Friday, February 13, 2009

Innovative Solution for Solving Global Financial Crisis

A. Disintermediation of Banks :

Given that the age of the’' Information Society (with the Internet being our central resource that networks citizens and enterprises) is the Age of Disintermediation, a lot could be said for eliminating banks as they are intermediaries whose conversion process has broken down.

A key reason for the downward spiral we observe at present is that liquidity is absorbed at the intermediary level. Given the capacity of our Governments to electronically obtain our tax declarations and collect and disburse funds to those declaring, one would imagine that the same Governments could also provide capital directly where needed on a formula basis.

B.Disintermediation of inefficient Intermediaries

The demonic nature of the financial system and its links to interest rates as the means of capital allocation across capital classes is evident if you look at the "near zero" interest rate at the source, and the "near infinite" cost of capital for business, reflected in the "near zero" supply of funds for risk capital at all stages.

It means we have "near infinite" inefficiencies in the intermediaries of the financial system. As the basic supply of money becomes "near infinite", and the corresponding price "near zero", risk premiums apparently become "near infinite" , reducing supply of risk capital to "near zero".
This is a paradox that would not exist if we had changed the capital provisioning system and in particular removed the dysfunctional parts that are built around Credit.

No comments: