[DRAFT] Preventing Financial Crises

[Imperium Anglorum]

Whereas financial crises happen, but diversifying assets and creating a system to prevent those crises from freezing up economic activity would help stop them from harming average people:

And whereas securitising debt increases liquidity in capital markets, transfers risk from risk-averse investors to willing buyers, and increases the supply of loanable funds, thereby speeding recoveries:

And whereas a single nation's assets lack the diversity to stop highly correlated movement in default rates:

Now, therefore, be it enacted by this most excellent World Assembly, as follows :—

1. Member nations shall allow the sale of secured and unsecured interest-bearing financial instruments, i.e. "base assets", to the Credit Securitisation Facility and other public investors. Member nations may make reasonable purchasing rules on those base assets unless they affect the Facility.
   
   
2. There shall be established a Credit Securitisation Facility, i.e. "the Facility", to tranche and securitise reasonably uncorrelated base assets. It will raise funds from the sale of securities it creates. It shall publicly document the components from which those securities are produced. All produced securities shall fulfil the most stringent reasonable transparency rules established by member nations or the Assembly in future legislation.
   
   1. The Facility may subcontract out the maintenance of its products to third parties. When it does so, those products must maintain their original uncorrelated character and posted coupons.
      
      
   2. The Facility may guarantee its products. It may use funds from its support programme to make those guarantees credible.
      
      
   3. The Facility shall produce public indices to provide information on current pricing practices for securities it produces and their component base assets.
3. The Facility shall create a liquidity support programme. It shall invest its net income in safe interest-bearing assets. If an illiquidity crisis threatens a member nation's financial system and the Facility has exhausted its loanable funds, it may borrow monies from the General Fund for this purpose.
   
   1. For a financial institution to be eligible for liquidity support, the institution must file public disclosures detailing:
      
      1. its owned properties and subsidiaries, its balance sheet, the balance sheets of its subsidiaries,
         
         
      2. risk factors to its business, currently on-going legal proceedings,
         
         
      3. documentation of its accounting procedures, and
         
         
      4. other data that the Facility believes useful in determining an institution's value.
      Institutions shall certify that their disclosures are truthful. The Facility may undertake any necessary and proper actions to ensure that institutional disclosures are accurate. Institutions must also have a history of and commitment to maintaining such disclosures before being eligible for support.
      
      
   2. If financial institutions require liquidity support, the Facility may extend such support, for limited times only, at its discretion. It will do so through secured loans or preferred share purchases. The Facility shall publicly report the quantity and details of all its liquidity actions. When providing liquidity support, the Facility shall secure its loans with proffered equity capital or illiquid assets, in this subsection, "collateral". The Facility shall govern:
      
      1. the proportion of the principle secured so that it is not onerous on or a subsidy for that institution and
         
         
      2. the value of that collateral at reasonable normal market rates.
   3. The Facility may not support what it believes to be truly insolvent institutions.
4. The Facility shall publicly release data it believes helpful and not sensitive for investors in valuing eligible institutions.

 

[Imperium Anglorum]

Would be happy to hear comment on the proposal above.

 

[TlomzKrano]

I'll give this a more comprehensive read over in the morning.

 

[El Fiji Grande]

Correct me if I'm wrong, but my read of this proposal suggests that The Facility is similar to the Federal Deposit Insurance Corporation (FDIC) except that it also provides a system of exchange for securities. I'll have to read it over in more detail after I've gotten some rest, but for now, consider my support tentative.

 

[Imperium Anglorum]

Correct me if I'm wrong, but my read of this proposal suggests that The Facility is similar to the Federal Deposit Insurance Corporation (FDIC) except that it also provides a system of exchange for securities. I'll have to read it over in more detail after I've gotten some rest, but for now, consider my support tentative.

I work at the FDIC. It's not. I have a separate proposal in fact which talks about doing similar FDIC-activities. If you want a really really long-winded explanation for why that's the case, I can provide it, but trust me when I say it isn't. If you want an explanation for why these two different proposals do different things and why separation is necessary, see here.

Probably the best way to look at this would be to see it as a cross between Fannie Mae, the New York Stock Exchange, and Treasury, all in one. I don't want to rely on government money, so I have to use a separate funding mechanism. Nor do I want to rely on Federal Reserve-esque monetary creation powers. The former could be seen poorly in the light of GA 17's prohibition on interference in internal taxation. The latter is something that the Assembly as a whole does not seem to have any appetite for.

