The cloud of title: Part 2, the Established Doctrine

December 11, 2017 | blockchain, encryption, Government, Housing, Innovations, Property rights, Real estate, Speculation, Title, title insurance | No comments 68 views

 

By: David A. Smith

 

[Continued from yesterday’s Part 1.]

 

In the previous Part 1, our examination of the novel concept of using blockchain technology – cloud-based encryption, storage, and potentially universal access to discrete and permanent numerical information, such as of financial transactions – using as our source text The three stages of ownership, a cheerleading article by entrepreneurical evangelist Jeffrey A. Tucker, advisor to blockchain application builder Factom, presented Mr. Tucker’s case for how blockchain, the fin-tech world’s It Girl, will render all prior property-transfer systems obsolete, especially in emerging countries with weak cadasters, cumbersome procedures, or corrupt administrators. 

 

I was as pure as the driven snow …but I drifted

 

There are, however, quite a few challenges before we can sweep away all other forms of recordation.

 

What do you mean, you won’t dump her for me?

 

A registry of property title is much more than simply a compendium of transaction records. To demonstrate this, we’ll distinguish among three cases:

 

  • In a transfer, X sends M to Y, where M is an amount of money.
  • In a deed, X sells P to Y, where P is a property.  For this purpose, it could be any kind of property: personal property, chattel, intellectual property, or real estate.
  • In a property title, X sells ownership of P to Y, and Z authenticates both what P is and X’s former ownership of it.

Case 1: Money transfer.  As I’ve previously posted, money is a wonderful invention because it provides a convertible, countable, means of equating the value of things, and of similar importance, money enables people to have rational conversations about who values a given thing more.  So it not only creates markets, money facilitates making markets more efficient and value-additive.

 

Money is abstract, digital, and fungible.  A dollar is a dollar is a dollar, as Gertrude Stein would have said to her landlord. 

 

Assuming that blockchain works (see Necessary Beliefs above), money is the ideal commodity to transfer via blockchain technology.  It’s purely quantitative, and indeed, money is an abstract invention of the human mind, so if the Necessary Beliefs become universal, or at least so widely believed that everyone accepts them, then blockchain currency can be as transferable and redeemable as credit on a credit card. 

 

The magic is in the approval

 

The case of credit card companies is highly relevant.  Credit card technology depends on verifiable identity, administered by large companies with massive computing power and equally huge databases, so that the card company can verify or question every transaction. They also charge fees for their services.

 

Blockchain money transfer is actually incredibly similar to the hawala money transfer system.  In hawala, which operates today as it has done for a millennium, like a person-to-person Western Union, the transaction is between two permanent hawala agents. 

 

A two-point transaction verified at either end

 

There’s a tiny bit of linguistic inference Hawala originated in India, since the Hindi term is Hundi wala (wallah being Hindi for ‘’businessman’), and said quickly it was compress into hawala.

 

The applicant comes to a hawala merchant, who executes the transaction on the spot.  Then the hawala merchant communicates with the appropriate distant hawala merchant, and they settle up between themselves, with the recipient hawala agent responsible for paying the beneficiary.  The network of hawala agents police themselves and each other, and the system depends on all four parties – sender, recipient, and both hawala agents – having total confidence in the integrity of the hawala merchants. 

 

And indeed, hawala ledgers look very much as I envision blockchains:

 

Totally encodable and transmittable

 

Several things about the hawala table are striking as forerunners of blockchain thinking:

 

  1. The necessity for having a matching ledger record at the other end.
  2. The use of shorthand or simple encryption.
  3. The digitalization of the information.
  4. The ‘closed circuit’ aspect of hawala recordkeeping – only acknowledged (and, presumably, capitalized and collectible/ enforceable) agents are allowed into the network.

In the same way, blockchain depends on the presumptive incorruptibility of the encryption and the presumptive integrity of the record-keepers. Though I could easily be missing something, having read only lightly in the field, the blockchain diagrams invite the inference that the system’s integrity relies on the multiplicity and replicability of the computer nodes that all simultaneously show the same records and the same state of updating. 

 

All of you need updating at the same time

 

I do wonder, however, what happens if the computers are updating at different times, and even if the intervals between updating are shorter than a human could exploit, a human could write a program that could act fast enough to interpose a new transaction in between the time of posting at Node 1 and its propagation to Node 11, and if Node 11’s intake allows a new transaction in effect transferring the same commodity – leaving the network to sort out which transaction has precedence.

 

This potential for conflicting sequencing of events becomes more challenging still in the second case.

