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Big Sticks, Big Solutions and the Unmentionable Funding Proposal
Now don’t get me wrong – I am a big fan of the proposals launched this week by the Green Investment Bank (GIB) commission. Let’s celebrate a report that explicitly recognises market failures, and applies some big brains to how to encourage investment in useful low-carbon infrastructure. Let’s hope that George Osborne, having set up the commission, acts quickly to create the GIB.
So why mention big sticks? In launching the report to a packed house at the Green Alliance summer reception, commission Chairman Bob Wigley was refreshingly blunt. Surveying the dismal impact of previous policies to encourage domestic households into energy efficiency and renewables, he observed that the old regime was one of “grants and advice”. To really get anywhere what we need is a regime of “Sticks, grants, advice and loans”. The GIB can do something about the last three; the first requires political guts. Penalising house owners for not being green enough? Go, Bob, go. However, Mr Wigley was understandably diplomatic when asked his opinion of the fortitude of the government’s guts.
And what of big solutions – isn’t that what we need? Well up to a point, yes. There will be many large scale infrastructure projects to fund. But the commission identifies that most investment funds are too big to invest in small scale community energy projects, of which we need tens of thousands. The solution it seems is to aggregate the small morsels of community energy into a suitably large and appetising dish for the institutional fund managers to feast on.
Instead, how about making it easier for people to invest directly in their local energy co-operative and not give the cash to the giant institutional funds in the first place? Oh no, hold on – how would the City earn its cut? Best not go down that route.
And finally, what about the Unmentionable Funding Proposal? The commission says we need to find £550bn over 10 years to invest in the low-carbon transition. A questioner from the floor pointed out that the Bank of England had pumped £200bn into the economy in as many months to save the financial system. This has clearly not caused a Zimbabwe style monetary collapse, despite the orthodox horror of ‘printing money’, but now it seems that it is rather impolite to mention it. When there is spare productive capacity in the economy, why not use ‘green quantitative easing’ to kick start the GIB? Bob was characteristically blunt in his evasiveness: “I’m afraid as a former member of the Court of the Bank of England I’m going to dodge that question”.
One good thing about the budget: the recognition by George Osborne that the financial crisis began with the banks. This was the justification for the £2 billion bank levy – though, as nef’s Tony Greenham points out, this is only a third of what they paid out in bonuses.
The implication – though Osborne didn’t say this bit – is that it will also end with the banks. Only the most anal deficit hawk can possibly believe any more than we can cut our way to recovery. Quite the reverse. John Maynard Keynes warned that this approach will lead to “a peregrination in the catacombs with a guttering candle”.
No, the only way out of recession is to get the enterprise economy working again, despite decades when official attention – and certainly the attention of the banks – has been elsewhere. The fantasy is that somehow the free market will do this magically, when it clearly won’t – and the main reason it doesn’t is that we no longer have a banking system fit for purpose. Its structure and attention is on the speculative economy.
So, although Osborne may have made the link between the banks and the crisis, the full implications of that don’t seem to have been worked through in the budget. There is nothing but more cuts ahead unless we can produce a useful, local banking infrastructure out of the oligopoly of dinosaurs we have inherited from the huge banking mergers that the UK government encouraged throughout the 20th century.
We have names now to the banking commission that will investigate this, but they are not hugely inspiring ones, and the hands of the expensive lobbyists for the banking industry are everywhere – and desperate to keep us all chained supplicants to the old dispensation.
The key point we need to get across is that solving the problem of our ineffective banking infrastructure is critical to bringing recovery forward, and staving off more cuts. It is a fantasy to suggest that somehow UK bankers can be cajoled in lending more effectively locally. They don’t have the systems or the people in place to do that. It is a fantasy to imagine that enterprise will somehow emerge without lending.
There was much to discuss in yesterday’s Mansion House speech, but I would like to focus on one disappointment and one pleasant surprise.
