 Thank you very much for giving me the chance to present my take on the Fogel initiative. I'm not going to vote on that either, unfortunately, but I'm fascinated by a country getting the chance to vote on these issues. So I'm trying to tell you a little bit about what my take on this is going to be. Let me start with a brief look at the data. So this is, you probably can't read it. I can't read it either really, but what you should see on the left-hand side here is money that is issued created by the Swiss National Bank, by the Central Bank. What you see on the right-hand side is money that we use, we as the general public. These two things are different, and that's really the starting value or the starting proposition, the starting observation for the Fogel initiative. So on the left-hand side, thanks, that's great, you see maybe a blue curve which is pretty much flat and then it's exploding around 2008, 2009 during the financial crisis, and thereafter, once the S&B tried to, or actually did impose a minimum floor visibility euro and the exchange rate. So this is base money. This is money created, issued by the Swiss National Bank. It's the legal tender. The red line is actually the bank notes, but most of it by now is not bank notes, but it's money that the banks hold in reserves at the Swiss National Bank and the liability side of the Swiss National Bank's balance sheet. In the old days, this part that the banks hold was pretty small, you see these two lines were basically the same. These days, the bank notes are the minor share of the central bank issued money. On the right-hand side, you see money that we use as a means of payment. There's cash, that's this purple curve down here, pretty small. The large share of that is deposits, essentially, right? You have at UBS, you have your transaction account. This is the money that we use for most of our payments and this is called M1. There's different monetary aggregates, whether you also include some term deposits and savings account, et cetera. You get larger aggregates. I guess the central one would probably be the green one, the M1. So what you see, what you observe is that if you go back in time, say here around 2000, we had about 200 billion in circulation as means of payment, but what the Swiss National Bank at the time had issued in terms of money was much less. The central bank money was a very small share of the money that we use for making transactions. Today, it's actually not much of a difference. If you compare M1 to total base money, this is still a little bit smaller, but it's not met much of a difference anymore. Why is this? Because these days, banks wanna hold a lot of reserves at the Swiss National Bank because financial crisis and many other things, right? And the interventions on the forex market. But the starting point of the initiative really is to say, this is the money that we use, but the Swiss National Bank typically has issued much less. Why is that? And is this a good idea? And that's the starting question really. Why is this an interesting question? Why could it be really problematic that we have central bank issued money being much less than the money that we actually use? And there's different arguments why this really could be a problem. Number one, credit binges is one of these words. A lot of asset price inflation typically coming also from the real estate side is related to mortgages. So credit creation by banks. Credit creation by banks goes hand in hand with money creation. Banks create deposits to a large extent when at the same time they create credit on the asset side of the balance sheet. So what that means is that whether you have asset price inflation or for that means other types of inflation on certain markets, asset markets, other markets could be totally beyond the control of the national bank if the ratio between the money that the central bank issued and the money that is actually used in transactions gets out of control. That's the notion that the central bank might actually lose control over money and therefore inflation, many other things. Bank runs is another thing. Typically we don't really care that much or maybe are not even aware of the fact that the money that we have on our account at UBS is not really true Swiss francs, right? But at some points people realize and then they get worried about the stability of the banks. They start to queue. They want to withdraw money from their accounts and at that point it becomes clear that UBS typically would not have enough cash to actually pay out. These are the bank runs. This is a problem because it could lead to situations in which otherwise solvent institutions collapse. There's huge social losses, economic losses attached to that. So then typically a central bank would intervene, provide the end of last resort that again has costs, there's deposit insurance, there's moral hazard involved with all of that. So that's a bad thing. If we can get away from that problem that would be an improvement. There's another issue when central banks issue money typically at least in the old days they didn't pay interest on that because we are willing to hold money or banks are willing to hold money at the Swiss National Bank without interest because this money provides liquidity services. It's super liquid, super safe assets. We are happy to hold that even if it doesn't pay interest rates. Now when we hold our money in our transaction account with UBS we also get paid pretty little interest even in normal times because to some extent we believe well this is also a transaction medium it's like a Swiss franc so we are happy to hold that even if it doesn't pay much interest. So you could argue that UBS is actually to some extent free writing on the notion that they can provide money that they can create money and there's a notion that they collect senior rich revenue in return they can actually issue liabilities without paying interest on those which is a bomb for the commercial banks and the question is is this a fair arrangement or should this senior rich revenue actually all go to the central bank because in the end we don't require interest because we think this is legal tender or something very close to legal tender. So all of these are ideas or at least hints that we could ask the question is this really the right arrangement? Is this a fair arrangement or should we change that? And the Folgate Initiative says we should change it essentially we should make sure that in a nutshell the green line is the same as the blue line. So there should be no other money than the money that the Swiss National Bank has issued. There's no right or there should be no right for commercial banks to also create money on top of the money that has been issued by the Swiss National Bank. That's mainly the argument. Why would that happen? So here's again in a nutshell the proposed chain of the stream. How would this happen? So this is where we are today. I of course I left out all the positions that are not going to be relevant. This is the balance sheet of the central bank, the commercial bank sector and the general public, say me and this will come later. So these days I have a deposit. I have a deposit account at UBS. It's a liability for UBS. It's an asset for me. I feel this is sort of money but it's not really money because it's not a liability of the Swiss National Bank. It's just a promise by UBS that if I want they will give me some Swiss francs but it's not a Swiss franc. That's just a promise, right? Whether they will actually when I need it, whether they'll actually be in a position to provide it is a different question. Sometimes they are, sometimes they are not. So here comes DX. On DX, this, sorry, the Swiss National Bank will provide a loan to the banks, to the banking sector. They will basically credit the banks with reserves. The banks will gain reserves. There will be more liabilities of the Swiss National Bank vis-à-vis the banking sector but at the same time, the banks will have a liability because they got a loan extended by the Swiss