Tag Archives: interactive finance

Is the Fed Going Soft on Big Banks?

In a Senate Banking Committee hearing earlier this summer, Sen. Elizabeth Warren (D-MA) and Federal Reserve Chairwoman Janet Yellen played their parts brilliantly. They acted out a time-tried political science convention, that legislators and journalists are judged on results while bureaucrats and professors are judged on rules.

At issue is Federal Reserve Board enforcement of its statutory obligations under Section 165 of the Dodd-Frank Act, to see to it that JP Morgan has orderly resolution plans in the event of failure. Broadly stated, that section of the Dodd-Frank Act empowered the Fed to impose “prudential standards” on bank holding companies with assets of at least $50 billion if an institution’s failure could affect “the financial stability of the United States.” The section also required the Fed to report its determinations annually to Congress.

The hearing demonstrated the limits of our current system and the need for interactive finance, by which I mean rewarding institutions and individuals with financial or strategic advantage for revealing information that details risk. Interactive finance will provide indispensable liquidity to crucial markets that currently see little trading. More importantly, interactive finance addresses the core challenges of concentrated market power in banking and of sclerotic market administration — of which Fed efforts to manage orderly resolution of JP Morgan are but a single, frightening circumstance.

The issues are crucial not just for our economy as a whole but for insurers, in particular, because they are such large investors in securities offered by major financial institutions. The investments generate a high percentage of the insurance industry’s operating profits but expose it to catastrophic losses. For instance, in mortgage-backed securities, insurers hold more than $900 billion in commercial and multifamily real estate mortgages, according to the Mortgage Bankers Association’s Q4 2013 report. (That’s $343 billion in commercial and multifamily mortgage debt plus $567 billion in commercial mortgage-backed securities, collateralized debt obligations and asset-backed securities.) The Federal Reserve tallies life insurance companies’ holdings of residential mortgage-backed securities (RMBS) at $365 billion as of the end of the first quarter, 2014.

In that wonderfully well-acted hearing, Sen. Warren asked Chairwoman Yellen if JPMorgan could sell its assets without disrupting the economy and impelling a taxpayer bailout. Warren also asked: Where are those reports the Fed is to provide annually?

Warren was raising a key question: Is the Fed forbearing, being lenient on JPMorgan and other huge financial institutions?

Congress enacted Dodd-Frank in July 2010, and this March the Federal Reserve Board published 100 pages of rules and regulations implementing Section 165. That is a gap of 33 months. Congress has yet to see any Federal Reserve reports, but for a wholly lacking 35-page document, Warren asserts.

It’s possible that market administration is so complicated that it simply takes inordinately long to articulate and implement regulation and to report outcomes to Congress and the public. But the Warren-Yellen exchange revealed vastly more, specifically what appears to be a Federal Reserve policy to forbear on implementing its statutory obligations under Dodd Frank 165 in connection with JP Morgan and orderly resolution.

In the hearing, Sen. Warren expressly asked Chairman Yellen, “Can you honestly say that JPMorgan can be resolved in a rapid and orderly fashion…with no threats to the economy and no need for a taxpayer bailout?” And, “Are you saying the plans [for resolution] are not credible, and you’re asking them to change their plans?”

Yellen never really indicated that JPMorgan has any credible plan in place for its orderly resolution or has submitted any since 2012. Instead, she articulated process, iteration and feedback. Dodging Warren’s direct questions, Yellen essentially said that complexity drives inconclusiveness and explains the lack of annual reports to Congress. Yellen used the word, “feedback,” five times in her replies.

Both Yellen’s circumlocution on JPMorgan resolution and its outsized concentration are but symptoms of market and market administration sclerosis, which Warren is trying desperately to treat.

Absolutely brilliant performances by each woman. No question about it. As a legislator, Warren underscored that she wants results. As a regulator, Yellen adhered to processes and rules and the Federal Reserve Board’s traditional discretion in so weighty and complex a matter.

Requests for clarification from the Federal Reserve Board for this article elicited no further information about the important question: Is the Federal Reserve forbearing on implementation of Dodd-Frank 165 bank resolution?

End of story?

No. Two problems remain.

First, what of the JPMorgan resolution elephant in the room?
Why couldn’t Yellen assert simply to Sen. Warren that JPMorgan — with its $2.5 trillion in assets and 3,391 subsidiaries — has credible plans in place for rapid, orderly resolution without triggering a systemic threat or taxpayer bailout?

Could it be “the economy, stupid,” in James Carville’s bald turn of phrase? Monetary policy regulators repeatedly assert they have a very small palette of choices. At a conference of central bankers in Jackson Hole on Aug. 22, Yellen acknowledged that monetary policy makers are grappling with how to determine the best mechanisms to foster growth and to maintain price stability. “While these assessments have always been imprecise and subject to revision, the task has become especially challenging in the aftermath of the Great Recession, which brought nearly unprecedented cyclical dislocations and may have been associated with similarly unprecedented structural changes in the labor market — changes that have yet to be fully understood,” she said. Eleven days earlier, in a speech to a finance conference in Sweden, Fed Vice Chairman Stanley Fischer cautioned of protracted economic slowdown well over a dozen times as he articulated policy-making constraints. “In the United States, three major aggregate demand headwinds appear to have kept a more vigorous recovery from taking hold: the unusual weakness of the housing sector during the recovery period; the significant drag — now waning — from fiscal policy; and the negative impact from the growth slowdown abroad — particularly in Europe,” he said.

