Re-Inventing Wall Street: Finance 2.0

When Umair Hague posts something on his blog, i always take some extra quality time to read.

Umair Haque is Director of the Havas Media Lab, a new kind of strategic advisor that helps investors, entrepreneurs, and firms experiment with, craft, and drive radical management, business model, and strategic innovation.

Always sharp, and always in for a good controversy and/or polarizing opinion. I am a strong believer in polarization being a big driver for Innovation.

Have a look at his latest blog post titled “Reinventing Wall Street from the Bottom Up”

Some super-quotes:

Welcome to the new trickle-down economics. Here’s how it works:

1. Banks massively misallocate capital.
2. The government uses money reserved for public goods — education, transportation, healthcare — to bail out banks instead.
3. The bailout should trickle down, as lending to businesses and consumers alike sparks economic activity.
4. No effort to settle bad debt is made; little reform of corporate governance, industry structure, or competition is necessary — because banks are too big to fail.
5. Little oversight of steps 2, 3, or 4 are necessary, because markets are perfect resource allocators, and market actors are rational.

Result? In trade terms, a shock worse than the Great Depression, as Paul Krugman has noted.

In employment terms, a lost generation.

In monetary terms, a flight from the dollar.

In microeconomic terms, the stagnation of America’s industrial base.

If it weren’t for Apple, Google, and a handful of old-school companies pursuing dramatic reinvention, like Wal-Mart, we would be in a Great Depression.

In macroeconomic terms, value is transferred from you, me, and our grandchildren to Wall St — permanently.

And also:

The greatest transfer of wealth in history is taking place. It is already roughly worth a year’s output of the entire United States, or about 5% of the entire world’s output.

Or…

It’s is faith-based economics — and it’s Barack Obama’s biggest mistake. (Consider for a moment that 20+ per cent of hedge funds misrepresent info.) For years, George Bush hunted for phantom WMDs, while terrorist networks flourished under his nose. Now Barack Obama is hunting for a phantom prosperity, while the greatest robbery in the world is happening right under his nose.

In the same blog post, he is referring to his Finance 2.0 Manifesto, published back in April 2009, where he makes 9 recommendations for a better financial system. I have cut & pasted the whole lot, not because i am lazy, but because the context is worthwhile reading as well (orange/red highlighting by myself)

Edge funds. An edge fund is the opposite of a hedge fund. Where hedge funds are opaque, edge funds are transparent. Where hedge funds are closed, edge funds are open. Where hedge funds are run for near-term gains, edge funds are in it for the long run. Where hedge funds create artificial book value, edge funds create value that accrues to real people and society. Where hedge funds focus on long and short transactions, edge funds focus on relationships. Think Marketocracy on steroids.

Macro and microcurrencies. A currency tied to national interests determined by a political elite? That’s so 20th century 16th century. A better financial system needs better currencies. Finance 2,0 will be built on microcurrencies and macrocurrencies: currencies which operate hyperlocally and transnationally. Why? Because people shouldn’t have to bear collective responsibility for bankers looting or regulators cahooting. In the 21st century, the quiet tyranny of economic collective responsibility is intellectually bankrupt: it is fundamentally unjust, deeply inefficient, and vastly value-destructive.

Social banks. Despite what marketers tell you, banks do not exist to maximize profits. They exist to maximize the safety of deposits. We’ve been taken for a very expensive ride. Next-generation banks will be structured as social enterprises — because the incentives to safeguard deposits and reinvest profits for the common good perfectly converge to a dominant strategy for long-run value creation.

Fair markets. Markets are free like a shark is a fish. Anyone can play — but only at the risk of being manipulated, looted, and defrauded by the deepest-pocketed. The anonymous arms-length transactions orthodox economics lionizes are, in practice, just a hyperefficient mechanism for front-running, predatory trading, and bid rigging. Next-generation markets aren’t just free: they’re fair. They are markets where information about reputation, reliability, and relationship thickness are hardwired into the DNA.

Stakeholder communities. Institutional investors are so 20th century. Centralizing control over our biggest corporations in the hands of a bunch of old dudes asleep at the wheel was as good an idea as the spork: interesting in theory, useless in practice. Tomorrow’s radical innovators are already updating corporate governance for the 21st century, by letting communities of stakeholders shape managerial decision-making. Think mega-Etsy.

Whisper bullhorns. Why is trading such a great business? Because traders have access to info that you don’t. Why can’t everyone get in on the whisper circuit that powers prop desk profits? Because no radical innovator has taken on the challenge yet of amplifying the secretive whisper circuit into a blaring bullhorn. But imagine if the rumours that drive share prices up and down on trading desks were Twitterfied. The result would be a financial revolution: the market power Big Trading enjoys would vaporize faster than you can say "insider info."

Googlizing financial instruments. What business is Wall Street really in? The business of hoarding information: to seek a so-called informational edge. Of course, markets don’t work if everybody’s hiding info — they only work when people are revealing it. Google can help me find a tennis racquet, Match can help me find a date, and Last.fm can help me find some tracks to rip — but who can help me find a better place to put my cash that effortlessly? No one. And that’s a massive reason why we’re stuck with a 1.0 financial economy.

Anti-ratings. Your credit is rated mercilessly. But does anyone rate lenders — not to mention brokers, banks, and investors? Today’s crisis would have been far less severe if consumers had access to knowledge about who was a trustworthy lender — and who was going to sell them the financial equivalent of a roadside bomb. Credit ratings alone cannot create more efficient financial markets — doing so requires better information about both buyers and sellers of every kind of financial product.

Open source modeling. Every bank built the same models. Every bank built the same flawed models. Every bank built the same flawed models on similarly erroneous assumptions. How dumb is that? Incredibly. Unleashing the power of open source to vaporize this black hole of incompetence is going to be a tremendously powerful path to innovation. The peer review, voluntary contribution, and always-on negotiation at the heart of the open source model create powerful incentives for quality — which is exactly what the hare-brained quants at banks lacked.

Finance 1.0 cannot power growth 2.0. Yesterday’s finance cannot power tomorrow’s prosperity. Bailouts, taxes, nationalization, regulation are what your discussions this week are focused on. These can limit the depth and intensity of the crash. But what they cannot do is build a radically more efficient, productive, and effective financial system.

See also my previous post about Peter Thiel and the Singularity, where he said that credit only works in a growth society.

That requires a better kind of finance altogether — one designed not merely to make the worst among us richer, but

to make us all authentically, meaningfully wealthier.

That’s why finance 2.0 is the future.

This is the sort or personal and corporate values we want to discuss as underpinning for our Long Term Future. Hence the need for the Think Tank we are building from Flanders to gather like minded authentic people who do care about our next generations.