National Bank. The size of these reserves here in that very simple example would be the size of the deposit accounts that the banking sector has. At the same time, also at DX, the deposits and the reserves are transferred to these new fall-geld accounts. So they leave the balance sheet of the commercial banking sector and they get into a separate sort of legal entity which is not part of the balance sheet of UBS. So now I, as a depositor, I still have my assets as before but now they have turned from claims vis-à-vis UBS into claims that are fully backed by reserves. So this is basically as if I held directly true legal tender, true liabilities of the Swiss National Bank. And now I can write checks and transfer money and do kinds of things. And I might call these now not deposits but fall-geld, but in essence, at least according to my interpretation, this is what would happen on DX. Now the commercial banks, they're probably not super happy about that because they used to have liabilities vis-à-vis myself. Now they have liabilities vis-à-vis the SMB. How are they going to repay those? Over time, the loans that they have extended back in time, they will be repaid and eventually all these loans will be repaid now in true cash or in fall-gales. And then they will be able to also service their loans vis-à-vis the SMB. So over time, the stock of reserves of true SMB money will be reduced by the commercial banks servicing their loans vis-à-vis the SMB. So at the same time or over time then, the SMB will have, for some means, issue new reserves. Otherwise the central bank money or the money, the stock of money would shrink over time. So the proponents argue that there's different ways of doing that. One way is simply to inject new money, new fall-gales by transfers, essentially. That's like helicopter money these days. So the SMB would print money and would transfer those funds to the public sector or to each citizen or to the social insurance system or these kind of things. That's a different way of injecting money than we do today. And they also say to proponents that during a transition time or during emergency times, there could still be credit extension by the Swiss National Bank. So they could also inject money by giving credit to the banking sector. But this is not the main way through which they propose to inject funds into the economy. So that's in a nutshell, the proposal. What would be the consequences? There's a couple of consequences that are positive in my view. One, you remember one of the aims was to reduce credit binges, for example, to better control monetary aggregates in the economy. That would clearly be the case because it's only the Swiss National Bank that is able to create money if this works. But this has also drawbacks, disadvantages because you can think of many situations, many occurrences in which it's actually very difficult to supply the right, if you want, stock of money. Think of, I don't know, some special circumstances in one part of the country. Suddenly money demand goes up because there's lots of transactions needs. Maybe the S&B doesn't know about that. So either the interbank market is working perfectly and these funds are now supplied in the right way and very quickly. In the old days, the local banks would be able just to extend credit and create money in order to respond to this spike in money demand. Now in the new world, the money would have to come essentially from the S&B. It would have to change hands. I mean, if you want to have more money, somebody else will have to have less money. So there's much less elasticity in the supply of money in the new regime and that could be a problem. It could, for example, lead to more erratic price movements in the economy. Another advantage achieved, I guess, would be that there's much more power with the S&B because the S&B is now really in charge in supplying money, but there's also by the same token a much larger risk that these guys do mistakes and these are humans as we are, right? And they do make mistakes. There's lots of discussion these days that we actually feel central banks have too much power. So this would really go just in the opposite direction. It would give Thomas Jordan and friends even more power and it's not clear, but it's necessarily a good idea. There would be no more traditional bank runs. True, at least there's no reason for anybody to run anymore because all this stuff here is perfectly safe and liquid. There's no reason to worry that somebody else could come first and withdraw before you because this is 100% backed by reserves, no reason to run. That's true, but when we think back of the last financial crisis, this traditional bank run wasn't really an issue to start with, right? Who ran in those days were large money market fans, short-term investors, but not depositors and these guys could continue to run also the new system. So there's no real improvement on that side. More seniority for the S&B, again, that's going to be true. In the new world, all the money that would be created would be injected by the S&B and as the main channel of doing this, there would be transfers essentially to us, to the households or to the government or to the social insurance system. So this is really seniority that is directly distributed to the public sector. So indeed, this seniority stays with the public sector or whatever the central bank wants to use it for, no longer with the commercial banks, but by the same token, you can imagine that there would be lots of political pressure exactly for that reason, right? If I get a check every year about a thousand Swiss francs because that's what it amounts to, to increase the money supply, I would probably also be favorable of getting 1500 per year, right? Or maybe 2000. Social security systems are in disarray. There's going to be lots of problems in the future. Why not have a little bit higher money growth rate in order to fund the social security system, right? These kind of questions would necessarily come up. There's trade-offs. Do we want to have more money growth and therefore inflation? Do we want to rescue RFA or not? So there's new issues that would be present in the political discussion, not necessarily positive ones. I have like 10 minutes or something. Okay, so my assessment, if you were to ask me what is my assessment, could this work? I think it could work in theory in the sense that there's some issues where people believe this doesn't even add up and I'm not sure. I think it would actually add up. It would certainly mean a lot of changes in the banking sector. For example, if you think about the typical balance sheet of a bank, these guys would now become true intermediaries. So they would exactly be doing what most people actually, if you ask them, think that banks are doing. What most people think that banks are doing is that they take in my savings, my Swiss francs, and then they look for somebody else and then they lend these savings to somebody else. That's exactly what banks would then be doing in that new world. That's not what they're doing these days because these days, if they want to give credit to somebody, they don't need to find somebody like me first to deposit money, but they simply extend their asset side and the liability side of the balance sheet. They can create deposits and at the same time they credit them. So they have a loan on their asset side, they have deposits on their liability side and that's the way they can create money. They do not only intermediate funds that they get in and then they hand them out, but they create money. In the new world, they would truly intermediate funds. So there would be a total separation in this new world between intermediation services that would stay with the banking sector and the creation of means of payment that would now be exclusively with the Swiss National Bank. There would be a separation of intermediation and the payment system also. And that would, this severance of the link between these two things would provide some financial stability but it would also entail