An Alternative to a “Trustee and Related Services for a Securitised Funding Structure”

The ACT government is seeking expressions of interest in supplying “Trustee and Related Services for a Securitised Funding Structure (SFS).” However, an alternative to this is Reciprocal Loans and Capital (RLC), which would not cost anything. With RLC, the government can administer it with a bookkeeping change in the debt instruments and assets they may securitise. They can negotiate with their existing suppliers or move the funds to suppliers, such as a community bank, willing to accept the bookkeeping changes.

Securitisation may make the government budget look better in the short term, but it will cost Canberreans in the longer term. RLC will provide Canberreans with deposit bank accounts with a 5% indexed return, a 30% reduction in existing mortgage payments, and lower electricity, water and sewerage prices. The government can introduce them incrementally and monitor and adjust them to achieve the desired goals.

Why Securitise?

Currently, the government hasn’t publicly specified any particular objectives for securitisation. However, should they require goals for the following reasons, RLC can accomplish them with the added advantage that they will benefit all Canberreans. At the same time, the government would save money and possibly reduce taxes.

Possible benefits to governments of securitisation are:

1. Diversification of funding sources: By securitising assets, a government can access a broader range of investors and diversify its funding sources. This can help reduce reliance on traditional borrowing methods, such as issuing bonds or taking loans from international financial institutions.
2. Lower borrowing costs: Securitised funding structures may offer lower costs than traditional financing methods. The pooled assets are often divided into tranches with varying risk levels, allowing investors to choose the level of risk they’re comfortable with. Higher-rated tranches may carry a lower interest rate, reducing the overall borrowing cost for the government.
3. Improved liquidity: Securitisation can help improve liquidity for the government by transforming illiquid assets (such as loans) into tradable securities. This can free up capital for the government and enable it to invest in other projects or repay existing debt.
4. Risk management: By securitising assets, the government transfers some of the credit risk associated with the underlying assets to the investors. This can help the government manage its exposure to potential losses in case of default.
5. Stimulating economic activity: Securitisation can promote economic growth by funding sectors that might have difficulty accessing credit through traditional channels. This can stimulate investment and job creation in those sectors.
6. Asset-backed policy implementation: In some cases, governments may use securitised funding structures to support specific policy objectives, such as affordable housing or infrastructure development. By pooling and securitising assets related to these objectives, the government can attract investment and promote the growth of these sectors.

The above are ways to assist the government in handling its debt and investment obligations with sources external to the community the government serves. The alternative is RLC, in which the government shares new Capital with the community created from community assets and funded through the community.

The following outlines RLC and how it reduces risk, stimulates economic activity, improves liquidity, lowers borrowing costs, and diversifies funding sources.

RLC is a financial concept that allows individuals to benefit from the profits generated by existing financial instruments. Often, citizens pay taxes and usage charges that contribute to these profits but receive no share of the profits in return. RLC offers a solution enabling end-users to participate in the profits generated from financing community assets.

Reciprocal Loans

If P is the loan amount outstanding, R is a repayment, and I is the interest owed, then for a Reciprocal Loan repayment,

P(new) = P(old) minus R minus half of I.

For a Regular Loan, the formula is

P(new) = P(old) minus R.

The following spreadsheet compares a Regular Loan with a Reciprocal Loan. In the example, the interest payments are about the same for the Reciprocal Loan, and the repayments are 40% or $4,000 less.

An interest payment is a profit or increase in Capital. Reciprocal Loans share the increase between the bank issuing the loan and the borrower who paid the interest to create the profit. If the bank loans deposits, then the profit is shared between the depositors and the borrowers.

The differences in Repayments and Interest depend on the length of time and how the interest is shared. The community of repayers can vary these values and use them to redistribute the new wealth created by the loans.

The same objective of repaying the loan with interest is achieved with fewer payments, increasing the productivity of creating and lending money. Much less money in circulation is needed to fund the same amount of investment. Governments will have money available to fund other infrastructure the community needs.

If it is done with housing, it will reduce home loan repayments by at least one-third for the same valued house.

Reciprocal Housing Loans

Governments can mandate that all government and housing loans are turned into Reciprocal Loans. That can be done for a fraction of the cost of hiring a financial organisation to set up and operate a securitised Funding Structure.

Canberrean investors will receive a 5% indexed return on their bank deposits. Canberrean home buyers will reduce their minimum monthly mortgage repayments by 34%, or for those who cannot afford 34%, it can drop to 50%. New home buyers will not need a deposit.

All repayments on Credit Cards or other loans will reduce the amount owing even if the interest payments exceed the repayment.

The reason Reciprocal Loans are superior for both lenders and borrowers is the sharing of profits from interest speeds up the movement of Capital, so the Capital is invested more often. Hence, there are more profits from the same amount of Capital. With regular loans, the profits do not move but accumulate in assets and low-interest accounts. Reciprocal Loans increase the productivity of Capital by using it more often.

Investing with Reciprocal Capital

Investors fund companies with the expectation of receiving a return on investment. This return typically comes from the profits generated by the sales of goods and services. When customers purchase goods, they pay the company more than it costs to produce them, creating a profit margin for the company. In today’s market, companies offer various methods of sharing profits with their customers, such as frequent flyer points, everyday rewards programs, or Stock-taking Sales.

Another potential way to share profits is to share the profit with each sale of goods and services using a method similar to Reciprocal Loans. This involves shareholders selling half of the profits as shares in the company as part of the payment for goods and services, allowing buyers to share in future profits. This approach, called Reciprocal Capital, can eliminate unnecessary transactions and promote the reinvestment of profits for increased productivity. It sets fair prices, even in a monopoly, and reduces the need for markets to set prices and taxes to redistribute profits. Reciprocal Capital has the potential to release underutilized money within existing economic systems.

Investing using Reciprocal Capital can be a beneficial strategy for government and quasi-government bodies. It allows existing Capital in infrastructure such as roads, hospitals, land, schools, dams, and energy distribution infrastructure to be reinvested without incurring additional finance charges. This means existing Capital can be used without the need for Securitised Funding Structures, which generate unnecessary expenses.

Reciprocal Loans and Capital Benefits

RLC Benefits to government:

1. Diversification of funding sources: New funding will come from Canberra residents and self-managed super funds. Existing sources can still participate.
2. Lower borrowing costs: Borrowing costs are lower because Capital moves rapidly and is more productive.
3. Improved liquidity: Capital moving rapidly gives greater liquidity.
4. Risk management: The risk is lower because the cost is lower.
5. Stimulating economic activity: RLC makes investing available to everyone and will stimulate economic activity because more static Capital is available.
6. Asset-backed policy implementation: The approach funds difficult-to-finance projects, including community facilities like libraries, meeting places, sports grounds, nature parks, and other investments to increase well-being.

Summary

The ACT Government can mandate RLC for all situations it is considering SFS. It will find that whatever goal it addresses with SFS will be addressed with RLC and increase the wealth of all Canberreans as they share in the new wealth generated from Community Assets. The losers are the promoters of Securitised Funding Structures.