First the disappointment; the five members of the new Independent Commission on Banking are all economists and bankers of the highest calibre and integrity. Some are on record with quite strident views about the ills of our banking system and quite radical prescriptions for their cure.
But they are all, well…, bankers and economists.
If we are to truly create a system as Mr Osborne says, where “banks support the people, instead of the people bailing out the banks”, we need to understand HOW the banks need to support the people.
- Can these five commissioners really understand the needs of small businesses?
- Can they really understand the needs of social enterprises, and local regeneration?
- Will they consider the still shameful lack of access to finance experienced by many of our citizens?
- Do they understand the urgent need for massive investment in decarbonising the UK economy?
We do not know yet how the commission will carry out its remit. It should ensure it builds a broad, credible and comprehensive stakeholder consultation on the needs of the users of the banking system, and not just get lost in the technical details of restructuring the banks.
Which leads me to the pleasant surprise.
The new commission’s terms of reference are not limited to the question of splitting investment and retail banking. They include the Government’s wider goal of “creating an efficient, open, robust and diverse banking sector”.
This last point – diversity – is crucial. To meet all society’s needs, the banking system should comprise many different kinds of institution: different in industry sector skills and expertise, different in regional and local focus, different in forms of ownership, different in investment horizons, different in culture and goals.
It’s not just that we need to look at breaking up the massive universal banks we have today, we need to look at how to build up the alternative and diverse institutions we need tomorrow.
Lindsay Mackie is a consultant at nef. She is leading nef’s post office campaign and works on Clone Town and Ghost Town Britain.
Let’s hope, as the chancellor prepares his Mansion House speech on Wednesday evening, that he has already included brave words about the banks along the lines of “I know that the cuts I am announcing are in part the result of banking folly and greed. And so I am entirely with my colleague Vince Cable, who is even now preparing root-and-branch banking reform. We cannot have a public service cuts programme without the banks being equally painfully reformed.”
To help him in this decision, let’s also hope that some brave Treasury official slides across to him the following info from Britain’s small businesses.
Around a quarter of them are deeply fed up with the banks’ lack of business support, particularly credit availability. Nearly half of them don’t even have a local bank manager. Thousands of them have had to deal with not one, two or even three business managers at their bank in the past two years, but four or more.
Since the height of the crisis last year, the 213,000-strong Federation of Small Businesses has been polling its members monthly and collecting this kind of information. These are the people on whom local economies, and the national economy, depend. And the banking system treats them appallingly.
They are joined of course by the poor and the unbanked – its reckoned that 2 million people have no access to a bank account. The numbers of people falling into the hands of loan sharks (1,800% interest, threats thrown in for free) are already increasing.
Now, as George Osborne prepares to throw raw meat to the deficit hawks at the Mansion House, he cannot ignore the banks’ failure. He should not be contemplating cuts that will hurt the economy and individuals without announcing banking reform at the same time. Does he, or does he not, agree with his colleague Cable, who said in his first public speech in government two weeks ago that we have “a seriously dysfunctional banking system”?
Taking on the banks is absolutely crucial and there is a movement growing around it. The Future of Banking Commission yesterday called for regulation and separation of functions and – most importantly – transparency, so that we can see where and to whom banks lend. The Better Banking Coalition is powerfully arguing for real and fair help from banks – who will have to be forced to do it – for the unbanked and the less well off. The Post Bank Coalition, of which the new economics foundation is a member, wants a publicly owned local banking network based on the Post Office. It’s a popular and ingenious idea and bedrock small businesses want it.
The chancellor will be surrounded by the City, literally and metaphorically, at Mansion House tonight. That food on those exquisite plates will be hard to swallow if he does not announce painful banking and reform along with the cuts for the rest of us.
We need a universal banking obligation. It would mean that everyone, by right, would have access to the full range of banking services – whereas at the moment, one of the great fights with the banks has been the way they’ve chosen customers to maximise profitability and created finance deserts for poor communities. On the ground, it propels people into the hands of vulture lenders with baseball bats.