some of the disadvantages that I mentioned before. Would we get problems funding businesses? No, not necessarily. Because all it means is that the balance sheet of the banks would take a different structure. There would be no more deposits up here. You would have more long-term funding instead. So if you really want to invest money, you could no longer do this in a deposit account. But if you really wanna invest money, then you would do this through a long-term, whatever, a bond or you would have a long-term savings account or something like this, right? You would have to commit funds for a certain period of time to the bank and then the bank could use these funds and invest them in some project or in assets or whatever they want to do. So there's no direct notion in which this would undermine funding for small and medium-sized enterprises, I believe, at least in principle there is no. Does it make sense to do it? Although in theory, I think it could work if you believe in that. I don't think it really makes sense to do it because the plus sides, you could get differently and the minus sides are very major and significant in my view. So if you really care about money creation, inside money creation by the banking sector and you want to avoid that, there's different means to do that. In the old days, for example, what central banks used quite extensively is the minimum reserve requirement. Minimum reserve requirement says that as a bank that has some deposits, you're required to have at least x% of these deposits invested in cash or sitting in cash on your balance sheet. The proposal says this should be 100% essentially. You can think of that as a 100% reserve requirement. This is as big as this one. In the old days, we had something like one, two, maybe 5%. If you feel that we should go in that direction, why not use this old instrument and make it 20% or 30% or whatever is the right number? But why put it to 100%? In economics, we believe that there are certain socially valuable services that are being provided by banks ensuring you against liquidity shocks. So that's what a deposit account essentially does. It allows you to deposit money to earn some interest on that and to withdraw it when you really need it. Typically, we don't need it all the time. So some of us need it and they withdraw. Some other people don't need it, they don't withdraw. So that's a socially useful arrangement if liquidity is scarce because it helps us to reduce the total liquidity needs. And therefore this you would completely destroy whether you wanna do that. It's not obvious why you wanna do it. Certainly there are costs in the present system. For example, a bank run, but there's also clearly social benefits of the current arrangement. Why do you wanna completely go one way rather than do something intermediate? So nevertheless, I think in theory this could work but would it work in practice? And there are much more skeptical actually because when you think back about the history of finance, you see that whenever you do grant projects, new regulation, eventually these things don't work out because the financial sector finds way around it. And I'm very much convinced that the same would happen here. We are used now for decades, actually for centuries to believe that a deposit account at a commercial bank is a very useful instrument to satisfy all liquidity needs. And it's pretty safe because in the end, society in the central bank will always bail us out if it's needed. So now if at day zero, if at day X, we would change regime and go to this new world here advocated by the proponents, my sense is that people would probably be unhappy and in the short run at least, they would try to find ways around that. Remember, I didn't mention that but it's of course very important. These new accounts here, they would not pay any interest, right? Because if you have to hold cash essentially or reserves at the session national bank, unless these reserves pay interest, there's nothing from which you could pay interest on this deposit. Essentially you would have to pay fees to whoever is managing these accounts. So rather than getting say half a percent in normal times on your deposit account, you might maybe have to pay half a percent or one percent in order to cover the fees that the payment services require. So would people accept that? Or would they talk to their local banker and say, you know, I need to buy a house from my friend and they would actually be willing to accept, I don't know, a share of my mutual fund as a payment rather than Swiss francs or maybe part of my euros that I have on my some other account. If enough people were to coordinate on some different means of payment, what would happen? The whole purpose of the initiative would be undermined because the Swiss national bank would no longer control the money supply if everybody starts to use euros or money market funds or something else as a means of payment. Actually, in the extreme case, they would lose even more control of monetary aggregates than they have now. So it could actually totally backfire. If this happens in a very abrupt way, and with too much force exerted by the Swiss national bank. So I think, in short, enforcement is key and I'm very doubtful whether enforcement could actually work under this new regime, at least in the short run. So it could actually backfire. At the same time, I do believe that the proponents of this initiative have something which really points in the right direction. Because if you think about what this in my sense, the underlying problem of the current monetary regime is, is that there is a certain cognitive dissonance in society about what it means to hold deposits. We believe that when we have a deposit account, we really hold claims on Swiss francs, but we don't. I tried to show that before. This money is not money issued by the Swiss national bank. Nevertheless, in almost all cases, you actually do get Swiss francs if you need to. And if you get huge turmoil and crisis, the Swiss national bank will actually stand ready, provide land of last resort, support, they'll bail out account holders, et cetera, et cetera. So do we want to have this cognitive dissonance or do we want to have a more robust system in which we really hold Swiss francs and are willing to actually take the consequences of that? I think one way to get into a more robust system would be to do half of what the Swiss Guild of the Folger Initiative actually proposes, which is to open the balance sheet of the Swiss national bank to the general public and indeed give all of us the possibility to hold reserves if you want that, either directly, I think directly is probably a bad idea in terms of operations, but through vehicles like that, if you really want to hold reserves, let's give people a chance to do that. And maybe there's 20% or so of the population which values the absolute security and safety and the equity to hold reserves and they're willing to go that way. Whoever does it, we should be very happy about because there's somebody less to be bailed out if things go wrong. I think that this would be a step forward because it would not be linked to enforcement problems. You wouldn't have to force anybody and those people that don't want to do, they wouldn't have a reason to try to circumvent and rig the system. Over time, and that's a little bit of the feedback I've gotten so far, there's certainly a significant part of the population and also of asset managers, of money managers that think there's value in that. I think I would prefer to hold reserves even if I have to sacrifice half a percent of return because I have a truly liquid and safe asset and my customers actually would appreciate that. If you get that and if there is a social consensus being built in that direction, then over time more and more people would do that. We wouldn't have to force anybody in that direction but there would be by conviction and by understanding what it means, more and more people hopefully would do that. And we would, as I said, we would not