In such weak economies, the last thing Yellen or any senior regulator with any sense of self-preservation would do is to acknowledge that JPMorgan cannot credibly assert that it can resolve itself. Milton Friedman and Anna Schwartz’s analysis (1963) that regulators — and not a spending crisis — triggered the Great Depression through monetary policy yet resounds in economic thinking. Hence all of Yellen’s process talk, for it would be incautious to respond negatively to Sen. Warren’s unambiguous questions whether JPMorgan can resolve itself without wreckage or bailout.

In the pantheon of Federal Reserve Board chairs, if one thinks of Fed Chairman William McChesney Martin (1951-1970) for probity, Arthur Burns (1970-1978) for concision, G. William Miller for brevity (1978-1979), Paul Volcker for decency (1979-1987), Alan Greenspan for obscurity (1987-2006) and Ben Bernanke (2006-2014) for agility, Yellen may be laying claim as the Fed’s Rocky Balboa. In winter and early spring, she said weather was the economy’s problem. In mid-summer, she gamely parried Warren’s Ted Kennedy, who was insisting government can do better.

Screenshot-2014-09-23-17.51.33Screenshot-2014-09-23-17.51.04

Second, what of sclerotic market administration? This represents the graver challenge. Warren got no answers or reports. Yellen advertised she cannot or will not enforce Fed rules. All they achieved is good video. Both came up empty.

Citizens voted for change six years and again two years ago. Certainly, voluminous regulation — the rules and regulations on Section 165 fill 100 pages with single-spaced, eight-point type — is a change in a very narrow sense from Bush-Cheney deregulation, outsourcing and selling of public resources and lands. However, such extensive regulation raises regulatory costs and seems to mainly benefit practitioners of crafting and evading the regulations rather than providing broader economic benefits.

Interactive Finance

Technology now affords near-real-time or even real-time market administration, providing the kind of protection that the Fed can’t and removing the JPMorgans of the world as existential threats to the economy. Interactive finance animates the next step to create wealth with the data and meta data. There’s everything to gain and nothing to lose.

Prudential valuation based on credit ratings has had its run. In terms of evaluating securities, the system is so laden with conflicts of interest between the rating agencies and the offering firms that it is amazing it has persisted after having such catastrophic effects in the 2008 asset crisis.

An International Accounting Standards Board/International Finance Reporting Standards draft report is exploring new approaches to risk management generally. And confidence accounting is receiving more traction for its greater transparency and accuracy than traditional, prudential valuation. Its robust explanatory powers support greater prospective certainty and exactness determining value and risk.

But the most promising possibility is interactive finance, which administers markets more efficiently than the incumbent regulatory system, so frustrating to Warren and Yellen alike, and more effectively than the compromised prudential valuation system.

Let’s begin with a shared orientation that information and data are the crucial wealth generation engines of the 21st century. Large search firms like Google and online retailers like Amazon or news and information content providers like Bloomberg and Thomson Reuters necessarily seek to exploit first-mover advantages and deep domain competencies by controlling as much of the data associated with their online businesses as possible. The new wealth in information is no less hoarded than pre-Internet wealth in fiat currencies, art, precious metals, insurance and real estate.
But remember: The markets are liberalized. Better mousetraps beat the world to innovators’ enterprises.

Airbnb is using an overlay of information to disintermediate hospitality and accommodations incumbents, and Uber is throwing hackney licensing for a loop. New entrants Datacoup and Meeco are enabling users to sell their data, even challenging the largest Internet firms in the world. And, because of liberalized markets, more and more innovation and individual and institutional wealth creation with data and meta data will take place.

Marketcore, a firm I advise, is pioneering interactive finance to generate liquidity by rewarding individuals and institutions for sharing information with financial or strategic advantage for revealing information that details risks.

Think of it this way: Interactive finance crowd-sources market participation by rewarding individuals, organizations and institutions seeking loans, lines of credit or mortgages or negotiating contracts with monetary or strategic incentives and rewards. Whether risk takers are a bank, insurance company or counter party, granters define rewards. A reward can constitute a financial advantage — say, a discount on the next interval of a policy for individuals purchasing retail products. The reward can express a strategic advantage — say, foreknowledge of risk exposure for institutions dealing in structured risks like residential mortgage-backed securities or bonds, contracts, insurance policies, lines of credit, loans or securities.

As crucially, transaction credits empower any and all market participants to act as granters of rewards. Individuals, organizations and institutions grant strategic or monetary incentives to counter parties seeking to acquire risks, too.

All this transpires on currently existing broadband, multimedia, mobile and interactive information networks and grids. Interactive finance realizes a neutral risk identification and mitigation system with a system architecture that scans and values risks, even down to individual risk elements and their aggregations. As parties and counter parties crowd markets, each revealing specific risk information in return for equally precise and narrowly tailored rewards and incentives, their trading generates fresh data and meta data on risk tolerances in real time and near real time. This data and meta data can then be deployed to provide real-time confidence scoring of risk in dynamic markets. Every element is dynamic, like so many Internet activities and transactions.

Talk about efficiency!

Crucially, interactive finance constantly authenticates risks with constantly refreshing feedback loops. Risk determination permits insureds, brokers and carriers to update risks through “a transparency index. . . based. . . on the quality and quantity of the risk data records.” Component analysis of pooled securities facilitates drilling down in structured risk vehicles so risk takers, including insurers and reinsurers, can address complex contracts and special pool arrangements with foreknowledge of risk. Real-time revaluation of contracts clarifies “the risk factors and valuation of [an] instrument” and, in so doing, “increases liquidity and tracks risks’ associated values even as derivative instruments are created.”

