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October 7, 2008 at 3:38 pm · Filed under credit

This is the second of 5 posts on how relationships will have to trump transactions if we are to make it through the next decade. The premise being that it is our social networks that have the best chance of sustaining us and that social software in the end will have a huge role to play.

How do I know my “New Credit Rating”? What do I have to do to improve it?

Let’s now look at how I might map my own “Credit Community” and see if there are some rules that emerge that will show you how you might map your own.

The first thing that I see is that I don’t just have one of these networks. I have several. Some overlap but some don’t. In this post I am going to talk about family and show how the family connects to work. I will focus on work in the next post.

A really important Network is my Blood Family. In the centre of my family map is my marriage.

I think many of us forgot the eternal truth that the key to getting through the bumps of life is a great partner. Here is the opening line of Pride and Prejudice by Jane Austen:

IT is a truth universally acknowledged, that a single man in possession of a good fortune must be in want of a wife.

However little known the feelings or views of such a man may be on his first entering a neighbourhood, this truth is so well fixed in the minds of the surrounding families, that he is considered as the rightful property of some one or other of their daughters.

Sounds sooo old fashioned! But lets look back at the past. Imagine you are an immigrant to America in the 1880’s. You are planning to take a wagon train to the west. What kind of spouse are you looking for? Good looking. Fun. Sexy. Well those would be nice. But wouldn’t you look for more? Dependable. Hard working. Self sufficient. Skilled. Imagine you are farming or run a small business. Could you cope on your own?

So it’s all different today - right? The one easy way to get poor today is to get divorced. Another easy way to stay poor is for a man to remain single. A bad way to enter old age as man is to be on your own.

I think that Jane Austen was right and remains right. The single most important investment we can all make in our Family Network is the choice we make for spouse and the value that we place on that bond.

For everything reverberates out from that. Do we have kids who are prepared for life or are they not going to be able to cope? Are the kids going to be able to help you as you get old or are they always going to be kids?

Does the rest of the extended family admire your spouse or are they indifferent or worse? For when things get bad will your family want to help?

When my grandparents lost all their money - their sisters got their husbands to help. When my Dad died aged 55, my sister and I looked after her - she has been an invalid for many years.

Shit happens to us all. We can’t manage on our own or with a very limited family network. Family is the Real Insurance and the Real Pension Scheme. We have to pay into this Insurance and Pension Scheme just as we pay premiums into the transactional equivalent.

To get the support that we might need, we have to contribute. You have to freely help others in the family. But what is weird about this system is that the payments are not direct exchanges. The story of our aunts helping their brother reverberates through our family. They did not get back directly. Their grandchildren will repay them. Their act created a story and it is the story of what it means to be a sibling in our family that guides us all.

My sister and I have looked after our mother for more than 25 years. We do it because it is the right thing to do - but also because this too reverberates through our family. These stories will affect how others in this family will react when they are called. The “Insurance” in our family is that you will not be abandoned. You may never have to claim, but the “Insurance” is there.

So how does this network work?

At the centre is the marriage or partnership. The power of that centre is the health of that relationship and the ongoing contribution that each makes to each other and to the marriage. It’s not about what you get - it is what you give that counts. The getting is a product of the giving not the other way around.

It seems that attached to the marriage are the stories. The myths of who we are. But to have power, these myths have to be known and told. All traditional families know their stories. Meals are when they are retold. They tend to be told by the older members, so there has to be opportunities to cross the generational lines in the network.

It is clear that the key Nodes of Trust that connect the system together all all dimensions tend to be the women in the family. Though I have a male cousin who is a massive affiliater. It tends to be the women who do the day to day work of keeping the connections tight. They call, they write, they invite. They remember birthdays and anniversaries. They organize the celebrations.

So if you are a man and have no woman that is loved and trusted by the group, you will find yourself moved to the periphery. The serious matriarchs gain power over time and move to the centre and take their man with them. This is even true in the most patriarchal families. The power lines move to the matriarch.

Piss of the matriarchs and you lose.