have to deal with these enforcement problems with this circumvention and we would eventually get to a situation, I think, I hope, in which the few people that would still stick to deposits vis-a-vis UBS, they we could afford actually to let fall if things really go badly. Then we would be in a situation in which there is now a consensus in society and there is a general understanding in society that if you want to have perfectly safe liquid means of payment, then you have this option, so take it. But the few percent that still want to pay, that want to get some interest on the deposits, they want to be a little bit riskier in their investment and their liquid investment, you do it, you stick to UBS and UBS can offer these deposit accounts but then you also have to bear the consequences of this and if this is just 10 or 20% of the population, there's much less of this political pressure exposed to bail these people out if things really go badly. So that's why I think half of the proposition I really like, I think there is an issue, things are not optimal in the current monetary regime, it's very hard to solve it because the democracy, governments and the central bank always have an incentive to bail out exposed, it's very costly politically not to do that. So let's move in the direction where these exposed incentives become a little bit weaker and provide those people at least that are willing to go along the means to do so and hope that many of the people will jump on board and follow that road. To do it on one day and to force everybody to be it and to follow this new, totally new regime I think would not be incentive compatible. I think people would find ways around it and it could actually totally backfire. Thank you very much. Dirk for explaining the initiative how it would work and also doing the very interesting analysis and coming up with the suggestions. Now we will go to the webcast with Ron and afterwards we'll go to the questions. Thank you. Thanks for having me, I appreciate it. Glad to be here. In my presentation I'm gonna talk a little bit about the history of Swiss banking, the history of gold and how it was used to back the franc over time. I'll also talk about the Swiss National Bank's balance sheet and how they've managed it over time and how that's changed and gone through different regime changes at various points in time. Now touch on the Chicago plan as well as the Genesis for the Volga initiative as well as its intellectual parent, the positive money folks in the UK and what they've written about and as well as my interpretation of what I think these things are and what they mean. And ultimately I'll talk about what risks pretends for the markets as it relates to this going forward. So if you look back at the expansive history over the last 55 years or so, you'll see that the Swiss had their official gold holdings back their monetary base at various percentages at points in time. So going back to the early part of the 20th century, you saw them have gold somewhere between 40% and 20% over time and then during the post Bretton Woods era, you saw the amount of gold that they held ramp up dramatically as many investors saw the safety and protection of the Swiss banking market. And so as they had that strong market behind them you can see that the amount of gold backing their currency was substantial and increased to approximately 180% at one point in time. And now you can see that's fallen off to less than 10%. And so it's been a really dramatic turn of events for the country again over a long period of time. You can see on the right hand scale, we've got charted the Swiss franc relative to the US dollar over time. So you can also see at what points in time when their currency was strong or weak relative to the dollar. And of course for most of that period, it was strengthening. And so that's an interesting background for what we're about to talk about. Looking at the Swiss national bank, primarily over time they've held two assets. On the one side of the history, they were primarily in gold and more recent history that have been primarily in foreign investments or FX. And you can see that all changed when the Bretton Woods system was dropped in 1971. So you can see that there's been a radical departure from the way things have been done. And so there's very little in terms of tangible assets backing the currency at this point. And so that's been a market change from the past. So now let's talk about the Chicago plan. Coming out of the Great Depression, economists Irving Fisher and Henry Simons and others participated in something they call the Chicago plan, which was they were looking at the Great Depression and trying to figure out a way to stop all these bank runs from happening. And what they came up with was a system where they would force banks to back their deposits with government-issued reserves, excuse me. The banks would then borrow from the treasury in order to make their loans. So the primary source of funds would be the treasury. The government would set nominal interest rates paid on reserves at a real rate lower than the growth of the economy. So they would arbitrarily select a low real rate of return. And they would also fix spreads in the marketplace. This is a plan that gained a lot of notoriety in the academic community, but really didn't make its way out of that academic community really until recently in 2011 when the IMF published a paper talking about revisiting the Chicago plan. And that since rejuvenated the interests and efforts around this topic. And that seems to be part of the impetus behind the Volgale initiatives. And so if you look at the objectives of the people backing Volgale, it seems to have very noble intentions. If you look at some of their primary objectives, they're trying to separate cash savings and payments from the lending functions. So obviously the current system works where people make deposits in banks and it ends up rolling through the credit system to expand the money supply. And so because it's fractional reserve banking, that would be a source of leverage and a source of systemic risk in the system. So they're targeting that with the Volgale initiative. And so ultimately their objective is to create a stable money supply to keep the value of the dollar constant and protect the system. They also wanna reduce the burden of personal and household and government debt to realign risk with reward and to create a structure that allows banks to fail. And again, many of these things are laudable goals that I'm a favor of, but the plan lacks a lot in specifics. And they've in fact said that they're gonna leave many of the details of the Volgale plan to legislators. So there isn't a lot of of hard evidence that we can sink our teeth into. So we're gonna have to talk in broad strokes. One of the things that they have done though is they've cited the work of the positive money folks in the UK who have come up with a framework for thinking about just a sort of thing, a full money initiative where reserves are fully back. And some of the arguments that they make in their book Modernizing Money is talking about creating where banks create deposits. So a lot of times we think of consumers creating deposits by showing up at the bank, but they argue that banks themselves actually are the ones creating deposits when they make loans. So it's kind of a reversal of the status quo. In addition to that, they also argue that the demand for credit will always be high, citing insufficient wealth, speculation and undisclosed legal incentives. So the current lending directed toward non-productive investment. So they want the credit markets to focus only on productive investment and to minimize non-productive investments such as credit cards. And lastly, they've outlined a transition to go from where we are today to something in the future where they'll end up with money creation being switched today when the plan will be enacted. And then longer term, there'd be a transition to work off the hangover of debt. Again, all these things