Through these capabilities, Marketcore technologies connect the specific, individual risk vehicle with macro market data to present the current monetary value of the risk instrument, a transparency index documenting all the risk information about it and information on the comparative financial instruments. Anyone participating receives a complete, comprehensive depiction of certainty, risk, disclosures and value.

Think how readily Chairwoman Yellen could respond to Sen. Warren with information replenished constantly and willingly by market participants and verified by constantly updating feedback loops.
Think how much Sen. Warren could ask regarding transparency. She’d receive a verifiable response, with great confidence.

Interactive finance allows for transparent markets capable of clearing and self-correcting. With interactive finance, legislator and regulator can get results and adhere to rules. Sen. Warren could administer vibrant, efficient, self-stimulating and self-correcting markets powered by information and data-verifying risks and clarifying confidence. Chairwoman Yellen could enforce Fed rules.
Both could get well beyond JPMorgan’s compliance issues to apply their appreciable talents administering information economies, the wellsprings of 21st century commerce and economic growth.

Smarter, Faster Trades — and Without Fraud

New York Times senior economic correspondent Neil Irwin did great public service in his Upshot column provocatively titled, “Why Can’t the Banking Industry Solve Its Ethics Problems?

While Irwin addressed the issue for investors in general, his column should hold particular interest for those in the insurance business because insurers are such large investors and generate such a high percentage of their operating profit from investments. In terms of commercial and multifamily real estate mortgages alone, insurers hold more than $900 billion of investments, according to the Mortgage Bankers Association’s Q4 2013 report. (That’s $343 billion in commercial and multifamily mortgage debt plus $567 billion in commercial mortgage-backed securities, collateralized debt obligations and asset-backed securities.) The Federal Reserve tallies life insurance companies’ holdings of residential mortgage-backed securities (RMBS) at $365 billion as of the end of the first quarter, 2014. Insurers need the investment industry to clean up its problems if they are to get maximum value from these huge investments.

Why does fraud occur so repeatedly? Irwin ponders.

The answer: gamed markets.

Since the Great Depression, investments systems have relied on enforcement after the fact. If companies were investigated, prosecuted and found to have done something wrong, they were punished. Typically, this is now done through fines and stricter monitoring, meaning that current and future staff – not those in place at the time of the fraud – and shareholders bear the costs. Sometimes, individual perpetrators are forced to retire (with pensions). Only in the past few years have the Department of Justice, Federal Housing Finance Administration and Securities and Exchange Commission begun extracting hefty fines and settlements with the largest banks, such as: Citigroup’s $7 billion, JPMorgan Chase’s $13 billion and Bank of America’s $6.3 billion with FHFA and the reported $17 billion with DOJ in connection with residential mortgage-backed securities.

As Irwin notes, fraud continues to occur despite extensive efforts to address the problems that led to the near-collapse of the financial system that spawned the Great Recession.

Gaming the system through high-speed trading remains legal. As long as there is no insider trading, traders can greatly increase the speed of their transactions with network equipment, software and advantageous location of their computers.

Insider trading is illegal but hard to root out. Successful prosecution almost always entails a whistleblower coming forward to provide regulators with precise information. And coming forward as a whistleblower entails consequential career risks.

Two innovations address these systemic challenges by providing better information for the market in real time and creating a feedback loop that improves that information – rather than waiting until after the fact to police bad guys. The innovations are interactive finance and confidence accounting.

First, Interactive finance rewards institutions and individuals with financial or strategic advantage for revealing information that details risk. That information could be, for instance, about the changing value of a house, about the payment history of the mortgagee, other financial information about the borrower, etc. That information would stay with the mortgage even if it became part of a pool that was sliced and diced into mortgage-backed securities, so that a potential buyer could probe and could track changes in real time, rather than rely on a single-point-in-time evaluation by a ratings agency. Interactive finance – not enforcement – would keep agencies from giving their highest ratings to securities whose underlying assets were suspect, as happened with sub-prime mortgages in the buildup to the Great Recession.

Marketcore, an intellectual property firm I advise, offers such interactive finance technology. It supports the determination of risk for financial products, continuous revaluation and analysis of components of pooled securities, among other capabilities that make markets and clear them.

Its technology diminishes incentives for fraud by making opacity and concealment anachronistic and replacing them with transparency. The IP also charts effective pathways to employ crowd data and meta data for timely detection of risk, building on the growing availability of information in a “big data” world and allowing for a generational improvement in detecting risk and rating credit.

Second, confidence accounting yields greater transparency and accuracy than traditional, prudential valuation. In confidence accounting, you don’t just set a value for an asset. You say there is an xx% chance that the valuation will fall within a certain range. You then roll up all the assessments and have a probability-based understanding of the likely range of total value. You can also use the estimations as a feedback loop and identify people or institutions that consistently overstate value – if someone says asset values will fall within a certain range 95% of the time, do those values, in fact, fall within that range 95% of the time?

As risk expert David M. Rowe explains in a current Risk blog (citing work by Ian Harris, Michael Mainelli and Jan-Peter Onstwedder) confidence accounting can illuminate “the degree of uncertainty around valuation estimates…including how to partition uncertainty surrounding current valuation from the more familiar concept of risk from uncertain future events, and the messy issue of how to aggregate valuation uncertainty for specific positions into the implied uncertainty of net worth.”