What other than the women act as connectors? In our family, we set up opportunities for the young cousins of each generation to spend a lot of time with each other. We spend a lot of our money to do this. We have found that connecting our children across the branches of the family is one of the best investments we make.

The ideal time is summer but sometimes it is Christmas. For many generations, the cousins have become all but siblings as a result. There are two network benefits. There is great love and trust across a wide part of the network and again the habit of repeating this process for the next generation. It means that not only are the kids connected across the same generation but that they also know their aunts and uncles almost as well as their parents. The bonds work up and across.

Now we come to where the work piece starts to affect the family piece. I got my first job because my uncle got me an interview. In the real world folks it is always who you know. He could spend his political capital because he knew I would die rather than let him down and so did Jack Cole at Wood Gundy.

I came back to Canada leaving my immediate family behind in the UK. I was embraced by my extended family. It was my great aunt, the one who lent my grandfather the money, who was my real estate agent. My granny furnished my place, I had her late husband, my maternal grandfathers bed.

I was introduced all around town. I had the full force of this huge family behind me.

Today my nephew has made the same journey to Canada. He is staying at my son’s place. He too is being shown the ropes in Montreal. The story continues. The payback is not direct. It is enfolded in the story - so all in the family can call upon the story to support them. The bonds work up and across.

So what if you don’t have such a family? Here Dickens comes to the rescue.

For all the experimentation, of course, Dickens’s novels eventually wind their way back to some kind of nuclear family. And with this “rightful” restoring of the family unit comes another restoration, this one financial.

Dickens had the kind of family that took energy from you. In his life and in his novels, we see his answer. If you don’t have the kind of Blood Family that can support you, create a “Heart Family” of your own. Look out for the people who can and will establish these same bonds with you without the ties of blood. Create your Tribe. For there is no secure life lived in isolation.

So how do so many of us live today? Has what I have been saying seem normal or weird?

I am saddened by how we have fallen for giving up on family - family as a tribe not mum and dad.

So in our pursuit of “freedom” we become slaves who rely on the state, our health plan, our investments, our line of credit, our pension. None of these things are in our control!

In reality, we have swapped the family for institutions! We have then become so busy in getting the money for the transactions that don’t know how important relationships are. We have become incapable of knowing how to be in family so that it can support us.

Well my dear readers. In the next few years, we are going to relearn a lot of things we have forgotten. None of the institutions that we have given our allegiance too will be worth anything. You and I will find our way home or we will perish.

Next - Our Work Community and then how your organization can map its community

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Mapping out your access to the real credit system

October 7, 2008 at 7:03 am · Filed under credit

Thanks to Ross Mayfield for this model that looks like the work also of Valdis Krebs.

In this post I am going to do my best to show you what the observed reality of this “Credit” system is, make the case that social software will be a wonderful tool that will enable us to use this natural system and finally to make the point that we may have no choice but to try this because, the other source of “Credit” will not the available.

In my first post on Credit - I made the point that “Credit” is an ancient process where resources are leveraged not by a direct exchange of money (I lend directly to you and you owe me directly) but by a social process whereby my contribution to the community (which becomes my reputation and my character) allows me access to the wider resources of the group.

In the ancient system, the exchange is indirect. I contribute to an individual and this gives me an option of being helped by the larger group. If another doesn’t not know me well, my close friends stand surety for me. Leverage in this system is the “Six degrees of Separation”.

This system was the basis of all credit systems until quite recently. Even banking itself relied more on the lender’s knowledge of the borrower. 40 years ago, your banker lived in your community. He (was always a man then) knew you and of you not by a credit rating agency but by his own use of the social model shown above. Your banker’s work was to put himself at the centre of this social system. This was true even in the heady realms of Government Finance. The Fugger Bank had lifetime reps at the courts of all the rulers.

But post WWII, this idea of banking being based on relationships died away. It died because, we got to busy to have relationships. Many don’t even manage to have them with their partners or worse their kids!

Something “Inhuman” happened. We replaced community and relationships which is our real wealth with money and things that are only symbols. The more we strove for money and things, the more we lost our connections and hence access to real wealth and real resources. We substituted transactions for relationships. Maybe later I will explore why this happened but not today.