 

Come on, blogger – hit me with your best shot

 

Case 2: Registry of deeds.  As the name implies, a deed is legally the formal documentation that on a particular date, X and Y agreed in writing to something, and for our purposes, the agreement pertains to sale of property.  So the record isn’t of the money changing hands, but the property changing hands.

 

Whereas money is abstract, digital, and fungible, chattel property is physical (usually), non-numerical, and particular.

 

Thereby is the rub.  When money is transferred, the recipient takes the money and uses it.  Money is fungible and if the money is ‘resold’, that’s because the original recipient used the money to buy something with it. 

 

In a deed, the deed records the assertion of transfer, but it does not warrant the actual asset being transferred.  What if the asset referenced in the sale document isn’t in fact the one the buyer and seller thought they were transferring?  Then the principle of rescission becomes problematic, because unique objects by definition are irreplaceable.

 

No refunds even if completely unsatisfied

 

Moreover, chattel is portable – it can be seized and physically repossessed by the owner, then taken away.

 

You’re mine now

 

Additionally, a legal deed document typically takes the form Date Party-1 Party-2 Provision 1, 2, 3 … open-ended.  The registry simply holds the document for later reference. 

 

In other words, it is typically recorded as “On Day D Party A and Party B signed a piece of paper.”  It doesn’t specify the topic, or even if there is a simple header – like “Purchase and Sale – the deed caption seldom says what it being transferred.  It doesn’t address how to distinguish among multiple transactions between A and B.  Even more difficult for a blockchain technology would be determining whether multiple transactions by B – say, with C, D, E, and F as well as A – are connected to each other.  For instance, A might sell a piece of property P to B, then B might borrow money from C (loan document), execute a mortgage between B and C (collateral assignment document), and possibly a junior mortgage back to A (for the non-cash portion of the purchase price).

 

It’s the stuff that dreams are made of

 

The problem of multiple conflicting documents from the same party has bedeviled courts since the earliest days of inheritance.  It’s a principal MacGuffin plot point in Henry V, where the question of royal succession requires both timing and interpretation of documents.  Likewise, wills have to be proved – valid, properly drawn, and the latest ever executed by the now-absent decedent.  The inability to prove the will is the entire narrative hinge of Dickens’ Bleak House, where the endless probating of Jarndyce’s will in Chancery Court drowns the court in writs, the estate in legal fees, and the weak of character in a swamp of idle greed.

 

I have no patience with the weak of character

 

For that reason, nearly every nation moves away from the registry of deeds to the apex form, Case 3, the registry of title.

 

[Continued in Part 3.]

The cloud of title: Part 1, the Necessary Beliefs

December 4, 2017 | blockchain, encryption, Government, Housing, Innovation, Property rights, Real estate, Speculation, Title, title insurance | No comments 88 views

By: David A. Smith

 

Any sufficiently advanced technology is indistinguishable from magic.

Arthur C. Clarke, 1962

 

I’ll show you a verified transaction, big boy

 

This year’s It Girl, at least in the rich-geek circles of disruptive financial technology circles, is the blockchain.  Like previous tech-related It Girls before it (Theranos, anyone? On-line poker?), it rests on elements of ‘magic technology’ – in this case, mathematics that we can understand in words but cannot independently verify – and nifty diagrams like this:

 

Would you put your money into a distributed intangible invisible asset?

 

Yet, though very few of us can credibly claim to understand how blockchain works, the idea of it working has such sex appeal we want to believe it:

 

Try it, you’ll like it

 

Among those who believe is cheerful word factory Jeffrey A. Tucker, whose bio says he “has written 150 introductions to books and many thousands of articles appearing in the scholarly and popular press.”

 

The happy explainer: Jeffrey Tucker

 

Mr. Tucker is an advisor to the blockchain application builder Factom [Given him credit for full disclosure – Ed.], who’s penned a paean to blockchain, The three stages of ownership, posted on the web site of the Foundation for Economic Education:

 

I constantly get the question: why do we need this blockchain thing anyway?  Here is why.

 

Before we get into Mr. Tucker’s explanation, let’s identify the four Necessary Beliefs of blockchain technology.

Blockchain: The Necessary Beliefs

 

As suggested by Arthur Clarke’s formulation, many a new technology would be magic if we hadn’t seen it for ourselves.  Computer viruses, iPhones, Rogaine, flash drives, Lasix, and wifi are all things that my father would have told you flatly were impossible, and yet we today can observe them working – so we’re not required to believe in them, we’re just required to believe our own eyes.

 

Like these other new technologies, blockchain sounds like magic – and unlike the aforementioned other new technologies, we cannot directly observe it at work.  Instead, blockchain is twice intermediated:  (1) Through the physical intangible of cloud-based storage, and (2) Through the even more intangible mystery of the encryption/decryption mathematics. 