Through these two innovations, interactive finance and confidence accounting, banks would have much easier times detecting rogues and suppressing rascals. In the process, banks would not only increase their own wellbeing but that of their shareholders, employees and the investing public, including insurance companies.

Going forward is now a simple business decision for us all. We must pick up the pieces of what we have learned and refashion and rebuild data-refreshing business models in which everyone can participate as an information merchant. We must deliver a common architecture in which data is consistently revalued, in a system that continually rewards disclosures about risks and values.

Interactive finance and confidence accounting are emergent technologies poised to  play key roles shaping and defining smarter, faster, ethical trades in 21st century finance.

The Solution to the Hoarding Society and the Piketty Book

 Jacques Louis David, The Emperor Napoleon in His Study at the Tuileries, 1812, National Gallery of Art, Samuel H. Kress Collection, Washington, D.C. 

Every so often, a big book comes along that, in the words of Ralph Waldo Emerson, can rock people “clean out of my own orbit” and turn us into “a satellite” of the new ideas. French economist Thomas Piketty’s Capital in the Twenty First Century is lodging lots of Emersonian punches just now.

He shows us that we have a pervasive problem, a hoarding society. The implications reach to the world of insurance, where many companies hoard what can be toxic securities, such as residential mortgage-backed securities, because a lack of information about the underlying assets makes for an illiquid market and makes companies fear an economic loss. In general, the near-absence of a secondary market for many types of securities retards economic growth in America and Europe for all companies, including insurers. The solution is interactive finance, by which I mean rewarding institutions and individuals with financial or strategic advantages for voluntarily revealing information detailing the risk in assets. Interactive finance resolves hoarding by creating liquidity and stimulating volumes in new risk vehicles and, crucially for insurers, puts incentives in place to enable the insurance industry and other institutions to shed toxic securities.

Books like Piketty’s have come along before. Following World War II, John Hersey’s Hiroshima and Norman Mailer’s The Naked and the Dead became best-sellers among a public hungry for information after wartime censorship. At the time the Cuban missile crisis threatened World War III, Rachel Carson’s Silent Spring struck a chord about the fate of the earth. Francis Fukuyama’s The End of History and the Last Man resonated because of the collapse of Soviet communism. Nothing rivals the 9/11 Commission Report, with its stunning conclusions that failures of national imagination and surveillance agency cooperation explain the World Trade Center and Pentagon attacks.

Now comes Piketty with the arresting insight that inherited wealth will in all probability exert disproportionate control in mature economies well into the 21st century, to the detriments of meritocracy and democracy. He describes a permanent class of inherited wealth, augmented by vast new wealth in winner-take-all areas of information technology and in parts of finance that some have been able to game. As long as the top 1%’s capital has a higher rate of return than the overall economy, that top 1% consolidates power and protracts family wealth for succeeding generations. (“He… car’d to hoord for those, whom he did breede,” Spencer wrote in the Faerie Queene roughly 425 years ago.)

In other words, Piketty shows that we have a hoarding society — and a crisis. The super wealthy will invest what they want when they want where they want, and, from here on out, investments stimulating economic growth in national economies would weaken their power, prestige and income by helping disproportionately those less fortunate. So, a long stagnation awaits salaried professionals and wage earners and their progeny. The stagnation will curtail meritocratic achievement and compromise democratic participation and institutions.

John Maynard Keynes would find all this unsurprising — but concerning. “The moral problem of our age is concerned with the love of money, with the habitual appeal to the money motive in nine-tenths of the activities of life, with the universal striving after individual economic security as the prime object of endeavor, with the social approbation of money as the measure of constructive success and with the social appeal to the hoarding instinct as the foundation of the necessary provision for the family for the future,” the neoclassical economist observed in 1925.

At the very least at this moment, Piketty is our Antigone. With every successive response, the powerful show themselves to be self-serving. The Financial Times generated buzz by claiming Piketty’s numbers were wrong. Many used that analysis as an excuse to dismiss Piketty. But numerous pieces have shown that he is, in fact, correct – for instance, here and here.

His J’accuse punctures, equally mercilessly, Obama palliatives, libertarian rants, big business platitudes and regulator palaver. There have been unremitting waivers, settlements and failed prosecutions of large financial institutions by the Obama administration for billions and trillions of dollars of securities fraud. This comes amid vigorous prosecution of and fines imposed on European banks. The U.S. approach evokes Emile Zola’s withering indictment of corruption in the Third Republic general staff and War Office.

In 2014, Thomas Piketty reigns as the Napoleon Bonaparte of neo-classical economics. No one dominates economic discourse so pervasively or as persuasively. Like Napoleon before him, Piketty is consolidating the ideals of the Revolution: liberty, equality and fraternity in a teleology brooking no refutation. In Piketty’s heuristic, the wealthy retain liberty to invest; nation states will exert new laws to tax global wealth to restore equality; and fraternity can then express itself with adequate resources.  All the financial engineering on Wall Street and with the euro since the late ‘90s, coupled with all the vast new wealth in Internet, Silicon Valley, Seattle, oligarchic Russian and Chinese state-chartered enterprises, has dislocated vast numbers of people and segments of national economies outside privileged participants. Obama and discordant, multi-various Europe are but a place-holding Directory, so many wanting Talleyrands,  achieving temporary stability but no real order, so economic growth never really happens. Hence, Piketty proposes a global tax on wealth, a 21st century economic and public policy correlative to the Code Napoleon.

