The Finance 2.0 Manifesto  

The Harvard Business School has a post a "Finance 2.0" by Umair Haque looking at some necessary reforms to keep capitalism functioning - The Finance 2.0 Manifesto. It links to my post on locabucks in the section on micro-currencies, in yet another example of my failure to remain completely disreputable (though the publishing date was April 1, so maybe this is the HBR's idea of an April Fools joke).

Here are nine paths to igniting the next financial revolution.

Edge funds.

An edge fund is the opposite of a hedge fund. Where hedge funds are opaque, edge funds are transparent. Where hedge funds are closed, edge funds are open. Where hedge funds are run for near-term gains, edge funds are in it for the long run. Where hedge funds create artificial book value, edge funds create value that accrues to real people and society. Where hedge funds focus on long and short transactions, edge funds focus on relationships. Think Marketocracy on steroids.

Macro and microcurrencies.

A currency tied to national interests determined by a political elite? That's so 20th century 16th century. A better financial system needs better currencies. Finance 2,0 will be built on microcurrencies and macrocurrencies: currencies which operate hyperlocally and transnationally. Why? Because people shouldn't have to bear collective responsibility for bankers looting or regulators cahooting. In the 21st century, the quiet tyranny of economic collective responsibility is intellectually bankrupt: it is fundamentally unjust, deeply inefficient, and vastly value-destructive.

Social banks.

Despite what marketers tell you, banks do not exist to maximize profits. They exist to maximize the safety of deposits. We've been taken for a very expensive ride. Next-generation banks will be structured as social enterprises — because the incentives to safeguard deposits and reinvest profits for the common good perfectly converge to a dominant strategy for long-run value creation.

Fair markets.

Markets are free like a fish is a shark. Anyone can play — but only at the risk of being manipulated, looted, and defrauded by the deepest-pocketed. The anonymous arms-length transactions orthodox economics lionizes are, in practice, just a hyperefficient mechanism for front-running, predatory trading, and bid rigging. Next-generation markets aren't just free: they're fair. They are markets where information about reputation, reliability, and relationship thickness are hardwired into the DNA.

Stakeholder communities.

Institutional investors are so 20th century. Centralizing control over our biggest corporations in the hands of a bunch of old dudes asleep at the wheel was as good an idea as the spork: interesting in theory, useless in practice. Tomorrow's radical innovators are already updating corporate governance for the 21st century, by letting communities of stakeholders shape managerial decision-making. Think mega-Etsy.

Whisper bullhorns.

Why is trading such a great business? Because traders have access to info that you don't. Why can't everyone get in on the whisper circuit that powers prop desk profits? Because no radical innovator has taken on the challenge yet of amplifying the secretive whisper circuit into a blaring bullhorn. But imagine if the rumours that drive share prices up and down on trading desks were Twitterfied. The result would be a financial revolution: the market power Big Trading enjoys would vaporize faster than you can say "insider info."

Googlizing financial instruments.

What business is Wall Street really in? The business of hoarding information: to seek a so-called informational edge. Of course, markets don't work if everybody's hiding info — they only work when people are revealing it. Google can help me find a tennis racquet, Match can help me find a date, and Last.fm can help me find some tracks to rip — but who can help me find a better place to put my cash that effortlessly? No one. And that's a massive reason why we're stuck with a 1.0 financial economy.

Anti-ratings.

Your credit is rated mercilessly. But does anyone rate lenders — not to mention brokers, banks, and investors? Today's crisis would have been far less severe if consumers had access to knowledge about who was a trustworthy lender — and who was going to sell them the financial equivalent of a roadside bomb. Credit ratings alone cannot create more efficient financial markets — doing so requires better information about both buyers and sellers of every kind of financial product.

Open source modeling.

Every bank built the same models. Every bank built the same flawed models. Every bank built the same flawed models on similarly erroneous assumptions. How dumb is that? Incredibly. Unleashing the power of open source to vaporize this black hole of incompetence is going to be a tremendously powerful path to innovation. The peer review, voluntary contribution, and always-on negotiation at the heart of the open source model create powerful incentives for quality — which is exactly what the hare-brained quants at banks lacked.

Finance 1.0 cannot power growth 2.0.

Yesterday's finance cannot power tomorrow's prosperity. Bailouts, taxes, nationalization, regulation are what your discussions this week are focused on. These can limit the depth and intensity of the crash. But what they cannot do is build a radically more efficient, productive, and effective financial system.

That requires a better kind of finance altogether — one designed not merely to make the worst among us richer, but to make us all authentically, meaningfully wealthier. That's why finance 2.0 is the future.