 

Blockchain thus rests on four Necessary Beliefs:

 

1. Cloud-based storage is inviolate and cannot be systematically tampered with. 

2. The intermediary computer-server companies who are validating blockchain transactions are reliable: independent, accurate, and immune to deception.

3. There will be either zero or negligible transaction costs for using blockchain.

4. The encryption/ decryption mathematics is solid and unbreakable.

 

As the alert reader might well deduce from my framing paragraph, I have doubts about all four of the Necessary Beliefs – but I’m no expert in blockchain technology, so in the context of this blog post, and for the sake of analysis, I’ll stipulate to all four:

 

I do believe in blockchain!  I do believe in blockchain!

 

Every society with a vibrant commercial life exalts private property as an institution. The entrenchment of this institution occurs in three stages.  All three are essential.

 

I’ll fast-forward through his basics:

 

 

The first stage is to create private property itself.  For society to mature, private property needs to be discovered as a technology for dealing with the problem of scarcity.

 

I’ve discovered private property as a technology

 

‘Discovered as a technology’ is a remarkably circumlocutory way of describe the possessiveness that is wired into every human being (and most primates).akin to Monsieur Jourdain’s delighted discovery that for forty years he had been speaking prose without knowing it, and being the most obliged man for having been taught that.

 

 

The second stage involves securing that property from people who would violate the new norm.

 

Once again, Mr. Tucker’s view through the telescope’s wrong end leads him to invent of giving a technological cause for another of our primitive urges: power.

 

Policing is part of the method by which people can rely on the fact of ownership as a persistent feature of their lives. Otherwise, wealth creation is impossible.

 

Policing is a function of the strongman, and strongmen existed long before technology – indeed, they exist in baboons and other primate troops.

 

Everybody here knows who the alpha is

 

The third stage is the least understood of the three: you need some technology that compels social assent to what you regard as owned property. 

 

That’s nothing more than recordkeeping. 

 

Beyond that, you need some kind of record keeping … not subject to manipulation and fraud.  Property changes hands, and in multiple rounds, confusion over titles can create serious disputes and problems. 

 

However, a record keeper is not purely or even principally technological.  Instead, it’s a combination of a memory device and a reliable custodian – such as Meyer Lansky, whose reputation was as the mob’s ultimate registrar of deeds and assets:

 

Lansky was the money man trusted to hide or invest millions for the syndicate, and he saw to it that Luciano got his share of the profits even after he was deported to Italy. It was Lansky who opened up what was for a time the syndicate’s greatest source of income, gambling in Havana. He alone handled negotiations with dictator Fulgencio Batista for a complete monopoly of gambling in Cuba. Lansky was said to have personally deposited $3 million in a Zurich, Switzerland, bank for Batista and arranged to pay the ruling military junta, namely Batista, 50% of the profits thereafter. 

 

It’s all in my head, and you can’t get in there

 

In the rise and fall of underworld fortunes, Lansky was immune to replacement because he was too valuable to lose.

 

When it comes to recordation, the weak link is much less how information is preserved, and much more:

 

  1. How property is defined.
  2. How information is verified before entering it into the system.

 

This Mr. Tucker’s enthusiasm sails him breezily past, and in so doing he’s oblivious to the real challenges of the technology about which he is so blithely enthusiastic.

 

We, on the other hand, will slow down.

 

When we bloggers slow down, stuff gets real

 

It’s time to explain some fundamental things clearly.

 

 

And we’ll use small words.

 

I’ll use small words, starting with the bracketed ones below

 

[Continued in Part 2.]

Fiscal autonomy = Political autonomy: Part 2, Obstructing his policies

December 1, 2017 | Borrowing, Capital markets, China, Cities, Development, Government, Housing, money laundering, Municipal finance, Politics, Speculation, SPVs | No comments 89 views

By: David A. Smith

[Continued from the previous Part 1.]

 

As we saw in Part 1, using as the jumping-off-point a disappointingly credulous article in the Economist (November 16, 2017), China’s provinces, territories, and municipalities have indulged in an orgy of off-balance-sheet financing, using Local Government Financing Vehicles.  They did so partly for fiscal autonomy, but even more for the favorable byproduct of fiscal autonomy: political autonomy.

 

In 2014 the central government began trying to sort out the mess by banning local authorities from raising money through financing vehicles.

 

While fiscal autonomy is a headache for the finance minister or central banker, political autonomy is something neither a central committee nor a dictator-to-be will tolerate:

 

You’ll have to tolerate my intolerable acts

 

Instead, it said, they could issue bonds and use the money to refinance LGFV debt.