Think of Antoine-Jean Gros’s monumental, heroic painting of Napoleon touching plague-stricken soldiers in Syria in 1799. Like Christ touching the leper, Napoleon reaches out to the afflicted to convey hope. Metaphorically, at this time, Piketty plays the same role in economic and public policy discourse.

Tiketty’s triumph in Capital, like Napoleon’s at the Bridge of Arcole, the 1796 battle displaying heroism and brilliance outmaneuvering Austrian troops, may eventually give way to the scholar’s Waterloo, but, for now, none is in sight.

No one can deflect the stunning realization that the rich have accumulated and are taking off with the wealth, and nothing any leader has yet achieved on behalf of salaried professionals and wage earners realistically addresses oligarchic shifts in economic power and wealth in national and international economic life. The top 1% are intent on locking in and growing their ever-increasing share of national incomes, which increased from 8% in 1970 to 17% in 2010 in the U.S. An estimated $30 trillion, floating around the world with few owners and whereabouts unknown, according to a 2013 report, simply ices the cake.

Invisible elites now control and game inefficient markets and public policy so thoroughly to their advantages that political and social institutions are not equal to the challenge of addressing their hegemony or displacing their dominance. Contemporary regulation, originated in the Progressive period to spur investment and police wrongdoing in industrial capitalism, fails miserably addressing casino capitalism.

With all this concentration in wealth, as if to prove there is no fairness in life, Janet Yellen, a capable economist and administrator and first woman to serve as chairman of the Federal Reserve Board, suffers the indignity in Senate testimony of complaining about the weather to explain protracted economic lethargy. She shares that plight with other economic monitoring authorities.

In popular culture, “Shine Bright, Jamie Dimon,” Lauren Windsor/aka Lady Libertine’s American Family Voices YouTube hit, lampoons the CEO of JPMorgan Chase:.

“Shine bright, Jamie Dimon

Shine bright, Jamie Dimon

Fined light by the S-E-C

None from Sarbanes Oxley

To the sky/to the sky

Chasing profits ever high

Thirteen billion penalty

From mortgage securities

Fraud you sold me

Market dives

Chasing profits ever high

The regulators let you get away

Oh, D-O-J

Admission of wrongdoing you don’t have to say

Paltry the fine your power buys

So sleep tight

tonight

in your lies

Crimes provable sealed from the public eye

No jail time

Shattered lives

Foreclosures spike just like your bottom line

Shine bright, Jamie Dimon

Shine bright, Jamie Dimon….”

Jason Furman, chairman of the Council for Economic Advisors in the second Obama administration, is coming forward with what might be characterized as the American response to Piketty. Furman offers a rehashed take on le defi Americain, articulated so eloquently by J.J. Servan-Schreiber in Charles de Gaulle’s latter days, seeing American dominance in information technologies as a threat to French control of its nuclear arsenal.

While Furnam demurs from calling Piketty naughty, he suggests that Piketty is too French. Let’s shy away from Belle Epoque Third Republic wealth metrics and celebrate the frontier, Furnam says.

Furnam acknowledges in a thoughtful address at the Institute of International and European Affairs that between 2001 and 2007 “the typical family did not share in the economic gains in the broader economic gains, the first time an economic expansion did not translate into rising middle class incomes.” He says that, because of the 2008 asset implosion, “there has been no net increase in incomes since the late 1990s.”

Still, Furman disputes Piketty’s assertion that the return on wealth will necessarily be greater than growth in wages. Furman says “there is no a priori basis to predict [because] of unpredictable technological developments, norms, institutions and public policies.”

To appreciable degrees, news from Silicon Valley vindicates both Piketty and Furman. In April, Apple, Google, Intel and Adobe Systems reached a $324 million settlement with salaried professional workers to avoid litigation alleging that the four firms had conspired not to solicit others’ employees lest each pay higher salaries. The suit called for $3 billion in damages, with $9 billion in potential liabilities.

The wealthy hoard their riches and suppress labor, the settlement suggests, vindicating Piketty.

Institutions and law now enable a labor market to flourish and challenge inequality, vindicating Furnam.

Aren’t new money elites supposed to be less greedy and flagrant than aristocratic, merchant, manufacturing and landed elites, given how recently the new wealthy have attained their riches and how supposedly meritocratic they are? Apparently not. In Silicon Valley, salaried workers had to litigate simply to secure labor participation and capital accumulation rights they always held.

Picketty’s suggestion for correcting the hoarding problem partly through a tax on international capital strikes me as a non-starter in the U.S. Thirty-four years out from the election of President Reagan, those with millions are not likely to join with those with little to assail those with billions. It may happen, but the constant din of so-called free market, libertarian and socialist-fear-mongering rhetoric make for a very, very long shot.

The Solution: ‘Interactive Finance’

The surest means to address the hoarding society and crisis is, in practical terms, interactive finance, by which I mean rewarding institutions and individuals with financial or strategic advantage for voluntarily revealing risk detailing information.

For starters, let’s take a breath, look around and recognize information as the 21st century’s distinct commodity, analogous to steam in the 19th and oil in the 20th. In the U.S., information is to the 21st century as continental investment and settlement was in the 19th and industrial development was in the 20th.

System architectures, information technologies and the Internet are adequately mature and mobile and broadband communications networks sufficiently widespread that information is now commoditized and monetized. Even digital currencies like bitcoin, though classified as property by the IRS, are emerging. Cognitive computing, big data, parallelization, search, capture, curation, storage, sharing, transfer, analysis and visualization are commonplace. Three-quarters of American households pay for broadband access. Nine in 10 Americans carry mobile telephones. Global mobile transactions are projected to show more than 33% average annual growth.