The crisis of our time is going to take us back. There will be little transactional credit available. So if you need resources, you are going to have to put yourself back into the traditional resource model. You are going to have to find a community and you are going to have to do the work to establish yourself as a worthy person or group in that community.

The good news is that those of us that have been immigrants in the live web have paved the way.

This ancient system is being re-created in the Blogosphere and the Twittersphere. So here we see the old system at work. Need technical help as I did the other day when my Typepad site died - ask from my Twitter friends - within minutes I was connected to Mena Trott, the founder of Twitter. Need places to stay and guides for a trip, Jon asked his community in Europe and Ton his community in Canada.

Here is a simpler way of seeing this Resource Map. It is really a solar system or a galaxy. The natural system of organizing power. Hurricanes have the same structure.

This is how I see the elements.

I think at the centre in the human system is an idea and or a great binding inviting mission. Some thing that calls to the hearts on humans. In St Louis where we are working at KETC on the Mortgage Crisis it is the idea that if the city gets together we can help each other get through this. On PEI, it will be how we can help each other get through our energy crisis. Embedded into this Mission or Call, is a very small group who host. In Wikipedia it is 7 people. The research is telling us that tiny resources, the 1% Rule, are all that is required to initiate such a system.

Along the circular boundaries of the system, each mediated to enable the six degrees of separation and each having its own fractal system (for as in the universe itself - each one of us is at the centre of our own universe) energy flows aback and forth via the connectors.

Here is how Col David Kilcullen sees terror groups.

The work we all have to do now is to chart this out for ourselves. Each of us has such a world. Each organization has such a world. By charting it out, we will start to see what we have to do and who we have to know to bring back the power of this system to help us.

More later

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The Credit Crisis and Social Software - Part 1 - Why we need a return to credit based on social relationships

October 5, 2008 at 9:03 am · Filed under credit

I have been quiet recently because events are so terrible that I wanted to be ready to offer some thoughts that might really help. Here is the first of a series that will, I hope, help you see why we are in such a jam now and why social software may offer us a a healthy and sustainable way out.

Am I qualified to speak about such things. I think so. I was an investment banker for 23 years and was responsible for a major banks strategy for some time. In a way I was partly to blame for the mess that we find ourselves in. I also walked away from that life and rebuilt a new life largely based on the principles that I will offer in the hope that they may give us hope.

Part 1 is a description about what is credit. The core idea is that the natural reality of sound credit is that it is not transactional but social. If sound credit is indeed as I say social in nature, then there will be a way to deploy social software to create a better alternative.

There are two credit ratings that we have - both offer us the opportunity of having resources that we don’t have right now. One leads to serfdom and slavery and the other leads to freedom.

Hugh’s cartoon above gives us a hint here as to what choice leads to freedom.

Man is born free; and everywhere he is in chains. One thinks himself the master of others, and still remains a greater slave than they. How did this change come about? I do not know. What can make it legitimate? That question I think I can answer. (J J Rousseau - The Social Contract)

In the world that is dying around us, a credit rating was a statistical score that enabled a transactional system to lend us money. In the world to come - which is also the world that was before the modern credit system, credit was the product of how much you contributed to your community. Your credit rating was your reputation, based on your actions, as understood by your peers in the context of your bounded community. In this older system, credit was not transactional but social. Wealth was not money but the health and extent of your relationships.

So what does this mean in practice? What is wrong with a transactional credit system? What is a a social system?

We are suffering the normal bust/boom today of a reliance on a transactional system. The system that lent us the money made money on the transaction, so the system was skewed to lend us a much as possible. So, at its extreme, students were lent $20 - 50K, people with no real cash flow were given mortgages that they could not repay or even service, investors bought securities such as CBO’s taking the rating as a given and not thinking about the underlying issues that might prejudice their investment.

Our problems today are all rooted in the fact that credit became transactional and so masked the risk both the the lenders and to the borrowers.