 

Refinancing LGFV’s isn’t a financial move – it’s just swapping one kind of paper for another.  That makes it a move akin to India’s ‘de-monetization’ a year ago – an attempt to force those with informal money to bring it into the formal system.

 

Tensions between them [central government and provincial/ local] pushed up debt to dangerous levels in 2015.

 

In India’s case, de-monetization ‘failed’ in the sense that black money found a way to become white, and then post de-monetization reverted to being black. 

 

It was a success, I tell you – a success!

Previous posts on China’s housing and urbanization

 

Gleefully running up the debts (August 23, 2010), 2 parts

Another piece of the Chinese housing puzzle (December 27, 2010), 2 parts

Suburb stuffing (April 26, 2012), 2 parts

A theory of china’s cities and housing (August 23, 2012): 6 parts

Not nice places to live (November 14, 2012), 2 parts

Old before rich? (May 2, 2013), 2 parts

Runaway money train (July 22, 2013), 5 parts

Where the money goes, the people will follow (September 19, 2014), 3 parts)

The fall of China Mae (March 8, 2016), 3 parts

“Great job! You’re fired!” (November 30, 2016), 2 parts

 

Evidently it likewise failed in China:

 

As the finance ministry reported in August, complicated public-private partnerships are being used to disguise debt as private capital.

 

How do you say ‘Enron’ in Mandarin or Cantonese?

 

Changing the rules seemed to have solved the problem for a while. But as in the film “Pride and Prejudice and Zombies”, the horror is back from the dead.

 

 

Aside from the jarringly incongruous metaphor, once again the Economist is showing where its sympathies lie – with big central government.

 

By 2018 all such debt is supposed to be converted into bonds. This implies issuing about 15trn yuan, a huge amount. 

 

Sounds fine – if the PGFV’s fess up, and if other as-yet-unidentified bodies buy the debt.

 

Who’s going to buy all this new paper, anyway?

 

By putting local borrowing onto the books, the government hopes to bring some transparency to the debt problem.  By imposing ceilings on the amount of locally issued bonds, it also aims to limit the issue of new debt. 

 

If China’s government were honest and responsive, both transparency and regulatory management would be Good Things.

 

But you must prepare them right

 

Turning LGFV debt into bonds, it reckons, should also help the local authorities because bond yields are cheaper than bank loans.

 

Formal money is usually cheaper than informal … but then there’s all those regulatory strings attached.

 

Isn’t it better without the regulations?

 

There followed an avalanche of other reforms.

 

In this context, reforms = control devices.

 

The national government began to include assessments of local officials’ borrowing decisions in their annual performance reviews.

 

[Local officials] would be held responsible even after moving to another area.

 

Actually, I quite like that one, though it would be difficult if not impossible to enforce here in America.

 

The center also banned some dodgy incentives that local governments had used to attract private investors.  Most ambitiously, the five-year plan for economic development that took effect in 2016 promised that there would be a new revenue- and tax-sharing deal between the central and local levels.

 

It all made excellent sense.

 

Again with the credulity, Economist?  It makes excellent sense only if you believe the central government is honest and accountable – and that it will follow through on the promised ‘revenue- and tax-sharing deal’.

 

 

The trouble is that central and local governments have drawn different lessons from the LGFV debt saga:

 

  • The center thinks local authorities need to be reined in, not given their own tax base.
  • The periphery seems to have decided that increasingly elaborate schemes are needed to defend what little financial autonomy they have. 

 

When you cut through the smoke, this is nothing more than an existential fight about autonomy.  (It may be existential, but it’s simple enough to understand.)  Localities have fiscal autonomy, and because of that they have political autonomy.  Beijing wants to stop both.

 

In principle, it ought to be possible to make a clearer division of tax-raising powers between the center and periphery, a prospect raised in the five-year plan and reiterated by Mr Xi at a party congress in October. 

 

In theory there’s no difference between theory and practice.  In practice there is.

 

Actually, I never said all the things I said

 

They do not trust each other enough to negotiate such a deal.

 

The issue isn’t negotiating the deal, the issue is counterparty performance after it’s negotiated.  Both sides well know the Ferengi Rule 1 of Acquisition: Once you have their money, you never give it back.

 

 

Localities also worry that a property tax might lower house prices—and no one wants to be blamed for that.

 

Especially as it would be Beijing blaming the provinces for the house-price fall.

 

Houze Song of the Paulson Institute, an American think-tank, says local officials have been reclassifying loans so they no longer appear in official statistics.

