Futurismic

As the current financial crisis unfolds, I’ve been wondering how it will affect me as an individual in the future. Hamish McRae reckons it’ll be like it was in the sixties (but not in a good way ):

It is easier in a way to see the situation in a year or two’s time than it is to call the detail of the next few weeks. What we can see is a world where it will be much more difficult to borrow money.

For those who can remember, it will be more like the 1950s and 1960s. Then, if you wanted a mortgage, you had to have built up a deposit in the building society or bank that might lend you the money.

People would open an account with two or three societies and stick as much money as they could in each so that if one would not give them the loan they could try another.

Other interesting speculations on the future of banking can be found in Casino Capitalism, on the BBC’s iPlayer service, available until the 5th of October. One conclusion from that programme is that banks will become more like utility companies, and the idea that banks can be innovative businesses in their own right is wrong - banks should provide basic financial services based on sound risk management (see below).

It’s worth listening to. Also if you haven’t read Charles Stross’ thoughts on the banking crisis, go do so:

…banking is the art and science of risk management. (You have a pot of money. You want to use it to get more money.

Do you lend it to person A, who you figure has a 25% chance of defaulting on the loan but is willing to pay you 1% per month in interest, or person B, who has a 1% chance of defaulting but can only pay you 0.5% per month?

If you picked person B, congratulations: you’re a good banker. If you picked A, you’d better hope there’s a government hand-out in your future.)

[image from Odalaigh on flickr]

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Your employer is highly unlikely to be very impressed at finding there’s spyware on the computer you use for work … unless you work in investment banking or the stock market, that is. Because then they may have put it there themselves. [image by epicharmus]

Increasingly worried about the risk of rogue traders and insider deals causing all sorts of economic nastiness, banks and financial institutions are turning to sophisticated spying software to keep an eye on their employees. A number of other industries use similar precautions, too - we can expect our employee contracts to expand in sympathy as we become obliged to consent to being watched while we work.

As a side note, while it’s good to see the banks taking precautions and adopting the latest technological advances to make the economy more secure, I just don’t see how - in a business where $6 billion can be lost off the value of a company in less than an hour - it still takes five working days for a cheque to clear to my account. Is this what they mean by the “trickle-down economy”?

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That’s one of the reasonings in a Guardian article today entitled ‘Toxic Shock: how the banking industry created a global crisis’. With policymakers unsure about what to do, many regulators are starting to get tougher with their requirements, which will make credit less abundant. As much as $1 Trillion dollars could have been lost in the crisis, and that number could rise. In the short term, it’s likely to lead to difficulties in loans. In the longer term, reregulation and tighter lending standards will change the shape of the world economy.

That’s not to say the economy is totally without worth at the moment. Wired’s latest issue has a series of 9 articles on positive business trends in 2008, including open source software and ‘Instapreneurs’ that make their products with virtually no lead time in a manner very much like in Futurismic’s April short story, ‘Mallory’ by Leonard Richardson.

[via the Guardian and Wired, photo from I Can Haz Cheezburger via Shiny Things]

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With the sale of Bear Stearns for £2 a share on Sunday (it was worth £170 a share in April last year), the Credit Crunch claimed a high-profile casualty. But in the long run, what does a possible US and global recession bode, after things clear up? Some people think this may be the worst we get, others think there’s a fair few other banks and businesses looking shaky. However it continues, there’s no doubt that the markets are going to change following the collapse of a lot of mortage-based finance.

The crisis has been caused by an decrease in the enforcement on banking legislation. Without sufficient checks, financial companies offered loans to people who couldn’t afford it, then traded the loans like shares across the world economy. As lenders failed to pay up and defaulted, the companies who traded the paper behind the loans began to make losses and a lack of trust led to less liquidity, or money available for lending between firms. Bear Stearns was one of the companies most at risk, like Northern Rock here in the UK.

Many economists and analysts are starting to look at the repercussions of the credit crunch. Some say that the reduced interest rates by the Federal Reserve and Bank Of England will lead to inflation problems, especially with commodities like wheat, gold and oil recently at all-time highs. Others compare the crisis to other recessions around the world. Although Japan in the eighties and the Great Depression are scary comparisons to make, some say that Sweden in the early nineties is the best one to make, and a good example of how the Fed can get out of this situation: more regulation to clear that bad debt quickly.

But if we’re looking at ways to stimulate the economy, surely we should be looking at moving the focus away from the financial markets and ‘bubbles’? During the dotcom and housing bubbles, wages have stagnated and many have succumbed to borrowing large amounts to keep consuming. A possible solution: invest in new infrastructure for alternative energies, mass public transport and energy-efficient products. Jobs will be created to keep the economy afloat and the financial world could settle to a fairer and more balanced system.

[photo via Calculated Risk]

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Well, they are in Second Life, at least; Linden Lab, creators of the anarchic virtual world, have stepped in with a major change to the terms of service that bans individuals and organisations from running finance operations that offer “unsustainable interest”:

“Usually, we don’t step in the middle of Resident-to-Resident conduct – letting Residents decide how to act, live, or play in Second Life.

But these “banks” have brought unique and substantial risks to Second Life, and we feel it’s our duty to step in. Offering unsustainably high interest rates, they are in most cases doomed to collapse – leaving upset “depositors” with nothing to show for their investments. As these activities grow, they become more likely to lead to destabilization of the virtual economy.”

This move is doubtless triggered by the final collapse of SL Ponzi scheme bank Ginko Financial - though the threat of lawsuits from people who lose significant amounts of real-world money probably has a part to play as well.

Economist Robert Bloomfield is a little disappointed, as he saw the SL economy as an experimental control group for learning how real-world markets operate, and he wonders whether some of the stock exchanges will continue to operate - if the Linden Lab rules provide sufficient loopholes for them to do so.

Meanwhile, Ian Betteridge wonders if we’ll see real banks stepping into the breach. [Image by ChikaWatanabe]

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You may or may not have heard about the ‘bank run’ of panicking customers withdrawing their savings from beleaguered UK lending institution Northern Rock over the last few days. While the phenomenon of snowballing panic causing the initial problem to worsen is an old one, it has moved to populate the online world in parallel with the offline - so many customers are trying to access Northern Rock’s website at once that their servers can’t cope and return 404-page-not-found errors, adding to the impression of an institution in trouble. [Image from Getty, copied from BBC article]

As a side note, the Financial Times is predicting that this is the start of a rough period for finance on both sides of the pond - welcome to Crunch Week.

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Much like the early incarnations of the web itself, there are a few tried and tested ways of making money in Second Life: porn is one, of course, and another is financial confidence trickery. The jury is still out over whether Ginko Financial - a Second Life banking scheme that offered 60% (yes, sixty) interest on deposits - fits the latter category; what is certain is that, after a sudden rush of withdrawal requests, Ginko don’t have the liquid assets to give the money back … and they’re none too forthcoming about what exactly they’ve done with it all, either. Common consensus seems to label the whole thing as one huge ponzi scheme, but only time will tell … probably very little time, in fact.

There are other ways of making money in the metaverse, though, with new ones appearing or rising to prominence all the time. Maybe virtual property is a smart business investment for the near future. [Image by Tanya Ryno]

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