The underlying issue about lending money has always been universal. The most important parts of lending money are these:

The crucial “Credit” decision is not whether the borrower can repay you - it is do you have a high expectation that he WILL REPAY you. The key to credit is a knowledge not of cash flows but of character.

In 1933, my two great aunts both went to their husbands and demanded that they lend a pool of working capital to their brother, my grandfather. Their husbands, who were both in construction, and so had funds, did so. But they lent the money as much because they knew that Alec would rather die than not repay them under these circumstances. They also had the power of their wives to ensure that Alec would protect their decision. At the time of lending the money, Alec had no way of repaying it. Only his real credit rating, his honor, stood assurance. The social capital of his sisters was the guarantee. This is how the Grameen Bank works or how Social Credit (Micro Credit) works.

The lenders and investors of today all missed this. They relied not on the character of the borrower and a profound understanding of what was going on - but on a score. They relied on a formula based on statistics based on transactions that left out the heart of credit - relationships and emotion.

The whole idea of a pool of mortgages breaks this key rule. Derivatives and swaps break this key rule. The direct relationship between the borrower and the lender had been dissolved.  Imagine that you have a sweater with some good and some bad threads in it. How do you get at the good threads? It can’t be done. You can’t extract the good from the bad if they are co-mingled like this. All that is left is the letter of the law. And the law is not enough. There has to be the will to repay and in a transaction, there can be no such will. In Canada a mortgage  rests upon the person of the borrower with the house as collateral. In the US it is the house alone. So the central  relationship is weakened by design.

Because credit really relies of deep personal knowledge and personal commitment. It can’t easily be scaled. So sound credit cannot be naturally abundant.

But in a transactional universe, scale is everything. So an economy based on easy to get credit which is based on a transactional context, must fail. Now that we have introduced pooled securities and derivatives, failure is not only guaranteed but will have a huge impact because we have leverage on leverage.

You don’t believe me? In the US the banking system has failed in 1857, 1907, 1933, 1986 and 2008.Stop and think about this for a minute.

The US banking system has failed in 1857, 1907, 1933, 1986 and now in 2008. What does that tell us? That we keep repeating the same design flaw. Each time the impact of the failure has been greater. We keep the assumption that we can scale credit based on a score and not on a real relationship. The product of the 2008 failure is what? Huge mega banks that can only take a transactional view. What is the inevitable result going to be? Sooner rather than later we will have a Krakatoa type of failure, if we don’t have one now.

So, please - please do not fool yourself that things are going to be OK soon.

The second aspect of being a creditor is the issue of power. Why is it always a bad thing to lend to a friend or a family member? Because it affects the relationship. Being such a borrower broke my granny’s  spirit and my grandfather’s. After he had repaid the loan, he killed himself. You can see now why my own family story has so informed my own view of credit. For as a creditor, you are in the power of the lender. The more you borrow, the less freedom you have. At some point you become a serf.

You graduate with a BA and $30,000 in debt - what choices do you have in a career? You have to choose the money. You have to accept work that may not fit you. The promise was that if you get into debt to get a degree that you will earn more. In reality you have become a serf.

You are told that home ownership is a good thing. But if the bank has 100% of the equity of your home, who owns the home? You are a serf. You think that if you have a lot of stuff that you look successful. But if you have a lot of consumer debt to pay for all this stuff, you are only a serf. So now with all this debt, you have to work for “The Man”. You think you are free but you dare not question your employer. You are a serf. You are indentured.

This is not just about the low income folks. Many who have had huge incomes are just as much slaves as the rest. Worse. Their identity is tied to their image of success as my granny’s was. Their fall will be even more terrible because they thought they were free when in fact they too were slaves. Rousseau was right then and now. Many think themselves free but are in reality slaves.

Rubbish you say. I am not a serf. So let’s take a test. Are you free or are you a serf?

In the Middle Ages, Serfs were tied to the estate of the Lord. They could not move. They had an income but had to pay taxes to the Lord. Who himself did not pay much tax. They had housing, but the houses really belonged to the Lord. Their children were born serfs. They had no social mobility. In fact, as the system grew, what few middle class yeomen got pulled down into serfdom. The full power of the law was behind the system. If you tried to escape, the full force of the law enforced serfdom back upon you.