sound very positive if they can do it, but as always, it doubles in the details. So as you start getting immersed in what they're talking about, they've made a number of what I believe are troubling claims. So the first thing that they said, banks create deposits, well, if you've ever owned and followed banks in the banking industry, pretty quickly discovered that they need to finance every ounce of loans that they make through some third party sources. So it's not clear to me that that would be the case. The assets and liabilities come together at the same time when that's created or very close to the same time. So to choose one side or the others, I think arbitrary and specious. If money creation moved into government hands, it could make millions to pay for vital services. This is a claim that also is unsubstantiated. So if the government would make millions from that, then the private sector or the banking sector, rather would make millions from it now. And that's not how they make their money. They make their money off of spreads. So it spreads in fees. And so it's not clear to me exactly what they're referring to, how the government could somehow adopt the entirety of the money creation process and be able to somehow finance all this. In addition to all that, they've talked about banks to have incentives which operators now incentives when it comes to money creation. So that by pursuing profits, banks certainly can do that. So I think that's a valid claim that they make. In addition to that, the burden of debt becomes too high on borrowers. They default by putting insolvency of their banks at risk. This is of course always a problem. And so whenever you've got the threat of default hanging over the credit system, that certainly could put a bank at risk. And that would be true with volgale or without volgale. So whenever you've got credit and leverage combined, that's a risk that's always present. And so I think that case is again overstated. Another claim that they made that I wanna address on, I won't touch on all these, but another claim that I wanted to address is the claim that there's no hope of living in a stable economy while the money supply depends entirely on the lending activities of banks that are chasing short-term profits. So if that were true, if we can't have a stable economy, with that, they seem to be implying that in a volgale world, everything would be stable and simple. And as I'll demonstrate in a moment, that's never going to be the case. It's not possible. And so a lot of the claims that they are making, underlying this volgale initiative seem to be things that I don't think we'll stand to test the time. So if you look at the way the banking business works, you've got a number of different groups of players. One of them is commercial banks. And they're typically comprised of, the balance sheet is typically comprised of long-term illiquid assets, such as mortgages and commercial loans and so forth. On the liability side of their balance sheet, they've got sticky deposits, short-term and medium-term loans and other sources of funds. Another primary set of players in the markets are investment banks. And their balance sheets are typically comprised of liquid sovereign corporate and structured credit. And their liabilities are typically short-term, wholesale, commercial paper, et cetera, things like that. The financial services industry, the rest of the financial services industry, organizations like insurance companies, hedge funds, plan sponsors, and they typically have very long-term liabilities funding their business. And so when all those three come together, you get shadow banking. And so the shadow banking can be stable or it can be unstable. So if you're combining short-term, unstable sources of funding with long-term illiquid, unstable assets, you get the potential for crises. But where other financial services come in, they have stable long-term predictable sources of funding and they can invest in a wider array of assets because of that. And so it's not clear if the commercial banking structure was changed and all the lending function went to the government and the currency was fully backed and held in central bank accounts that the lending function wouldn't be pushed into the shadow banking sector. And the investment banks and other financial services companies would expand their role in banking. And so you'd have perhaps a net effect of zero on overall financial stability which will simply be displaced. So another statement that they make a lot is that the Volgeld initiative would potentially reduce systemic risk. And by implication, they suggest that the fact that the reserves in banks are fully backed would prevent bank runs. But we know from the 2008 crisis that you had bank runs in the shadow banking sector. So you saw runs in the asset-backed markets. You saw them in commercial paper markets and money markets. So you saw these other non-traditional sources of funding experience runs from investors. And so really you got to take a much broader look at what's going on in the financial markets and lending activities in particular and not just within the banks if you're going to argue for stability or instability from these changes. So there's three key sources of instability in markets and they're illustrated here, which is leverage, which is the more obvious one. But then there's interdependence, which is defined in part by cross ownership of securities and the like. And then you've also got buffers in the system. So the buffers in the system are things like the bank capital ratios. So the amount of capital that the bank carries or it's the down payment that people put on a house for a mortgage or the equity that's built up in the system. So there's lots of sources for these buffers and between corporate policy, banking policy, personal policy and government policy, there's lots of ways that these things can change over time for the better or for the worse. And the Volgale initiative is largely silent on that. So I would expect the market to react in some way across this triangle of leverage buffers and interdependence such that the level of risk would simply be shifted somewhere in the system other than the commercial banking sector. So could we have bank runs in the Volgale world? So I would argue yes. And the reason being, if you look at the banking system, you know, sort of a generic asset liability structure for a bank before the system, versus one after the system, if you look at the cash reserves in green, you'll see that it grows so that they have to match the deposits in the bank with cash or some sort of cash reserves. And that would be a big change from a status quo, but the other sources of financing of the credit function throughout the economy, throughout the banking system, it's not clear exactly what that would look like. And certainly they could continue getting sources of funds from third party sources that would be very interested in the quality and performance of the assets. And so, you know, as we saw again in the crisis of OA, we saw that those sort of funding mechanisms dry up and evaporate. And so it's not at all clear to me that even banks themselves would be immune to runs in that environment. So they've got to think about this and I think a broader context. So my last slide here in all this stuff brings up a very fundamental discussion of what credit is and what its role is in the economy. And one of the things that the Vogel folks site is at least the positive money folks site and the book Modernizing Money, they dedicated a section of it to Heimann Minsky's work about stability leading to instability. And of course, that's probably true. And there's certainly lots of opportunities for us to discuss and debate and improve the way things are currently done. But they intimate that in the credit markets, credit is channeled inappropriately and that the banking system tends to favor stable borrowers and higher quality credit, so to speak. And that's natural because the whole credit function works on the basis of