 

This month a manager at one LGFV told Caixin, a Beijing-based magazine, that even if an institution announces that it is separating from the local government, it will quickly turn to the local government again when it gets in financial trouble. 

 

Sure; privatize to avoid the Chinese equivalent of FIN 46 consolidation, but as soon as the newly independent vehicle runs into trouble, that old devil moral hazard re-enters.

 

If you’re moral, there’s no hazard

 

Huo Zhihu of China Securities Credit Rating, a domestic ratings agency, was quoted by the magazine as saying that such separations were “just a formality”.

 

There’s little doubt Mr. Xi will lose, even if (when) some of these LGFV’s default.  Most complex faster-OODA systems always beat command-and-control ones.

 

Get faster than the other guy and you win

 

Mr Xi has long complained that local officials are obstructing his policies and says he needs more powers to force changes through.

 

Ever try to hold back the ocean, Mr. Xi?

 

See?  It’s working

Fiscal autonomy = Political autonomy: Part 1, Not subject to the same rules

November 29, 2017 | Borrowing, Capital markets, China, Cities, Development, Government, Housing, money laundering, Municipal finance, Politics, Speculation, SPVs | No comments 103 views

By: David A. Smith

 

As every child who’s ever had an allowance knows, among its many virtues money provides autonomy – and almost as good (sometimes better), unobserved autonomy – the freedom to buy what I want, not what my distant imperious parent wants, and not have to listen to a lecture about it afterwards.

 

Right, now, only virtuous things – you got it

 

For that reason, money is the bane of a dictator’s existence, as reported in the Economist (November 16, 2017):

 

What a debt crisis in the provinces says about governing China

Xi Jinping’s enormous power still has limits

 

Just because I ordered you to carry the burden doesn’t mean you should have done it

 

The persistence of the debt problem reveals much about the difficulties of governing China and the limits even of Xi Jinping’s immense authority.

 

It is inherently uncontrollable and a real-time unstoppable referendum on the leader’s competence, as Kristina Kirchner and Robert Mugabe discovered, Recep Erdogan is learning, and now China’s Xi Jinping, who seems to be following them on a steady climb to one-man rule, discovering to his vexation. 

 

Maybe I need even more powers

 

It is a truth universally acknowledged, said China’s central-bank chief, Zhou Xiaochuan, recently, that huge debts are “the root of weakness in China’s macro financial system”.

 

Sure I know what happened to Fouquet

 

As Mr. Zhou surely knows, debt is not the problem, only the visible symptom of a deeper problem, but like many another symptom, its own effects are unpleasant:

 

China is so vast that relations between the center and periphery have always been problematic. As one epigram puts it: “The empire, long divided, must unite; long united, must divide.”

 

The one I favor, which better captures the dynamics, is The mountains are high between Beijing and the provinces.

 

During the past few years the center has been stressing the need for unity.  Convinced that local governments have been enjoying too much autonomy, it has been trying to exert greater control over them.

 

For the better part of a decade, I’ve been posting about China, doing my best armchair analysis based on the principle that ideology may differ by place and culture, but money, like gravity or particle physics, is universal.

Previous posts on China’s housing and urbanization

 

Gleefully running up the debts (August 23, 2010), 2 parts

Another piece of the Chinese housing puzzle (December 27, 2010), 2 parts

Suburb stuffing (April 26, 2012), 2 parts

A theory of china’s cities and housing (August 23, 2012): 6 parts

Not nice places to live (November 14, 2012), 2 parts

Old before rich? (May 2, 2013), 2 parts

Runaway money train (July 22, 2013), 5 parts

Where the money goes, the people will follow (September 19, 2014), 3 parts)

The fall of China Mae (March 8, 2016), 3 parts

“Great job! You’re fired!” (November 30, 2016), 2 parts 

Four years back, I posted about China’s Runaway money train (July 22, 2013), which included this handy five-point summary of the growth of local finance:

 

 

Choose the form of your destructor

 

In essence, by mandating economic growth in the provinces, and yet slurping all the provincial revenue for central-government purposes (patronage, graft), China pushed local officials into a corner.  Needing to produce growth, needing to pour cement, you overbuild the market (as in Ordos, which is just now catching up with where it should have been a decade ago):

 

To contextualize the development of Ordos Kangbashi, new Chinese cities are generally built on 20-year timelines, and a 50% habituation rate at the 13-year-point is more or less right on target.

 

[With such long horizons, it’s almost to fail politically – but if Jim Rouse had set a twenty-year goal for the feasibility of his developments, he’d have gone bankrupt many times over, instead of becoming an urban renewal pioneer. – Ed.]