User-generated information now creates significant assets. With each additional user, wealth creation shifts toward originators. “As value creation shifts from well-connected MBAs to the innovators themselves, so does wealth creation,” Reddit founder Alexis Ohanian observes in Without Their Permission.

Interactive finance will increasingly take place over the Internet and mobile devices. Consumers and institutions will embrace interactive finance to participate in value they are creating. Many shrug off sale of metrics about their data to advertisers as inescapable tradeoffs for Internet and mobile telephone use. But, with interactive finance, users would receive financial or strategic advantages and rewards for information that they create in all these transactions and that they forego more or less involuntarily now.

Amid these circumstances, eight in 10 millennials, those born between 1983 and 2003, concur with the statement that “there is too much power concentrated in the hands of a few big companies” and express dubiety about Wall Street, according to a recent Brookings Institution report.

While it is amply clear that interactive finance enables users to become more efficient traders, more importantly interactive finance stimulates massive communities of use to capture and to monetize risk-detailing information for those willing to share and those willing to reward information revelations with financial or strategic advantage. By enabling each person’s control of his or her information when he or she chooses to reveal some part of it, interactive finance establishes open and free markets in information. These markets will complement the data miners, credit agencies and Internet behemoths that currently act as sole gatekeepers, repositories and traders of the data.

While this may sound rather highfalutin’, interactive finance is wholly pragmatic.  Corporate bonds are all dried up. Residential mortgages are so lethargic that lay-offs are legion. Two key sectors lack adequate liquidity to stimulate aggregate demand. And, as long as the largest too-big-to-fail banks receive lifelines to the tune of roughly $7 billion a month from the Federal Reserve through its Orwellian-named quantitative easing program, a crisis is averted only at stinging, life-altering and phenomenal costs to all but those privileged institutions and their regulators.

For instance, Brookings Institution economist Charles L. Schutlze contended in The Public Use of Private Interest (1977), that “according to conventional wisdom, government may intervene when private markets fail to provide goods and services that society values. This view has led to the passage of much legislation and the creation of a host of agencies that have attempted, by exquisitely detailed regulations, to compel legislatively defined behavior in a broad range of activities affecting society as a whole. …Far from achieving the goals of the legislators and regulators, these efforts have been largely ineffective; worse, they have spawned endless litigation and countless administrative proceedings as the individuals and firms on whom the regulations fall seek to avoid, or at least soften, their impact. The result has been long delays in determining whether government programs work at all, thwarting of agreed-upon societal aims and deep skepticism about the power of government to make any difference.”

“Strangely enough in a nation that since its inception has valued both the means and the ends of the private market system, the United States has rarely tried to harness private interests to public goals. Whenever private markets fail to produce some desired good or service (or fail to deter undesirable activity), the remedies proposed have hardly ever involved creating a system of incentives similar to those of the marketplace so as to make private choice consonant with public virtue.”

Technology now affords, as risk expert David M. Rowe points out, the vehicles to obsolesce regulatory inefficiencies and to challenge ever-worsening inequality by rewarding candor and providing incentives for reciprocity. Persons can do well by doing good.

Marketcore, an intellectual property innovator that I am advising, is developing interactive finance with system architectures that reward originators, intermediators and investors alike without bias toward seller or buyer. Its technology enables interactive finance and turns the tables on hoarding and gaming. For instance, any time a borrower of a loan reveals information, the creditor is able to offer a credit toward a future transaction or to provide information that will be of strategic advantage to the borrower. Any time an issuer of a bond reveals projected cash flow, say in connection with scheduled payment, the holder of the bond can offer a credit toward a future transaction or provide information that will be of strategic advantage to the issuer. Because of its robustness, Marketcore system architectures clarify risks for institutions dealing in structured products like residential mortgage-backed securities or bonds, contracts, insurance policies, lines of credit, loans or securities.

At this stage in technological and market development, large financial institutions and insurance companies are still incorporating Internet and mobile phones into their business models on terms that sustain revenues and market shares and that maintain margins and ownership of the all-important customer. And, large Internet firms like Google, Facebook, Amazon, Apple and Microsoft exert first-mover advantages by controlling use-generated Internet value-add to sustain market power.

Salaried professionals, wage earners and the public generally will find that interactive finance will chart the surest paths to address and reverse hoarding and to supersede regulations now so thoroughly compromised by the elites they were created to regulate that they neither promote nor protect citizens they were designed to serve.

For financial services professionals, interactive finance should prove a gold mine by leveraging domain competencies in financial data, creating voluminous new data for repurposing and analysis.

Notice, too, that interactive finance channels the best of Piketty and Furman. It achieves egalitarian wealth creation, which each economist champions, more efficiently than contesting market administration systems stacked against average persons or raising taxes. As crucially, interactive finance entails no new 21st century Code Napoleon and instead enables markets to thrive.

No one is doing as much as Piketty to clarify middle-class fragility and impotence in contemporary America. Piketty has stated middle class insecurity, so crucial to Marx in The German Ideology and his earlier Capital, in the precise way that makes Americans gasp at, respect and resent the French. If only Louis Althusser could have commanded a simple sentence and hadn’t murdered his wife, or Michel Foucault had found public leaders as compelling as private pleasures.

