Archive for October, 2013

The future of education

There is a quiet revolution in academia underway that is growing exponentially and will decimate ‘The Anointed’ class very soon. It is called Massively Open Online Courses (MOOC). Two examples that I have personally used are Coursera and the excellent Khan Academy (See the TED talk by Sal Khan in the video above. A very worthwhile use of your next 20 min) . A single inspired teacher can give the lecture once, put it online and it never has to be done again. Or as Sal puts it, “If Isaac Newton had bothered to put his ideas up on YouTube, I wouldn’t have to”.

Now subjects like Chemistry, Medicine and Engineering will always require lab time to make the principles stick.

Comparative Gender Studies, not so much.

With the accelerating deflation of the Higher Education bubble in the US and the introduction of £9,000 tuition fees in the UK, more and more students will forego traditional universities for MOOCs.

Imagine an 18 year old student considering doing Economics at the LSE. The tuition fees over 3 years will come to £27,000 and accommodation and expenses near the same again. The online Distance Learning option costs £3,807 with invigilation fees and books maybe £1,200 more.

So do you choose to go to college for 3 years and come out £50k in debt, or spend maybe 4 years to do the exact same course, while holding down an entry level job and come out at the end debt free with exactly the same degree? The lack of a £50k noose around your neck will give you a lot more options to buy your first rung on the property ladder.

As Joseph Schumpeter put it: – “The process of Creative Destruction is the essential fact about capitalism”.

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Money given to banks is a LOAN

loan application

There has been a lot of controversy recently with the ‘Bail-in’ of the Cyprus banks. What this entailed was any deposits under €100,000 were fully protected, everything over this amount was discounted by 47.5% (for now), all shareholders and junior depositors were wiped out and all senior bond holders (i.e. French and German banks) were compensated 100%. This procedure was financed by a €10 Billion loan to the Cypriot government, to be repaid by the Cypriot people at roughly €12,500 for every man, woman and child in the country plus ongoing interest.

Now the fact is that this is an inversion of the internationally accepted hierarchy of rights on the insolvency of banks. In this agreed model the hierarchy should be as follows:-

  1. Depositors under €100,000 (to be made whole by a national deposit insurance scheme if capital remaining is insufficent)
  2. If any capital remains, deposits over €100,00 in proportion as to what is left in equity
  3. If any capital remains, Senior bond holders in proportion
  4. If any capital remains, Junior bond holders in proportion
  5. If any capital remains, other creditors in proportion
  6. If any capital remains, shareholders in proportion

The third place in the hierarchy has been pushed to the top and has taken all the remaining equity in the insolvent banks leaving ECB loans to cover both their shortfall and that of the under €100k depositors, partially cover the above €100k depositors and screw the rest, all at the expense of the Cypriot taxpayer, who will be paying off this loan for at least the next 20 years.

It is obvious that this deal was hammered out and forced down the throat of the Cypriot government by the ECB under severe pressure from the indebted French and German banks who engaged their wholly-in-the-pocket national politicians to lobby for them at the European level.

So national politicians, perceiving their self-interest in keeping this creeping Euro financial disaster from their own doorsteps by supporting their national banks, have forced a reversal of the standard norms in order to fully compensate their own banks at the expense of the Cypriot depositors and taxpayers.

This ‘bail-in’ model with reversed hierarchy has been quietly adopted by national governments around the world with no media scrutiny and zero public awareness.

So expect the Cyprus deal to be repeated in a country near you in the near future.

Now in My Ideal World™ the original hierarchy should prevail and the public should be fully informed of the actual position of their deposits at their local banks. Deposits are a loan to the bank as has been established in law for two centuries. If you put your money in a bank and expect interest, you have to accept some level of risk because there can be no profit without risk. Your bank is only able to pay you interest because it loans out your money to businesses and house buyers at a higher rate, keeping the difference as its profit. There is an inherent risk in this, as we have found out over the last five years.

Senior bond holders need to accept their place in this heirarchy and not  try to skew the system in their favor by lobbying through their in-house politicians, and the public need to inform themselves of the facts of the situation so that they are not bamboozeled by their bought-and-paid-for political class.

If you put your money in a sealed container and bury it at the end of the garden you will have no bank risk and you will also earn no interest, in fact your stash will lose value over time due to inflation.

Now, if it were up to me, I would create a higher level in the above hierarchy with level 0

0.  Current account holders who earn no interest and pay an annual fee for banking services

These top level customers should have the highest priority above all others, as they get no interest (in fact they pay for their banking services), and should, in turn, face the least risk.

Bottom line is that bank customers need to make themselves aware of the inherent risk they take on by LOANING their money to a bank, and divide their money between current and deposit accounts and multiple banks in order to mitigate their risk. This is not super-complicated and anyone with over the €100,000 savings level should be financially sophisticated enough to take on this relatively simple task.