The weakest link I think is trading loan rights:

“A key question is to whom to give the right to take out zero interest loans. It could keep the right to itself – which it does in times of war – or it could give it to people who already have assets or it could give it to the population. Giving it to the whole population on an equal basis is fair and democratic and is likely to be a politically acceptable solution. Let us assume that this is done. Each person in the population gets a relatively small amount of rights to take up a zero interest loan. People can trade their rights if they are risk averse and do not want to invest themselves.”

The key issue is to distinguish between a group of people who are actively interested in the low carbon-emission energy ant the rest. Looking at the number of people who vote for the Greens I wouldn’t expect more than 10% of the people to be interested in active participation in the schema.

Now about trading.
The market price of a zero interest loan right must be lower than the cost of a normal commercial loan – say 50% of the principal of the loan. This amount of money has to be paid upfront if somebody wants to buy a green loan right. Where will this money come from? This money is probably going to be borrowed using a normal (commercial) line of credit unless green loans can be used to buy more green loans rights (what gives unique opportunities to rort the system).

In this case introducing trading instantly diminishes any significant gains which could come with zero interest loans. They are not zero-interest any more when traded.

The most likely outcome is that 90% will sell these rights instantly. This is what I did when I got a voucher for privatised state assets in Poland. Do you think that I would like to buy shares of a solar power plant on a zero % loan for $1500? What for? To earn $100 per year but at the same time to be kept liable for any rort committed by the actual power plant? I don’t care. $100 is the cost of 15 trips on the motorway to work. If it was $10000 and no liabilities I would be of course interested.

So what is this exercise needed for? To buy a social support for the idea of low-carbon energy production? Let’s better provide normal commercial loans with interest halved to companies willing to invest in green energy. There will be less hassle and a few hundred $ per person will be saved.

The key to the scheme is the compliance part. We can never stop some people trying to go against the spirit of any scheme but we can detect them and we can exclude them from the game.

The key to this is making the whole scheme voluntary – you do not have to get the rights if you do not want them and if you do accept them you sign up to obey the rules. Because it is voluntary that means we can exclude people if they break the rules. As it pays to stay in the game then that makes compliance highly likely.

Everyone can win including the existing polluters. We can all win because if you take away the interest costs then it is cheaper to generate clean energy than it is to generate polluting energy. This means it does not matter if people care about renewables or not. They will participate because they get something out of it.

The reason we charge interest on newly printed bank money is because the system is set up to ensure compliance and repayments of loan money. In other words I do not believe there is a great conspiracy of bankers to exploit others but the current system of generating money through loans backed by existing assets was set up to stop banks printing too much money. The current system is one where the issuer of the currency outsources the generation of the currency to the banks. To make sure they do not print too much money we set in place the fractional reserve limits and capital adequacy. Unfortunately the system allows loans themselves to be treated as capital for the purpose of guaranteeing another loan. This then leads to the spiralling of debt. It is that simple.

Rather than stop this system or try to regulate it to control it the other approach is to create a more attractive and safer way to outsource the printing of money. Zero interest loans for investments with repayments from earnings on the investments is a way to do it. Banks will find this approach a much easier way to make money (from transactions) and the population will like the handouts of rights to take out loans and we will get efficiencies from the building of new more efficient assets. We will soon find that debt on debt is not an attractive way of trying to make money compared to zero interest loans because debt on debt is a zero sum game but creating more efficient assets is a win win game.

I am making some progress. My strategy at this time is to make sure the idea is “attacked” as much as possible so your comments are most appreciated.

So far the main objections have been

1. People will try to rort the system.
2. It is too complicated for people to understand.

My answers to both these points are we can hide the details and make it easy for people to participate and we can detect rorters. I also know we can build it cheaply and economically because we have recently built a system with similar characteristics that is proving to be a commercial success.

What do you think of the following for a catch phrase?

“Zero Interest with Zero Emissions” or
“Zero Interest for Zero Emissions” or
“Zero Interest in Zero Emissions” or
……

Certainly George Soros would agree with you on the objective benefits of short-selling. But Dr Mahathir bin Mohamad wouldn’t.

“As far as the stock market is concerned, we know that players in the stock market can also destroy the stock market simply by short selling. And to short sell you don’t even need to have the shares. That is why we decided that we would stop that, and as a result, the market has recovered.”

http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/int_mahathirbinmohamad.html

“I know that derivatives are a “tool” with no real value. I know short selling is higher risk and can be manipulated more than long. Yet I don’t understand why short selling helps to “stabilize” the market.”

Short selling is crucial to providing liquidity and helping to correctly price assets.

It may be helpful to think of the underlying supply and demand relationships. Suppose there is a town that has a market for cotton. Cotton is brought in from the farms and sold in the market. Suppose the market price is too cheap — investors know that in the future, the supply of cotton will be too low relative to the demand. So they buy up cotton now and hold it. Of course there are storage costs. This has two effects: it raises the current price of cotton, giving an incentives to farmers to plant more to prevent the anticipated shortage from occurring. Next, it helps bring the present price of cotton closer to the future price. I.e. it helps smooth the price over time. And if you think that the current market is too volatile, just look at the volatility that followed the ban on short selling.