 

‘Interactive Finance’: Meshing with Google

The insurance industry is poised to enhance its power, burnish its prestige and increase its income in the 21st century by developing interactive finance to mesh with Internet enterprises. By interactive finance, I mean rewarding institutions and individuals with financial or strategic advantage for revealing information that details risk.

Insurance industry success requires recognizing information as this century’s distinct commodity, analogous to steam in the 19th and oil in the 20th. Information also needs to be seen as an indispensable element in fresh, emerging digital currencies.

Information technologies are adequately mature, and mobile and broadband communications networks sufficiently widespread, that digital currencies like Bitcoin are beginning to emerge. Cognitive computing, big data, parallelization, search, capture, curation, storage, sharing, transfer, analysis and visualization are commonplace; three-quarters of American households enjoy broadband access; and nine in 10 Americans carry mobile telephones. User-generated information now is everywhere.

Insurance industry leaders would be wise to cultivate interactive finance. It could be used to manage institutional investments with less risk and more liquidity. Interactive finance could also be used with retail consumers to create experiences, incentives and products to help manage what promises to be massive, new wealth.

A key part of interactive finance — navigating crowds and matching parties — is up and running. For instance, with Airbnb and accommodation or Uber and ride sharing, individuals reveal information voluntarily to enable counter party matching. Both are emerging as phenomenally successful simply by using information in new ways to create efficient markets.

The glimmerings of these potential gold mines are now eliciting insightful commentaries about how insurers might aggregate and parse information gathered through “crowd-sourcing.” Sharing portions of the reward with institutions and individuals through protected communications channels — also known as interactive finance — will provide the broad avenues and fastest expressways to 21st century wealth among insurers.

In two, insightful articles published here on ITL, Denise Garth discerns the key value of information. “Consider the explosion of new data that will be available and valuable in understanding the customers better so as to personalize their experience, provide insights, uncover new needs and identify new products and services that they may be unaware of,” she observes of the strategic alliance betweenFacebook and AXA. “For insurers, the coming years promise unparalleled opportunity to increase their value to their customers. Those that are best able to capitalize on the key technology influencers will reap the most in rewards,” Garth notes in an earlier article on Google.

Indeed, Facebook is poised to offer a money-transfer service in Europe. Pending regulatory approval in Ireland, Facebook would be permitted to employ user deposits in fiat currencies to become a payment services powerhouse with what seems tantalizingly close to a virtual currency. “Authorization from the central bank to become an ‘e-money’ institution would allow Facebook to issue units of stored monetary value that represent a claim against the company,” the Irish Times reported.

The company will use its acquisition of WhatsApp for access and traffic and will build on its 30% participation in revenue with Candy Crush Saga and Farmville games. Facebook will also take advantage of “‘passporting,’ which allows digital payments to be used across EU member states without having to gain regulatory approval from each one,” according to a news report.

Should Facebook succeed, AXA’s partnership with Facebook would put it well ahead of its competition in employing mobile markets to acquire and retain clients.

In an article on ITL on how Amazon could get into insurance, Sathyanarayanan Sethuraman enumerates “the convenience of on-demand buying. . . personalization of product and service delivery.” Crucially, he notes the importance of “building trust through transparency in pricing,” which provides impelling “reasons for insurers and Amazon to create a distribution model to match ever-evolving customer demands.”

Brian Cohen indicates in a thoughtful commentary on ITL that companies can collect customer feedback that is volunteered on social media and can also use new channels to provide new types of information. For instance, he says that, when inclement weather approaches, agents can caution readers to secure objects that may cause damage to their property, as a means toward generating webpage traffic and strengthening client relationships.

Joseph Sebbag cautions that technological mismatches can threaten insurance industry value. “Insurers’ numerous intricate reinsurance contracts and special pool arrangements, countless policies and arrays of transactions create a massive risk of having unintended exposure,” he notes in an intriguing essay evaluating information technology and reinsurance.

Focusing on a company with which I am very familiar, former Comptroller General David Walker says Marketcore has transformative IP in interactive finance that could provide pathways to phenomenal growth for the insurance industry and, in general, finance. The mechanism is incentives for “truth, transparency and transformation” that will make risk vehicles and markets perform more efficiently and reliably. (Walker is honorary chairman of Marketcore; I am an adviser.)

Marketcore generates liquidity by rewarding individuals and institutions for sharing information, such as the history of individual loans being bundled into residential mortgage-backed securities. The reward could be a financial advantage, say a discount on the next interval of a policy for individuals purchasing retail products. The reward could also be a strategic advantage, say foreknowledge of risk exposure for institutions dealing in structured risks like residential mortgage-backed securities or bonds, contracts, insurance policies, lines of credit, loans or securities.

Through interactive finance, Marketcore creates efficient markets for insurers and reinsurers. All do well as each does good. Risk determination permits insureds, brokers and carriers to update risks through “a transparency index. . . based. . . on the quality and quantity of the risk data records.” Component analysis of pooled securities facilitates drilling down in structured risk vehicles so insurers and reinsurers can address complex reinsurance contracts and special pool arrangements with foreknowledge of risk. Real time revaluation of contracts clarifies “the risk factors and valuation of [an] instrument” and, in so doing, “increases liquidity and tracks risks’ associated values even as derivative instruments are created.”

These interactive finance capabilities are at tipping points for insurers and reinsurers, as outlined so thoughtfully by Garth, Sethuraman and Cohen.