We also need a green investment bank. The big question is how it should be funded. Some suggest creaming off the proceeds of the European Emissions Trading Scheme, or you could have a windfall tax on the fossil fuel companies, or carbon bonds – there are lots of ideas. And here’s one that could be a poetic test case: the Royal Bank of Scotland used to advertise itself as the Oil and Gas Bank. Given that RBS is now in the hands of the taxpayer, why not turn it into the Royal Bank of Sustainability?
Finally, Labour should aim at launching a competition inquiry into the big banks, and breaking them up. The great paradox of what happened after the crash was that banks that were already too big to fail got even bigger. Major action is needed to stop banks holding the country to ransom.
From today’s Guardian. Original article includes contributions from Sunder Katwala, Pam Giddy, Will Straw and Joss Garman.
It looks likely that while George Osbourne will take the job of Chancellor of the Exchequer, Vince Cable is being assigned a role looking after business and banks, although details are understandably sketchy at this stage.
From nef‘s perspective, Cable could be an excellent choice for this kind of role, as he appears to be dedicated to at least some structural reform of the banking sector. During the election campaign, Cable spoke out against the cartel of big banks in control of the financial sector, calling for them to be broken up. He also seems to be in favour of a levy on the banks – possibly a financial transaction tax.
Perhaps most encouragingly, Cable wants to encourage the local financial sector, including local enterprise funds and regional stock exchanges, which will help reconnect banking with the high street economy and small businesses. He’s also in favour of our plans to create a People’s Bank at the Post Office. Speaking in at the parliamentary launch of the Post Bank campaign, Cable said, “The Post Bank is an attempt to clean up banking. This is a cleaner principle based on sound banking ideas, but driven by public interest rather than narrow short-term profits.”
Obviously, in a coalition compromises may come, but let’s hope he holds true to principle and pushes for the kind of far-reaching reordering of the financial system that will kickstart the economy and tackle financial exclusion.
UPDATE: More on Cable’s likely moves are outlined by the Guardian, including what looks like taxes, curbs on bonuses and moves towards breaking up some of the banks. There’s a rather revealing comment as well from David Buik, City commentator at BGC Partners:
“Lovely bloke he may be, but the thought of Vince Cable, as Treasury Secretary, bringing influence to bear over the banking system and its constitution fills me with horror. This is nightmare material and I must head to the chemist for some barbiturates! I never voted for this and nor did millions of others.”
Of course, none of us voted to bail out the banking system with no strings attached. We’re going to have some serious moral hazard on our hands if those working in the financial sector think that they can continue to walk the highwire of speculative risk knowing that the safety net of public money is always below them.
nef has long argued that we need systematic reform of our financial system to make it work for people and the planet. So far, the Election Campaign hasn’t touched on banking or finance, which means a crucial debate on the future of our economy is not being had. You can help the cause for financial reform by asking your candidates what their party plans to do to fix the banks.
Lindsay Mackie is a consultant at nef. She is leading nef’s post office campaign and works on Clone Town and Ghost Town Britain.
When nef began to put together the Post Bank Coalition 15 months ago it was because we knew that this vital local economic and community network was being neglected and run down to the point where it might crumble to a few thousand post offices.
Successive governments have treated the Post Office as a series of problems which they hoped would go away- rather than as a trusted and flexible organisation which props up- and more- thousands of communities both rural and urban.
Today’s announcement then , that the Post Office is to get a dollop of £180 million Government (our) money to provide new financial services and to improve financial inclusion through credit unions and weekly budget plans is thoroughly welcome. The big banks have been made to offer up their current accounts for access in Post Offices and the poor will now be able to pay utility bills by direct debit instead of through the disgracefully over priced meters. The Government is talking about how it can levy retail banks to pay for credit unions to access accounts wherever they are in the country.
This announcement does show that the Government has entirely changed direction by recognising, and saying strongly, that the Post Office network is important, is highly valued by the people, and needs to be sustained .