the perception of risk and the realities of risk and collateral backing that. So if credit was extended on the basis of collateral, it's there to reduce risk. And if credit is extended with buffers, they're there to protect the lender, which reduces risk. And if credit is further focused on the quality of the borrower, again, it's there to reduce risk and protect the lender. And so these functions of credit are there for a reason. And if that credit function is somehow subsumed into the government, then you end up with a government that is ignoring these things. And if they are ignoring these things, then by definition, they're separating risk from award. And what that ultimately means is you have a long term misallocation of capital. And that could be substantial over time, depending on how egregious these things are. Again, we don't have details. We don't have any sort of thing that would spell out exactly how these things might function. But it seems to me to be a problem. And you need to maintain that fundamental relationship between risk and award in order for the credit markets to function. So I like a number of the things that the Evolve folks are identifying and talking about. But I feel like they've diagnosed many of the problems and misdiagnosed the solution. Thank you. We have Ron online. All right, hi, Ron. Hi, can you hear me? Ready? So we have taken questions by cards here, which I think what's interesting about it, there's a couple of questions here about clarification. And then most of the questions are more questions than are other suggestions about how we might solve some of the problems people brought up. So I think it would be interesting to see that there's a lot of creativity out there. Before we get to the bigger discussion about what else could solve the problem, maybe we could clarify two things. Probably the questions are best to you. What's the timeline for the vote, for the initiative? As far as I know, this is not going to happen next year, but probably in 2018, the government has said they don't like the idea. So it's probably speeding things up a little bit, but I guess this is gonna be 2018. Okay, and then also a piece of clarification or a question for your suggestion that people could deposit money directly at the central bank. If you make a payment from a full account to a normal account, what would the exchange rate be? In other words, would it be different exchange rates? The example here is with the TAR and TAF, the South African. Yeah, potentially, yes. Certainly, if I had money, if I had reserves, claims on reserves, I would not be willing to exchange them one-to-one against UBS money. And then another question, is your proposal, I believe it says, harking back to the competition of private monies from Hayek? No, I think that's different. I mean, the Hayekian idea is that we shouldn't trust the central banks, right? I mean, we should have many different providers. Well, maybe it's related, of course. We should have many different providers of central bank and there should, of money, and there should be not one privileged supplier of central bank, of means of payment. So I mean, all this discussion here is conditional on, we wanna stick to some fiat money system. There's no discussion about that here. We stick to that. Conditional on this, if we wanna stick to the fiat money system, that is the central bank issues, pieces of paper and we use them because for some reason we believe they're valuable. Conditional on that, let's make sure that only the central bank can issue these pieces of paper. That's the proposition. It's not the proposition of Hayek that we have a central bank issuing pieces of paper. Some other guys do the same and then let's see which pieces of paper the market values most and these guys will survive and the others will not. So that's different. Okay, I mean, maybe then I would ask both of you to comment on this because that question came up also and asking about couldn't oligarchy basically have central banks work instead of just having one central bank you have three to four producers of money with this. I mean, at all address the issue. Well, if you don't mind, I'll jump in with my take on that. I think the Hayekian approach could potentially work. If you go back 150 years or so in the United States, there were many issuers of currency throughout the United States and there was no central bank at that time. And one of the biggest problems at that time was the access to information. So if you had your deposits at a bank or a general store or whatever that issued its own currency, the farther you got physically away from that bank in that location, the more of a discount you had to make at the next bank when you want to redeem the value of that. So today, now we're 150 years later, the internet, all that, the price of information, the cost of information has fallen so much, I think that's no longer a barrier and you would be able to determine if your banking account was in New York City and you went traveling to North Carolina, I think you could deposit that money in a bank in North Carolina in a sufficient way that you'd be able to get the information you needed to verify whether or not it was some money at that particular location. So in a private system, private enterprise could potentially build up around that that would facilitate consumers making those choices. So I personally think that that would be a better alternative and suffer from fewer consequences than the current system of monopolized money. Do you have any comments, nothing to add? No, I mean, there's certainly lots of debate about that. People are more on the libertarian side of things that would perfectly, I think, subscribe to that view and there's people on the other side of the spectrum that would not. Okay. Here I think is a little bit of a devil's advocate point that says, you know, if we're worried about the safety of the money, we can put our cash in a safety deposit box. I mean, don't we already have the ability to control what happens with our real money if we want to? Yeah, absolutely, I mean, that's true. The thing is, and that's another argument I think in favor of the proposition in principle, you cannot use money in your safety deposit box for many purposes. If you wanna buy a house, even in Switzerland, you principally cannot do that anymore in cash, right? You basically have to have some electronic money to do that. If you live in Italy or in Germany or in France, as soon as you wanna go about 500 euros or 1,000 euros, already it becomes impossible or at least it's legal to use cash for that. So today, legal tender has really turned into some, it's an empty world basically because the legal tender is pretty much useless for many transaction purposes. So I think just for that reason, I think there is a big plus in the idea to give the general public access to true electronic money, I mean, to true base money issued by the central bank, electronic money that can be used for all these kinds of transactions. So money in the world, cash, isn't that super useful anymore? You simply cannot use it for any purposes. Well, the problem with money in the vault also is that if you were to put it in the vault for a long period of time, just through the process of inflation, the value of that would be deflated over time. So you might be able to put it in the vault, you put a $10 in, you can pull $10 out some period of time later, but it won't buy as many donuts. So you gotta deal with the reality that it's not as valuable. Another suggestion is how about forcing the banks to match maturity of assets and loans? As a solution to the problem instead. Just doing this by itself, I think would not fully address the concerns by the proponents. I mean, there's different ways of matching maturities. For example, if you, I mean, what does it mean? What is, what would you use to match the maturity of a deposit? The maturity of a deposit is overnight, basically zero. So that would mean you need to have cash in your vault, right? So basically, we would be back