 

[bowloftoast]

"Member nations shall allow the sale of secured and unsecured interest-bearing financial instruments..."
Legit question: Isn't 'shall' in this instance the same as 'should' in the other? Is this intended to be optional to nations or would it be mandatory?

I genuinely don't like the idea of any part of my socialist nation's economy being beholden to some neoliberal WA organization with an ability to offload it's responsibilities to 'third parties', which is essentially code for the private sector, elsewhere. The more murky the process becomes, the greater the likelihood that someone is going to game the system. Given the nature of the market you are describing, and what we have already seen can occur when debt gets consolidated, sold in bulk, and repayment of that debt bet against, this reads a bit like a recipe for disaster.
Maybe I'm missing something in the technobabble, but If nations are investing into this organization, or at least leveraging their assets, why wouldn't they simply be entitled to remove funds when they need to, without it being a loan?
Letting this organization handle nation's assets doesn't guarantee that its investments would be secure - define 'safe interest bearing assets' - any seemingly good investment can go bad in a heartbeat. What then?
Where is the clause guaranteeing a return of nation's investments at their full value, in the case where this whole scheme fails? Or is it just, oops, sorry?
A lot of this reads to me like a sort of NS IMF, and there are many irl examples of nations becoming outright debt slaves to the IMF, to the point where they have lost the ability to run their own economies, and with the IMF interfering with their sovereignty. There's a tendency here for the poorest nations to get exploited by this kind of structure, while the wealthiest and most invested in the fund gain power over them in a kind of financial imperialism.
I guess if you think the capitalism solves every problem, then this might seem like a good idea, but I see it as having few protections for nations, no guaranteed security or ROI, and a means towards consolidating the wealth of the multiverse in one somewhat risky place.

If my take on that is wrong, please let me know.

 

[Imperium Anglorum]

I have always interpreted the use of "shall" in any context except its negation (e.g. "shall not" meaning "may not") to be equivalent to "must". On this topic, people have used the word "shall" in the context of "The Crown shall appoint a Commissioner..." which courts have interpreted as "may". If I were a judge, I not have done so, and would have required the Crown to appoint such a person. This is something that actually came up in Europe's (the region) Commissioner elections, wherein I am required to put out a call for people to run. Someone once argued that my not doing so broke the law. I agreed that it did, and followed up with "But there aren't any damages to doing so".

I'm unclear with what you mean by nations investing. Nations are not forced to invest in these things, nor are they required to create them. Private investors would do that, although nations could choose to invest in them or create them.

The best example of what I mean by safe interest bearing asset is probably a US Treasury. There is a chance that the US could default on its debt. That chance is so low that it may as well be zero. Moreover, the purpose of securitisation is to reduce the impact of default on a revenue stream. The bonds held are not pari passu, rather, payments flow first to the top, which are then used to pay those in the first tranche.

At a more broad level, I'm unclear why anyone would set a standard such that they would only purchase income streams which are guaranteed to pay. There is nothing guaranteed to pay. If I purchase a US Treasury and there is then a nuclear holocaust, it's worthless. If I purchase gold and everyone else dies, it's also worthless. If I purchase gold and everyone only wants water rather than pieces of shiny metal, it's still worthless.

The first part about tranching securities is a funding mechanism. The second part about dealing with nations is the actual thing that the Facility does.

This scheme doesn't support nations, it supports financial institutions, many of which are multinationals. The fact they are multinationals creates a collective action and bandwagoning problem in that no one nation wants to shoulder the costs of dealing with them when they have problems. It also doesn't support just any financial institution, it solely supports financial institutions which have liquidity issues rather than those with more systematic problems meeting their obligations. The point of doing that is to restrict the spread of contagion inside and between member nations.

But about the IMF, I can almost certainly tell you that there has never been a time when the real world IMF has created debt slavery for any nation. The IMF consistently gives loans are below-market-rates to nations which accept them willingly due to the fact that not accepting them would cause worse problems. I think a better plan, to deal with severe moral hazard and the problems of bilateral foreign aid to dictatorships, is to dissolve the IMF and not help any nations suffering from those problems at all, but that seems overly harsh when nations start going bankrupt.