is wrong about who built America.  Mr Biden, likely as part of his campaign to sway Mr Sanders, Mrs Warren, and their populist supporters, states that America was built by an American middle class versus Wall Street bankers and hedge fund managers.  History does not support his assertion.  The middle class is, historically, a recent creation, taking root during post World War II.  America was the result of the metaphysical where monarchs, merchant traders, and bankers closed their eyes and envisioned how best to exploit a vast land.  To paraphrase Gordon Gekko, these men created nothing; they owned. 

I doubt if Mr Biden takes this metaphysical view toward the American political economy.  Even if he did, he would not share these thoughts with voters who would have to process the thought that their contributions to America’s economic growth was more that of tool than conceiver.  Given Mr Biden’s close relationship with the banking industry, however, he should have a pretty good grasp on the reality of the banker’s role in the capitalistic system: that his greed for life and ability to move money from perception to perception, much like Gordon Gekko’s ability, is responsible for America’s growth.    

Public policy should encourage banking to go back to its roots: financing commerce while supporting high yield…

The unbanked are unbanked because they have nothing to bank.  In a nation driven by capital formation and returns on capital, focusing on the unbanked seems like putting the horse before the carrot.  The American Treasury Department and the central bank should be focusing public policy on encouraging capital formation and generating high yield.  Nothing in the U.S. Constitution says that consumers should be encouraged to borrow or that banks should be obliged to lend to the consumer class.

Political responses such as the Community Reinvestment Act, the Dodd-Frank Act, or the creation of the Consumer Financial Protection Board cater to voters but overlook the need for encouraging the accumulation of capital goods necessary for driving the American economy.

More importantly, political responses mentioned above serve to incentivize consumers to enslave themselves to credit even while the last four decades have seen real wages go stagnant.  The political class on the left is quick to leave out consumers’ complicity in the financial downturn of 2007-2009 where consumers were encouraged to borrow against their shrinking means to repay.  Consumers do not need protection from banks.  We need our mindsets redirected in our approach to banking.

Each household needs to rebuild their capital buffer.  It is easier said than done especially in a transition period where the timeline for capital’s replacement of labor with automation and artificial intelligence is being sped up.  Not only is more work being done from home but businesses are determining whether the benefits of keeping employees at home outweigh the costs of bringing them back in-house.  A number of employers have been transparent with updating employees on their engagement with companies offering AI-driven resources that increase efficiency.  Larger companies are partnering with technology companies whose mission is to reduce the time employees spend on certain tasks.  These are threats to labor and income and in this environment not only is the consumer tasked with increasing household capital formation but with seeking additional or alternative opportunities that provide for increases in income, savings, and investment.

One way, in my opinion, to increase capital while deriving additional income is for public policy to encourage high yield on capital.  The consumer who flips her mindset from shopper to investor needs an environment where her savings can accumulate at a faster rate; where higher residuals can be reinvested into her principal holdings and create appreciation.  Public policy should support full employment of capital and maximum prices for capital. How does the US get there?

One way to get there is for banks to abandon their risk-based interest rate pricing model, where higher interest rates is the price that riskier customers must pay for borrowed funds.  Rather, banks should abandon consumer lending altogether.  Lending money to a consumer in a stagnant income, labor replaced by automation environment so that the consumer can build a deck, finish a basement, or send a kid to school is what I call low value enterprise lending where the loan is being applied to a consumer’s wage income versus residuals the asset provides.

Instead, interest rates should reflect the competition between borrowers seeking to demonstrate their enterprise ideas will provide the greatest returns to capital and equity.  High interest rates should not be charged because of a high risk of failure.  Rather, high rates should be charged because where the lender sees high returns to equity in the enterprise, the lender seeks to capture some of that value.

Banks, then, should abandon consumer lending and put energy and resources into commercial or merchant banking.  Consumer involvement in banking should be limited to establishing savings or investment accounts with banks or owning stocks in banks.

Again, the upside from this model for banks, a focus on lending to merchants that leverage real assets to make income.  The upside for the consumer is less borrowing and more investing thus greater capital formation.  Also, the consumer may learn how to plan purchases over a long term versus seeking the psychic value of getting something now and paying for it later.  For example, a consumer may put away cash over some determined period of time to purchase that new deck without having to burden themselves with debt.

Or, a consumer may seek out a group of private consumer lenders who are not connected to the banking system thus reducing the chances of shock to the system should a borrower renege on a loan.  They will be forced to rely on the courts, lawyers, and mediators for resolving any conflicts with private lenders.

 

 

Identifying the economic value within the African Diaspora and designing currency to transmit it …

Today while waiting for a haircut, a lovely young lady, who was waiting on her companion, asked me if I was a professor.  I was caught off guard by the question for it seemed almost prescient in nature.  I had been an adjunct professor back in Maryland, I told her.  She then asked if I had been on television. Again I informed her that I had made two appearances on a business news channel.  I expected the exchange to end there since her companion was finished with his haircut, but fortunately the conversation did not end there.  She proceeded to ask my opinion about the current state of the economy as it impacted black people.  I was happy to oblige since the topic was interesting and yes, when you get to engage a very attractive woman on the state of the political economy (underscore very attractive), you don’t pass it up.

The conversation turned to whether African Diaspora communities could use their own currency.  My answer was yes, but to get there we have to first identify a resource that could be used to generate an underlying value for the currency.  A true community is built on a resource the extraction, processing, and distribution of which leads to an industry that generates the income necessary for sustaining the communities members.

Second, there has to be a banking/financing resource in place to convert the assets of the underlying resource into loanable funds.

Right now we have very little of the above two components.  For example, Africans in America hold very little of its capital.  By some estimates, Africans in America hold approximately two percent of total capital in the United States. In addition, consider farm holdings by Africans in America.  Africans in America hold approximately two percent of all farms in the United States, according to the website ShoppeBlack.us.

Compounding the farmland problem is the lack of strong financial infrastructure through which not only lending can be accomplished but also trade in the securities that have underlying them black farm output.  There are approximately 45 black-owned farms located in 20 U.S. states.  There are, however, 14 black owned banks located in eleven states to support these farms.  It is a strong financial infrastructure that provides funding for land acquisition, seed, and new equipment and the current black owned facilities for lending are not enough.

Money is created when loaned funds for land acquisition, seed, and equipment are placed in a farmer’s checking account.  At this point black-owned banks could issue currency distributed by the Federal Reserve or create its own currency where a special currency is designed to be used by black farmers and any other industries related to or depending on black-owned farms including black-owned suppliers, black-owned restaurants, black-owned pharmacies and wellness stores, etc.

There is theory and there is application. With one to two trillion dollars in output, Africans in America could invest in more farmland while expanding their financial infrastructure in order to support lending, securitization of debt, and issuance of their own debt.  Where more land is not available, the next move may have to be the cultivation of intellectual capital and thus make greater inroads into the creative industry space.

On the other hand, Africans in America, rather than trying to replicate the existing model, may have to consider a completely new model for generating and trading currency, one where the resource is unique to and managed solely by Africans in America.