 

Development is all about speed of execution

 

For state-owned enterprise companies to overdevelop and yet not go bankrupt, there’s only one strategy: create state-owned developers and sell vacant homes for high prices.  To sell vacant homes at high prices, have them bought by state-owned banks.

 

It works as long as the central bank keeps printing the money

 

During the last half-decade, this ‘worked’ – at least as defined by the public-choice theory motivations of its various state-owned actors.  Beijing poured the cement it wanted poured.  Localities got revenue they needed to replace what they were shipping up to the capital. 

 

In Russia, gas siphons you

 

Developers and banks, as the people through whose hands the money flowed, were able to siphon off streams for themselves – which they could then expatriate into real estate in Australia, America, or other live-in safety-deposit boxes around the world. Yet that ‘success’ brought its own scrutiny. 

 

As I posted a year ago in “Great job! You’re fired!” (November 30, 2016), mayoral or regional autonomy can be seen in much the same manner Roman emperors viewed conquering generals, as either successful because corrupt or successful because ambitious. 

 

Localities, however, keep pushing back.

 

Basically, the municipalities have been Gleefully running up the debts (August 23, 2010) for years, because that was how they could deal with the myriad unfunded Mandates from Heaven that Beijing cast down to them.

 

A truth less universally acknowledged is the role of politics. A big part of the debt problem stems from a dysfunctional relationship between central and local governments.

 

China’s still got some ways to go

 

Local governments receive roughly half of total tax revenues but are responsible for two-thirds of government spending. In counties the discrepancy is especially large (see chart).

 

If you were a mayor, you wouldn’t like this either

 

Local authorities are permanently dependent on transfers from the center to keep afloat.

 

I’ve written before about the perversity of having local real estate taxes sent all the way to a distant state or national government; it disconnects people’s taxes from their own community, and hence it disconnects their community’s leaders from political accountability.

 

Such a deal would lessen the mismatch between spending and revenues. In particular a property tax, promised in 2013, would give local governments a new tax base.

 

It undermines school system quality and the community’s ability to assure its own police, fire, and school systems are responsive to the community’s needs.

 

These transfers account for, on average, half of local spending. Such huge flows give the center a lot of influence over lower tiers.

 

Not only are the localities contributing more than they get back, they can’t even finance the gap between present penury and future prosperity by borrowing:

 

Under China’s peculiar fiscal system, until 2014 local governments could not borrow or issue bonds without the center’s permission.  Localities depend on fixed shares of certain taxes: 50% of value-added tax, for example, and 40% of personal income tax.

 

If you can’t borrow and you can’t issue bonds (which are simply borrowing from the dear public), then you’re an economic hukou – a rural serf denied access to the capital’s powers and privileges.

 

Equally naturally, local governments look for ways to escape control from above. One that began to emerge in the 1990s is a shadowy kind of investment company under local-authority control, known as a “local government financing vehicle”, or LGFV.

 

Honestly, the Economist has no business calling an LGFV shadowy, especially in a country whose official statistics are fibs out in the open, as PGFV’s are fully political creatures.

 

Politics goes in, money comes out?

 

They were set up as state-owned enterprises, which allowed them to ignore budget constraints and often to keep their balance-sheets hidden from public view.

 

An LGFV is just a fancy special purpose vehicle, conveniently legal under the loopholes of Chinese financing law, that raises money by calling it ‘equity’ but bearing characteristics more akin to debentures or preferred stock. 

 

It’s just my special purpose vehicle

 

Such firms used state-owned land and shares in local state firms as collateral to raise money from banks, the bond market and consumers.

 

LGFV’s let municipalities get cash up front based on the largely irrational hope expectation that a developed property would have big value:

 

The purpose of this borrowing was usually to build houses, roads and other infrastructure.

 

More precisely, the building served to create wealth, whether real or simply in SEO-to-SEO indebtedness, that could be converted into real paper wealth – that is, yuan – and used to enrich the municipality, the developer, the lender, and their respective posses.

 

We’re just here to make sure everything’s on the up-and-up

 

LGFVs were not banks, so they were not subject to the same financial rules. Neither were they local-government departments, which are subject to central controls.

 

In other words, they were – gasp – autonomous vehicles.

 

Nothing to worry about at all

 

Alarmed by the growth of LGFVs, the central government set out to investigate. In 2013 it counted over 10,000 of them and calculated their total borrowing at 7trn yuan ($1.1trn, or 13% of GDP). 

 

That’s a boatload of money by anybody’s standards.

 

At the end of 2015 total local-government debt, mostly involving LGFVs, amounted to 15trn yuan, or 24% of GDP.

 

Meanwhile, China’s still outflowing billions of yuan annually as its affluent try to get that money into other currencies and other countries.