But the opposite situation can also occur. Suppose that there is a shortage of cotton. Everyone in the town panics, and the price of cotton sky-rockets. But the investors realize that this is a temporary affair, and that a cotton delivery will arrive in a week. So they short sell. They make an agreement to deliver cotton at the current prices, but provided that the delivery is delayed by one week. The effect of this is to lower the price of cotton, in anticipation of the future delivery. In exchange for that delay, they pay some interest — enough interest to compensate the cotton consumer for a 1 week absence of cotton. So if there is sufficient short selling, the price of cotton will drop to the price that would occur 1 week later, together with the costs needed to compensate the town for a 1 week absence of cotton. That is a good price adjustment allowed by the short sellers.

Of course, those who went “long”, planning to exploit the shortage of cotton will be angry with the short sellers for relieving the shortage and pushing prices lower. Those who go long counteract the effects of those who go short and vice versa, and so a market in which it is not possible to either go long or short will be unable to assign a correct price to anything.

If you believe that over the last few decades, the perennial problem with securities is that they were too cheap, that banks shares were too low relative to their fundamental value, then I guess you can argue that short sellers are too dominant. But, if you believe that the key problem is that securities were too expensive, and that bank shares were too high relative to their fundamental value, then you need to conclude that there has been a shortage of short sellers

In terms of derivatives being tools with “no value”, that is a difficult view to defend. It depends on whether you think that the ability to buy or sell something for a known price is worth paying for. If a gold miner discovers a large mine, but has no money to develop the resource, they will borrow money. It is difficult to borrow if you don’t know how much you will be able to sell the gold for. So you make an agreement to sell the gold for a fixed price during the next few years as you pay off the loan. That is a derivate agreement, as the gain or loss of the holder of the agreement will be determined by the difference between the spot price and the agreed upon price.

At the same time, someone needing to buy gold continuously for a few years may want to be assured of the fixed costs and will agree to pay a fixed price in the future. Both parties can benefit from this arrangement.

I watched your presentation and I agree that your proposals look serious.

However I believe the main issue is not the lack of capital to finance renewable sources of energy – it is the lack of political will.

People don’t care.

One issue which hasn’t been addressed in the presentation is the issue of depreciation of productive assets as for example photovoltaic cells may have a life span of 20-30 years. But this issue is rather marginal to the scheme and discussing it in a short presentation might be inappropriate.

To me the main problem would be the abuse of the scheme by the intermediaries. The idea of granting zero interest credit allocations to people is similar somehow to so-called voucher privatisation which was tried in Central Europe. Most of the people would instantly get rid of the allocations by selling / assigning the rights to corporate behemoths or to speculators.

“The outcome of voucher privatization (NIF), on the other hand, has been rather discouraging. The performance of the enterprises following this privatization track has systematically worsened.”

http://www.cipe.org/publications/ert/e32/e32_6.pdf

To me a combination of direct financing by the government of profit-seeking investors in renewable energy production, carbon taxes (not carbon trading but just taxes) or personal carbon allocations and possibly community-based schemes backed by the government could deliver the desired results. Not a single carrot but a few carrots and a few sticks.

But as I said before – I don’t believe people are ready to embrace any change in the society where “clean energy” or rather “a clean way of obtaining money” means this:

http://www.smh.com.au/lifestyle/people/lenders-at-fault-over-18m-debt-says-upton-baker-20091025-heok.html

“THE society doyenne Karin Upton Baker says lenders should never have let her owe them $18 million because they knew she was not earning enough to repay it.”

“In December 2006 Ms Upton Baker borrowed $5.8 million secured against the luxurious Elizabeth Bay apartment and, in June 2007, $11.3 million secured against four apartments overlooking Bondi Beach, developed by her husband, Gary Baker.

She is liable for $18 million, which includes interest, but argues the mortgages should be set aside because they are unjust.

Ms Upton Baker says that she was at a ”special disadvantage” because she was pressured by her husband into signing the loans and did not earn enough to repay them.”

Yes I agree. I will pressure my wife to pressure me to borrow 18 million in the name of our family cat to buy a few luxury houses. You won’t evict my cat, would you?

Here is something different. This is a “simple” mechanism to change the system in a way that will stabilise it. The idea is to make it cheaper to build a new facility that is more efficient in resource terms than it is to buy an old one that is less efficient.

At the moment it is much much more expensive to build a renewable energy plant than it is to buy a coal power plant because of interest rates on loans are much lower than expected equity returns on investing in new energy plants.

What if we turned this around so that it was financially cheaper to build new more efficient (in terms of green house gas emissions) than to buy or build new coal powered plants?

Here is the presentation I gave to the green institute on Saturday which describes a mechanism to make it financially cheaper to build new renewable plants than old ones. I should have labelled it “Zero Interest Loans for Zero Emissions”

http://www.slideshare.net/cscoxk/zero-interest-loans-for-energy-sustainability

I know that derivatives are a “tool” with no real value. I know short selling is higher risk and can be manipulated more than long. Yet I don’t understand why short selling helps to “stabilize” the market.

In any market activity there’s always insider trading and lots of other ways to manipulate it. And (especially with naked short selling) the abuse factor is even higher.

What am I missing here?