As those thought leaders say, large Internet enterprises like Google, Amazon and Facebook are striving for market reach and domination. Because of distributed wire line and wireless networks and the Internet, experts project that global trade will grow to $45 trillion from $6.5 trillion in less than 10 years. Global mobile transactions are projected to show more than 33% average annual growth, with 450 million users in a $720 billion market by 2017.

Only if Amazon, Facebook and Google offer new services can they exert market power in global electronic commerce analogous to late 19th century railroads, energy and steel industries. Each of them needs services like insurance no less than railroads required passengers and freight; than coal and oil required factories, homes, offices and motor vehicles; than steel required cities, railroads, trollies and cars. These Internet enterprises must have insurance, among other services associated with their brands, to remain dominant. All seek to create voluntary, de facto, walled gardens for their brands, and what better way to do so than to get users to rely on their brands to manage risks and pay bills?

None of these Internet search-and-connect giants can recoup its investments in mobile applications, drones and data centers unless it has voluminous, recurrent transactions and traffic engaging its mobile capabilities. For instance, Derek Thompson reports that the iPhone drives 60% of Apple revenue and that mobile advertising accounts for 60% of Facebook advertising revenue. John Greathousespells out the implications for advertising in a thoughtful essay on conversion rates and mobile formats. A service like insurance brings in users and encourages stickiness. In this way, insurance is the correlative to apps, drones and data centers. All these Internet giants are less without it.

Similarly, consumers and institutions are keen to participate in the value that they create with their participation in information technology and communications networks. Citizens and consumers, while resenting unremitting spying, shrug off the constant sale of metrics about their data to advertisers as inescapable and would love to turn tables on all these massive, intrusive public- and private-sector forces. People would willingly patronize a firm rewarding them for revealing risk information that they are comfortable sharing.

By rewarding institutions and individuals with financial or strategic advantage for voluntarily revealing risk-detailing information, interactive finance expressly rewards users for what they forego voluntarily with daily Internet use.

At this stage, the Internet firms have first-mover advantage when it comes to gathering and using people’s information. When I recently watched streaming video of Masterpiece Theatre’s “Mr. Selfridge,” there was the anomalous propinquity of an advertisement for an Internet tire seller in the bottom right portion of my display – within a day or so of my searching Google for motor vehicle tires. Clearly, Google, Internet ad placers and, in my case, the tire vendor are selling and purchasing access to user experiences. The sole party excluded from the value chain is the person who creates value in the information.

Earlier loyalty programs prefigure some of the notions of interactive finance. In mid-20th century America, supermarkets, gasoline stations and retailers often rewarded customer loyalty with S&H Green Stamps. Airlines, grocery chains and hotels employ loyalty programs and provide reward cards to provide incentives for recurrent patronage. In keeping with the times, Bellycard supports customer retention with a scannable card and mobile application. Each time I buy Italian bread and scan the card at the local bakery, I earn points toward a pastry.

What of insurance brokers, who reward consumers with incentives on forthcoming purchases for revealing risk information that they are comfortable sharing? Or insurer carriers, which protect asset values and boost shareholder confidence through enhanced capacities for risk detection and real-time valuation of risk exposures?

From here on out, the emphasis needs to be on rewarding customers and institutions by enabling them to create wealth with the information they are willing to reveal and by commanding information as a commodity and as the cornerstone component of emerging digital currencies. Insurers that can tap Internet industry demands for users, provide rewards for information and equip themselves to manage their risks more effectively can position themselves to dominate their sector well into the second quarter of the 21st century.

“Insurance is above all a relationship,” remarks Elise Manzi, account manager with Biddle & Company Insurance Brokers, based in Newtown Square, Pennsylvania. “We’re devoted to continuing to provide our clients with the exceptional services they have come to expect of us through these new communications capabilities. Interactive finance sounds like a great relationship builder.”

Ernest Tedesco, head of Philadelphia-based Webesco, says, “For brokers, web services support client retention and communication. For large retail carriers like Progressive and Geico, web services enable them to reach consumers directly with service and product offerings. Anything kludgy on one of these sites will send customers scurrying to competitors.” He adds that if Google and other Internet giants get into the retail insurance space, current industry leaders need to be ready to respond aggressively with technology or will be disintermediated. “Back-office executives managing trillions in risk will find themselves at competitive disadvantage without real-time and near-real-time risk detection, which web services visualize.”

By meshing with Internet industry firms on interactive finance terms, the insurance industry will have all the strength of the Internet yet sustain more discretion to manage institutional and customer experiences on terms much more favorable than those that musicians and publishers experience with Apple.

As Erik Brynjolffson and Andrew McAfee point out in The Second Machine Age, digitization both spawns vast new bounty and stimulates an increasingly drastic spread between the small fraction of winners and everyone else.

How better to build crowds and grow volumes than to provide incentives to customers by rewarding them for sharing information they are willing to reveal and to serve institutional clients with foreknowledge of oncoming risks to sustain competitive advantage and protect liquidity.

It is as straightforward as that.

For my part, I am optimistic about Marketcore because its IP enables insurance industry adopters to organize, channel and reward rich, diverse crowds of capital accumulation through interactive finance. Large, incumbent Internet firms like Amazon, Facebook and Google may still prosper from first-mover advantages based, in part, on recognition that information is the distinct commodity of the 21stcentury. But each and all now must offer more to maximize return on investments in capital-intensive operations. And that’s where any insurers, deploying Marketcore IP as sword and shield, stand most to gain for themselves and the people and institutions whose trust they hold.