 

Mainland China has 31 provinces, 330 prefectures and 2,800 county-level administrations, so this works out at more than three per jurisdiction.

 

Being thus pervasive throughout China, LGFVs are not flaws in the system but the system itself – and of course, because their autonomy is invisible, they are ripe for patronage, corruption, and good old rent-seeking.

 

Compared with China’s total outstanding credit, amounting to 250% of GDP at that time, this was not such a big share. But most borrowing by LGFVs was “off budget”, that is, unreported. It had exploded during the previous decade.

 

Occam’s three-bladed razor as applied to China: formulated five years ago and still cutting sharply

 

And the reasons were more than merely economic.

 

[Continued in Part 2.]

Leadership principles from Boom Beach

November 27, 2017 | Boom Beach, Cities, Games, Incentives, leadership, Management, Milennials, multi-player games, Regulation, teams, Theory | No comments 76 views

 

By: David A. Smith

 

I’m the leader of a 25-player global task force, and even though I theoretically have dictatorial powers, in fact to succeed I need to be a good manager – especially of Millennials.

 

Average age probably 20; average gender male!

 

Now that we are all hypnotized by our phones, we all must have an absorbing single-player game from those crowded subway moments, and after graduating from Tiny Tower, whose new urbanism I described in a two-part post four years ago, after two other game flirtations I settled about two years ago on Boom Beach, a build-em-up game that’s combat-based.

 

The higher level your headquarters, the more things you can do, and the more firepower you bring to them

 

[What follows are several hundred words on the structure of Boom Beach; if they’re of no interest, skip to Leadership Lessons. Bear in mind that the game’s been very cleverly designed and the rules of engagement have a big influence on the leadership strategy – Ed.]

 

You accumulate military forces, land them on enemy islands in the archipelago, and assault the defenses. 

 

The Boom Beach universe

 

Hence the game’s name.

 

Burly men in front, bazooka gals behind

 

If you conquer, you gain resources (gold, wood, stone, iron) that you can use to upgrade your weaponry and defenses.  Of course, attacks usually result in casualties, and while the fallen brave warriors can be readily replaced (after all, this is a realpolitik game), the new troops cost money, so you have to husband them. 

 

Like others that offer in-game purchases, Boom Beach is brilliantly designed to exploit the instincts of a fourteen-year-old boy: it’s competitive, accumulative, and penalizes impatience – all sins that can be cured just by giving them real money to buy diamonds, which can be used to accelerate or cure almost anything.

 

This world’s Bitcoins – and the same dynamics of buying them

 

Some defenses are computer-controlled, others belong to other players that the game randomly spawns onto your map. 

 

To keep players interested, the designers added an optional feature: task forces.  Anyone can start a task force – the equivalent of hanging out a shingle – and opening it for others to join, up to a preset limit (5, 10, 25, or 50 players).  When a newcomer is added, all you know is the player’s Boom Beach game name (you pick your name when you start out), experience level, and the layout and configuration of his or her base.  To promote collaboration, the task force operations map is entirely independent of the regular-game archipelago, and you’ll never encounter a task force member on your own ‘real’ archipelago, so you can never attack another task force member or be attacked by one.

 

You have to describe the plan in words

 

The Task Force operations give great big rewards (each member typically receives 6-8x the cost of his or her attack), but the bases your task force tackles are far too tough to take down individually.  Multiple attacks are required, and these are best if coordinated, which means using the game’s chat features to provide a plan.  But a member’s rewards are based on the whole Task Force’s results, so the game tolerates and even incentivizes free riders. 

 

  1. To join a Task Force.
  2. To coordinate and communicate with other Task Force members.
  3. To assure the other Task Force members do their share (‘no free riders’).

 

The result is a hierarchy: one Leader, as many Co-Leaders as the Leader appoints, Officers, and then Members.  Each higher rank has some powers not possessed by the lower ranks.

 

If you’re the Leader, it’s all green!

 

The Leaders’ prerogatives and limitations. As the Leader, I have ultimate power. 

 

It’s good to be the dictator … or is it?

 

Any time I want, I can:

 

  1. Decide who gets in to the Task Force.
  2. Promote or demote anyone.  The promotion/ demotion option allows me to share or delegate some powers, just as when to start an operation and which one to choose; whom to promote, whom to kick out, and so on.
  3. Kick out any other member.
  4. Start operations.

 

 

Despite what would seem to be omnipotence, the rules of the meta-game impose limits.  I can’t:

 

  1. Recruit, draft, or press-gang anyone into my task force.
  2. Compel anyone to give me his or her email.
  3. Make anyone attack. 
  4. Keep anyone in my task force if he or she wants to quit.

