Financial innovation: top to bottom

Companies in the US and UK, faced with a lack of willingness from the banks to lend, have been raising money by issuing ‘mini-bonds’ direct to customers.

Similar to the debentures issued by the All England Lawn Tennis Club in Wimbledon, they can offer customers a mix of goods and services (tennis tickets, chocolates, shaving sets) or a straight financial return.

Companies mentioned include Coca-Cola and Walmart, King of Shaves and Hotel Chocolat.

Meanwhile in the US Federal Reserve is also trying to innovate its way out of the crisis.

‘Operation Twist’, seen as the most likely outcome, would involve the Fed in buying long term treasuries, to reduce the supply of these ‘risk free’ securities to investors. Short term Treasuries might be sold as well.

Rather than fundamentally changing the situation, or creating anything new, this strikes me as “Rearranging the deck-chairs on the Titanic”: swapping long term debt for short term (or vice-versa).

Buying long term bonds would be intended to push long-term interest rates lower (even than they are) and that makes sense within conventional economic thinking. It encourages more borrowing to develop economic activity over the long term.

But the problem is that the fundamental long term outlook for growth is poor, no matter what the interest rates are. That is why markets crashed back in August.


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