The Post Bank Coalition – nef, the Communication Workers Union, the Federation of Small Businesses, the National Pensioners Convention, Unite the Union, the Public Interest research Centre – would go much further though, than the Government has today. Our proposal is that a Post Bank- of the sort which flourishes in Italy, France, New Zealand and elsewhere (South Africa is about to start one)- is the answer both to the business future of the Post Office and to our need for diversity in the banking system.
Our economy depends on local economies. At present they are badly served by the retail banks and could be must best served by their local post offices. At present the financial services offered by the Post Office- which it does do very successfully, being, for instance, the number one provider of foreign currency in the UK- are run by the Bank of Ireland so that 50 percent of all profits go back to Ireland. But worse than that, the Bank of Ireland is in a very shaky position and its capacity so far has not even included offering a current account to PO customers, nor children’s savings accounts. We on the Coalition think its probably not capable even of offering the new range of products adequately. It may have been the right partner at the time when the PO went into financial products but it isn’t now.
So we would have liked the Government to grasp that nettle. The other problem about the welcome first steps announced today is that they don’t do anything substantial for the big Post Office problem of the falling revenues of a third of all post offices. Only a publicly owned Post Bank, with all the revenues going back into the Post Office, with all the innovation and increased footfall it would bring, can do that.
But the Post Bank Coalition is pleased with a good first step to keeping and protecting this astounding and far reaching underpinning of the public realm.
Lord Turner was at his iconoclastic best last night. In a lecture to the Cass Business School in London, the chairman of the Financial Services Authority once again questioned the value of Britain’s swollen financial sector and called for tougher regulation on City activities.
“We need to challenge radically some of the assumptions of the past 30 years,” he told the audience, “and we need to be willing to consider radical policy responses.” According to Turner, there are a range of ideas that need to be taken out of the “index of forbidden thoughts” and brought into the mainstream.
Among those radical policies was, pleasingly, the idea of a Robin Hood Tax on financial transactions, proposed by nef back in 2001 and now the subject of a major campaign from a coalition of NGOs, faith groups and trade unions.
Lord Turner also reflected on an interview last year in which he branded much of the activity in the financial sector as “socially useless”. “People have asked me whether I regret those comments,” he said, “The answer is no, except in one very small respect, which is that I think it would have been better to use the phrase ‘economically useless’ or ‘of no economic value added’.” This echoes nef‘s recent report A Bit Rich which found that Elite City bankers (earning £1 million-plus bonuses) destroy £7 of value for every £1 they create.
Turner’s comments come less than a week after the publication of new research showing that London has lost its unique position as the highest ranked financial centre in the world: it now shares that status with New York. The banking lobby has tried to argue that the news should make Government cautious about increasing taxes and regulation on the financial sector.
Here at nef, however, we have long argued that finance should be the servant, not the master of the economy. The protracted financialisation of the UK economy has not brought benefits to everyone. Around 3 million people in the UK still lack a basic bank account, and small businesses find it increasingly hard to obtain loans, as banks moved away from local, high street level activities to prioritise speculation and short-term profiteering. The more we can do to reconnect financial services with the real economy – and especially disadvantaged communities – the better. We might also do well to refocus attention on neglected areas of the economy – such as agriculture and manufacturing – in anticipation of the necessary transition to a low carbon food and energy system.
Lord Turner’s comments show that, contrary to what been said by some defeatists in the movement for a just and sustainable economy, there is still plenty of opportunity to introduce new ideas and challenging, radical policy proposals. The door that was flung open by the financial crisis hasn’t closed yet. So let’s delve deep into that index of forbidden thoughts and see what works. If you’re curious, you can start here.
Sargon Nissan, a researcher in nef‘s business and finance team, recently spoke at the Transact Conference on financial exclusion, where he debated with Stefan Marx of the British Bankers Association on the subject of financial reform.
You can now listen to selected experts from the debate, and other clips from the conference:http://neweconomicsfoundation.podbean.com/mf/web/5ksi3s/TransactConferencePodcast1.mp3″