to that system. Maybe you could argue that there's some other asset, which is in principle super liquid or it's maturing immediately, but I don't really can think of anything beyond cash that would serve that role. So maybe it boils down to the same thing. Certainly for the other positions in the balance sheet of the government, the proposal would not require that, right? I mean, you would have equity, for example, on the liability side, which maturity obviously is longer than some of the assets that would still be on the balance sheet of the bank. So it would certainly not be identical in terms of the consequences. Any comment from you, Ron? Yeah, I think if you were to pursue maturity transformation by matching or immunizing the liability in asset flows, I think you would end up having to pay a trade-off somewhere and probably what that would mean is more leverage. So if you're gonna reduce the spread income that the bank earns on the one hand, they probably have to reduce the equity on the other so that they could earn a fair return. Okay, and how about can the current system work without too big to fail entities? In other words, is that not just a regulation that's trying to address the same issue? I think these are in principle different issues, right? I mean, you can think of a bank in the foregold world that fails, right? That becomes insolvent, absolutely. In particular, these guys will not have bank round problems of the old sort, as we both, I think, agree, but these banks become insolvent without any problem, right? I mean, you have, even if they're 100%, well, if they're 99% equity funded and 1% they have debt, then they can become insolvent if they're just to lose all their assets. So there's no change in that dimension. Insolvency and illiquidity are different things and this initiative really addresses the illiquidity side much more than the insolvency side. Yeah, I would agree with Dirk on that. I think that having too big to fail pulled into this discussion, I think Api skates the question on the volgeld money. Are the too big to fail issue is perhaps better addressed by breaking up the banks and having some sort of cap size on their assets? And then maybe a question about the volgeld proposal. If there was the case that it came to be, what would be the control mechanism to govern the central bank to maximize effective utility? Effective utility being... I'm not sure that came from someone in the audience and someone want to... So if the issue is that how do we control the central bank to behave in the general interest or something rather than special interest groups, I don't... So I think it's... I don't know. I think there's lots of issues there, right? I mean, first of all, who do you decide you want to transfer this money to, right? If you give it to the federal government, maybe that would be sort of an okay solution depending on whether you agree with the kind of ways the government has spending the stuff. Maybe you don't agree with that and you would hope that they don't get any more Swiss rank at all. If the money were to go to fund the pensions, say, probably many young people would not be super happy. They would probably be very hesitant to accept a little bit higher inflation for higher pensions, right? I mean, there's lots of, as we know, and whenever it comes to fiscal policy, there's even more conflict than there is about monetary policy and it's very, very difficult and dangerous, I think, to merge these things even closer than they have become these days and they have discussion on helicopter money and these kind of things, right? I mean, there's lots of, the political domain is a very difficult to bane to manage monetary policy today, okay? Yeah, I think the overarching lesson in all of human history is that people can't be trusted with power and so I'm always a fan of decentralizing that. Then there are two questions that deal with technology. One asks about are there innovative ways, like FinTech, to give non-banks access to central bank money is one of them and the other question goes in a similar direction and says, can technology change the costs and benefits of the fractional banking system? It expands the ability of banks to circumvent regulations but it also opens the market to other players. So what kind of impact does technology or possibilities of technology have on this argument going forward? Okay. It's interesting, I think it's a very fascinating question so I wrote a little bit in this direction a few weeks ago and I got somebody from Germany actually writing to me that they are thinking about setting up something like a bank trying to do this. I mean, the broader, the more general question might be, why aren't we doing this already today? Because nothing prevents us from doing that. I mean, why doesn't UBS run a fund essentially that is 100% invested in reserves because UBS has access to reserves? Why don't they offer that? And so I talk to these people and I think the answer is we don't know. I also asked at the BIS, the Bank of International Settlements, I mean, do we see this in the world, these constructs and they told me, no, we don't know of that. Somebody claimed in the Philippines, actually you can do this but I'm not sure what it means if the Philippine Bank promises that you can buy something which is 100% invested in reserves. Maybe it exists, maybe not, but certainly it's not something that you can get like this. It's not very easy. Now, why is that? And does Fintech maybe give us new perspective there? I think one reason to think that we don't have it right now is that this is probably not a winning proposition for commercial banks right now because the current system for them is not the worst one. Both the guys like me, the depositor and the bank, we both benefit from the safety net that the general public provides. So why do either I or UBS have an incentive to find a different arrangement? Right now we're doing fine. I get some interest at least in normal times and I'm still totally insured by a deposit insurance and by the S&B stepping in if things really go badly. The same for UBS, I mean, deposits are a very nice way of funding activities, very sticky as Ron mentioned before so it's actually a nice way of funding activities. So why would they change? I don't think they have much incentive to do so. So maybe it would really need a first step by the S&B maybe to provide a very, very basic account that doesn't do much rather than just you can have this money and you can transfer it and that's it. And then maybe there would be competition and then these new products would eventually be provided also by commercial providers. And Fintech I think certainly they would have a role to play here. Transaction costs have become much smaller now due to the new technologies. Fintech has another advantage I think or let's say the other way around, the commercial banks, traditional banks have lost an advantage because in the old days I would probably not have trusted the Fintech because I thought UBS, I mean these are serious guys I can trust them but now we know that they're doing the same kind of things that you would expect your seven year old daughter to do to you. So why not do a Fintech or use a Fintech instead of some of the traditional banks? So I think there is, yeah, I think there can be much action and we see there's lots of new products out there all the time, maybe also in this domain. At least I would be happy to see that. In the States there's a number of peer to peer lending networks that have cropped up in recent years and so you see that there is, there are some technology avenues where people are sort of getting around the banking system. So I think that Dirk's commentary on that is accurate in that the policy, the regulation, the comfort level that people have with the banking system sort of encourages the status quo but on the margin you are seeing some innovation and things going on that could potentially circumvent the banking system. So we'll see how that all plays out and ultimately it'll be up to