So how are you doing? Is your life any more free as a major borrower today? The full power of the law is also on the side of the lender. How are your kids doing too?

So what to do? Is there a healthier system than our transactional credit system? For I am not saying we should not use credit. I am saying that credit positioned in a transactional context is guaranteed to give us this boom and collapse cycle and in the end make most people not only poor but slaves.

First of all we need a better context for credit. “Better” being a context based on the observable reality of nature rather than a fantasy based on beliefs of men. We have to have a credit system based on observable truth if we are to have any chance of avoiding this boom/bust serfdom system repeating.

In the Middle Ages, the overarching belief was that the Earth was the centre of the universe. But observers such as Galileo proved that the observed reality was different. he was able to prove that the Sun was the centre. I bring this up because what I am going to say will sound as heretical as Galileo did at the time.

Our great belief is that Money is wealth. Being itself neutral, this belief has enabled us to accept and then to believe that the end in life to get as much money as possible is to be wealthy and free. Worse, because money in itself is neutral, a means of exchange, it has lead us to believe that all exchanges in life are, and should be, transactional. In so doing, we have set up our credit system to fail.

For all of time credit has been in reality social.

Credit is based in a relationship and it drives a relationship. Credit can only be a transaction when it is based on a fantasy. As we have seen, all the brilliant risk management models of Wall Street failed. Credit is not a commodity. It is a social object. Credit is not based on models but on emotion.

So what does a social credit system look like?

Imagine that you are a tin trader. It is 100 BC. Your home is in what is now Acre. You sail to Britain with object of buying Tin. How are you going to do the deal? Just turn up and give the tribal leader a check? Think about this for a minute. You are going to have to spend maybe a year in building trust. You may have to do a small deal and return in a year to establish more trust. Over time, you may marry the Chief’s daughter or leave a son behind as surety. Both sides work hard to establish a relationship that facilitates a healthy trade. Both profit mutually. Neither is subservient to the other. But it is not an easy process. It is not a transaction.

This type of credit is not lost in the mysts of history.

You are of Italian descent. You daughter is getting married next week. What happens at the wedding? The guests know that one of their jobs is to pitch in to ensure that the couple can buy a house with either a very small mortgage or none at all. Each guest gives a meaningful sum. Why? Because when when it is your turn, you know that your community will help your daughter do the same. The point is to give the couple a real home. A home that they own and not the bank!

The Italian community in St Louis does not restrict itself to weddings. All of its members know that the more that they give into the system, the more free and self reliant they all become. All pay attention to the impact of their social actions. Over time, the flywheel effect picks up and more and more resources become available to the members. The entire system is governed not by law but by social custom.

At the heart of the natural credit system are two things. Your personal reputation and your community.

On PEI, until recently, there was a code in your file that if you had it opened the doors. There would be a comment on your file that said this “Known to the bank”. This was the equivalent of a AAA rating. Island Bankers could do this safely because, it was a product of the community that we have here.

On PEI, we are small enough for your full character and hence reputation would be known to many. This did not mean that mistakes were not made. But on the whole, a lender could have a judgment on whether you passed the first test of real credit - would you pay the loan back. PEI also had a strong position in the second test. Being a small place where there are no secrets, the community itself, like my great aunts, could play a role in the borrowers good behaviour.

This has been too long a post already. In the next post I will offer some thoughts about what we can do now to return to a more healthy relationship with what wealth is and what a better credit system might be.

But as a teaser, here are a few thoughts.

• Wealth is not your bank balance or your portfolio - as we may all find out soon as these may disappear. Wealth is the health of our social network. My son James is “broke but not poor”.

• When we give into our social network, we are making deposits into a real credit system

• In a social credit system - it is a system of peers - there is less risk of there being a power imbalance

• In a social credit system there is much less risk of a default

This system has existed for all human time and has its modern examples that we can build on.In my next post I intend to expand on what we can do ourselves to get outside the transactional system. For the powers that be will do their best to restore it. Only we can elect to live outside it.