 

Though I have the power of banishment, if I banish my task force members I soon will have no further task force.

 

Both of you will be banished

 

Other Task force members can quit any time they want and there are thousands of task forces.  (Globally, over 33 million people play Boom Beach, adding 400,000 a month, and the game earns $2,000,000 a month in revenue, mainly from in-game purchases made by anxious adolescent male commanders.)  So loyalty is something they grant, not something one compels.  And loyalty has to be earned – indeed, we’ve encountered plenty of one-night-stand commanders, who join the task force, participate in an operation or two, and then leave without a word or a toothbrush.

 

Lastly, the chat communication is like a public-only Twitter account, where everybody can listen in on everything.  Hence you cannot chastise in private.

 

Teaching, teaching, it’s all about teaching

 

Leadership Lessons.  I’ve been Leader of my Task Force for thirteen months and have no present intentions of stepping aside.  Here’s what works:

 

1. Praise.  It never goes amiss.  Praise people when they attack.  Praise the tactics they use (even if you pick out only part of their attack).  Praise their strategic choices.  Praise their communications. 

 

The emoji I use most

 

2. Lead by example.  As leader, I always attack as early in the operation as I can.  I always take the hardest thing I can find.  And I will sacrifice all my troops so others can finish the operation later. 

 

Tell them how strong they are, and gradually people believe it

 

3. Teach.  Wherever possible, give constructive tips.  Show by example how they can do things better.

 

4. Reward visibly.  Promotion is a reward for high participation.  Even though promotion has no game significance, people appreciate it, and when I promote a new commander, the current Task Force members normally send congratulations.  Likewise, demotion is an effective means of getting somebody’s attention short of expelling him or her.

 

5. Explain.  If you make a decision or take an action, explain it.  I even write why-you-were-kicked-out notes to those expelled.

 

6. Be attentive.  A leader is present, so while not over-managing, respond to questions and performance by task force members.  People like being noticed.

 

7. Remind.  If 90% of life is just showing up, 75% of leadership is prompting people who might have forgotten.  People are much less likely to freeload if their absence is being noticed.  If the operation is running out of time or having difficulty, I’ll remind commanders, either in the open chat or in private email (for those whose emails I have) that they should attack.  And if somebody attacks after I’ve reminded him or her, I reward that by praising the attack in the chat.

 

8. Solicit opinions.  Before making a major decision – like warning someone of impending expulsion, or choosing which operation to start – I will ask the entire task force.  People can weigh in or not as they choose.  And most of the time, I’ll defer to any clearly expressed preference.

 

Tinderbox, Foxtrot, or Stronghold next?

 

9. Cull.  If a player is free-riding, being abusive, or ignoring the task force’s strategy, and after appropriate warnings, I’ll simply kick out him or her.  Nothing like showing the observant herd that inaction has consequences.

 

Well, that escalated quickly

 

10. Warn.  Before culling, warn – and be specific: what the problem is, what will happen if it isn’t corrected, how to correct it.

 

The consequence of ignoring warnings (not me)

 

11. Never bluff.  If you warn someone he or she will be kicked out unless performance improves, if it does not, follow through on the threat.  Again, it’s less about the individual commander and much more about being seen as consistent with your statements and principles.  (For officers, I can use demotion as an interim, escalated warning.)  Say what’ll you do; then do what you said.

 

Decisive … but not my style

 

12. Be cool.  Flareups between commanders are inevitable when we’re dealing across time zones, languages, and ages, as well as being constrained by 140-character message limits.  Sometimes I’ll wake up to 41 messages in my Boom Beach chat, 38 of which are a flame war between two commanders, each of whom decided the other was being insulting.  If I’m online when a flame war starts up, I will some of the time just let it play out before interceding, usually by changing the subject to something prospective, like finishing and winning the current operation or choosing which operation to do next. 

 

13. Don’t micromanage.  A lot of things, I just let go.  Helicopter-commanding demotivates the commanders; besides, it’s supposed to be a game and if somebody is prompting or commenting or criticizing every single micro-move, you’ll rapidly find another task force that’s not so compulsive.

 

14. Never lead weakly.  Even if a commander is valuable, if he or she is out of line, I have to kick him or her out.  Talent is not compensation for rudeness or selfishness.

 

15. Keep it fun.  Boom Beach is a game; people play it to have fun.  Increasing their fun is a leadership objective in its own right.

 

Satisfaction comes when the team wins

 

And if you wonder what all this has to do with housing, think of markets and households as Boom Beach players and successful cities (or housing properties) as Task Force Operations, because what works in one works in the other.