government policy as to whether or not they'll open the door wide for that. The last question actually goes really in that same direction. It says what about the example of parking garages and dry cleaners loaning other people's property shouldn't this be allowed in the sharing economy? So the idea that the sharing economy becomes part of the banking system and creating its own money, I guess. I think the sharing, in terms of liquidity, that's what we have right now. A deposit account is essentially the sharing economy. So UBS has, I don't know, Swiss francs, true Swiss francs and all of us that have a deposit account with UBS, we have an arrangement that says when you need really cash, I mean physical cash, you can withdraw it and I don't. If I need it then I go and I withdraw it. So this is like an insurance contract. It's really, it is exactly the sharing economy. It's a very efficient way to ensure against liquidity risk, individual, idiosyncratic liquidity risk. It allows the bank to minimize cash holdings and to invest the rest, so to speak, longer term profitable for all of us. All of us that don't withdraw, that don't need to withdraw in this very second, we earn interest instead because the bank could use all the rest to invest in longer term projects. So this is the sharing economy at work actually and I think the proposal would in a sense go the other way. And in that sense, it could potentially be a bad idea. Now in macro, in macroeconomics, we have a sense that there is social, there's social costs from banking because there's this risk of bank runs and failure and all the collateral damage attached to it. In the banking literature, we have a sense that this liquidity insurance that I just described has also benefits but we haven't really managed so far to put these two things into one framework, one model and to really understand the trade offs, the costs and the benefits. That's why that's also one of the reasons I tried to allude to before why I'm a little bit hesitant to supporting that initiative because I fear that we really focus just on the cost side of things here and we leave a little bit out of sight the possible, not only the possible but the beneficial side of the current arrangement. It's not clear to me why we wanna go from an arrangement where we have costs and benefits right now to an arrangement where we only have no longer the costs but we also lose the benefits but I think on the academic side we have very little substantial evidence at this point both in theoretical terms and empirical terms to really say we should go like half the way or three quarters of the way or whatever it is so we don't know I think. I can't beat that, Dr. Great job. Okay, that's all of the questions that we have on the cards. Are there any final questions from the audience before our app roll? Thanks, I keep it short because that's waiting for us. On the sharing economy argument I would slide a disagree with you on that because I think the sharing economy only applies to real assets because if someone uses real assets someone else can't use it and basically the digital world allows us to coordinate that very efficiently who's gonna use the real asset at what time. For example, the car, when we think about the future we could share a car among 20 people without having much frictions. On the financial side it's more about information asymmetries I would say. It's like the bank tells us we don't have to care about what the bank whom does it lend towards that's their job and I just have to trust the bank. I don't know what the bank needs to do with its lenders and that's more an information symmetry thing so when you say it's efficient to share the money I mean money is as a real asset it's not something that costs something right? Well, individually it does, right? For you and me, at least for me I'm not sure what access you have to a financial system but for me, if I hold deposits I have an opportunity cost in terms of not being able to invest these funds in equity or something with a higher yield, right? So for me personally it is costly to hold liquidity. Now, if I have an arrangement with you that tells me it's very unlikely that both of us will need cash at the same moment. Then both you and myself we can actually afford to hold a little bit less cash for precautionary purposes and we can invest more of our wealth into higher yielding assets. So therefore for both of us if we can find this insurance arrangement both of us we can actually get an average higher return which is helpful. Now, the question is, and that's really where we need a good macro model to answer. Does this private or this cost disadvantage of liquidity on the individual level does this also translate into social costs of liquidity provision for society at large? And there's people that would probably say no it's not the case because provision of liquidity for the central bank is essentially costless, right? I mean printing another bill doesn't cost much and creating reserves costs nothing, right? It's just code or electricity that's all it. But then of course there's issues. I mean if you create more of that there will be effects on the price level on inflation and all of this. So I think it's really an open question. What is the social costs and advantages of liquidity provision by the central bank? To the extent that we would find that there's any social costs of providing liquidity then there's also a social benefit of ensuring against liquidity needs and managing scarcity of liquidity for example through fractional reserve banking. If there's no cost then 100% reserve requirement is essentially socially costless and then why not do it? I mean you could argue with technological progress that it reduces information asymmetries, right? So it makes trading much easier. For example eBay, any real asset is much more liquid nowadays than it was 50 years ago. And when we look at financial assets that point is even much more valid. So doesn't that then kind of reduces the requirement for having another form of liquidity insurance when we can replace it with market liquidity? So maybe I misunderstood you before but I think what I understand is that you're saying now why only restrict ourselves to using Swiss francs as a medium of exchange? Anything is very liquid so I can do transactions using I don't know my car on eBay. If I want to buy apples I do this by selling a car to somebody who needs a car at that very second rather than using cash or electronic money for these transactions. If everything is very liquid or if many things are very liquid, everything that is very liquid I can use as a means of payment. Although there's of course lots of price risk involved, right? With money we don't have much of that. That's one of the advantages of this Swiss franc. We know pretty much what its value is going to be in 10 years time. I mean we can continue discussion on that. All right, so I think that the APRO will be coming up soon. So let's thank our speakers, Ron and Dirk for joining us tonight. I think they did a fantastic job on the topic. We give them a round of applause. Thank you. Thank you. And sorry, just before we close and move on to the APRO, just two reminders. One is our CFA public viewing next week on the 29th in the evening. We're going to be showing CFA institutes what live webinar called Emotional Intelligence for Finance Professionals. So we'll be showing it live and then we'll be having a discussion afterwards for anyone who's interested in coming. So that's also a bit of a new event. So we'd be happy to see you guys there. And then on the 21st of July, there will be a normal lunch event on investing in India. So hope we can see you there. Since this is a new format that we run, I'm really happy if you guys give us feedback when we send out the survey and ask what your opinion is. That's how we know whether you all like it, whether we should pursue these type of more innovative, let's say, formats or whether we should stick to the old and well-known ones. Thanks again and please enjoy the APRO.