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Enterprise 2.0 - Now a necessity in a low/no capital world - The Death of the Dinos

September 18, 2008 at 6:20 am · Filed under Enterprise 2.0, capital, credit

Easy to get capital and easy to get credit is vanishing and enterprises that rely on this will not make it.

A deep undercurrent of this blog has been how difficult it is for a conventional organization to adopt a 2.0 world. The entrenched habits of control, centralization and top down could not be shifted. No amount of appeals, about the power of a 2.0 world, more speed, better infomation, better conection inside and outside the enterprise, landed with the change.

I think we all underestimated the height and the steepness of the slope of the “landscape” that had to be crossed to go into the next “valley” of the 2.0 world.

Systems remain stable for a long time - so long as the key environment to support them exists. For real change to occur, you have to get out of the “valley”, over the mountain and into the next valley. So the dinosaurs ruled for millions of years, while the more adaptive mammals lurked in the shadows waiting the moment when the environment would change and set them free.

So until last week, it was still possible for organizations to chug along with a 1.0 perspective. For its key environmental factor, cheap and easy credit and access to capital was still in place.

Well dear readers - this is no longer the case. The asteroid has hit the worlds financial markets and the dinosaurs will die.Large cumbersome beings that need a lot of capital and credit and who cannot adapt quickly will die.

Credit and assets based on cheap credit are simply evaporating. So is the “photosynthesis” process of capital and credit creation. Investment banking and conventional banking is in the process of losing its own capital base. Even the credit of the US itself will be tested to the limit in the ensuing months.

What we are experiencing is not a normal correction but the equivalent of an asteroid strike.

It will get worse. For another key environmental factor for the 1.0 model was cheap and easily availble energy. As the new reality of Peak Oil becomes clear, then all business models also based on moving goods long distances and from huge central hubs fail. Of course this model is also based on massive usage of financial capital.

So how does this play out and who wins?

Mammals won for 2 reasons. They were small and because they raised their young they could extend their offspring’s ability to adapt by adding cultural learning to their natural instinct.

We cannot know in any detail what the future will now bring.

All we can know is that the nimble and the smart will do better than the clumsy and the unthinking. All we know is that any model based on large amounts of capital will not make it - so forget nuclear as an option for energy.

The new of course exists in proto form today as it did when the dinosaurs roamed. The new will be based on network models. It will use the network effect and it will use social capital to do big things. It will use its distributed intelligence to “see” what to do and to undersatdn the chaos that we will be living in.

The time for a world based on a model that is itself based on nature itself rather than a machine is dawning.

Understanding the “natural economy” , the “natural organization” and social capital will be the key to your survival. Not just in business but in every part of our lives.

For we as citizens of the “machine world” gave up all control to the “System”. We became isolated and helpless. We lived in the Matrix. We did not even know what we had given up.

2.0 is I think really short hand for using technology to help us go home to a world based on a community rather than one based on being cogs in a machine.

Until now many of us were merely playing with the idea of taking the Red Pill. Now its life or death. Life or death for organizations, life or death for us as people.

In closing I don’t think that this will be all bad. Here is a passage that has affected me deeply for decades. When I first read it, I could not imagine the circumstances that would make it come true. Now I can.

There will come a time when humanity will choose to go against nature, to exploit her bounteous gifts, causing a sickness across the planet. People will forget the ecstasies of communion, and life will become drab and colorless.

In these coming dark ages, though, a deep sense of loss will cause the beginnings of a Great Return. They will look at the landscape and the old temples, built to withstand the cataclysms of millennia and understand once again the sacred laws of Existence.

When this day comes, humanity will have come of age. It will consciously acknowledge its role in the creative impulse that comes from the Sun, fertilizes the Earth, and calls forth the flame in the hearts of men and women to worship Life and the miraculous forces behind Creation.

Miller, Hamish & Broadhurst, Paul. The Sun and the Serpent: An Investigation into Earth Energies

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