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Bookmark and ShareSargon Nissan is a researcher in nef‘s Access to Finance team.


As you’ve probably already seen, today saw the launch of a major campaign to introduce a Robin Hood tax on financial transactions by a host of organisations working on issues of global and domestic poverty, international economic reform and social justice. Bill Nighy and Richard Curtis have produced a great little film explaining the tax’s merits and appropriateness and nef is just one of the organisations backing this campaign.

The Robin Hood tax would impose a very small fee for every financial transaction between financial institutions. That means it is not a tax on the financial services you or I would use.  It is intended to make those who brought our economy to its knees, massive multi-national financial institutions, pay for the $20,000,000,000,000 (that’s twenty trillion dollars or a third of global GDP) of bailouts, guarantees and quantitative easing they have benefitted from. Here in the UK we’ve spent more than $ 1 trillion (£635 billion) to bail out our banking sector.

Very conservative estimates suggest it could raise £100 billion for domestic and international issues, helping to limit how far we have to cut public services in the UK and ensuring that we meet our commitments to the developing world to alleviate poverty. At a rate of just 0.05% per transaction, and given the huge sums taxpayers have stumped up, it seems a no-brainer in terms of being an appropriate and feasible policy option.

It may seem uncomfortable to line up the usual cast of celebrities and endorsements. It may seem too good to be true. But it actually gets better. Read the rest of this entry »

Bookmark and ShareAndy Wimbush is nef‘s Communications Assistant and blogmaster.

Today sees the start of a campaign to introduce a tax on financial transactions in the banking sector that would raise billions to save vital public services, green the economy and tackle poverty.

Called The Robin Hood Tax, the campaign bears the same name as a report nef wrote back in 2001 with our colleagues at War on Want, which outlined why a transaction tax – sometimes called a Tobin Tax – would stabilise volatile markets and raise funds for international development. The Green New Deal Group also recommended a Tobin Tax in their latest report, The Cuts Won’t Work.

Even at a rate as low as 0.05 per cent on each transaction has the possibility to raise hundreds of billions each year. And when the banks have been saved at the taxpayer’s expense, it’s only right that we should see some return from it. And surely even the most self-assured banker – even one played by Bill Nighy – couldn’t be opposed to that.

nef is very proud to be part of the broad coalition of NGOs who are calling for this tax. You can show your support by signing your name on the Robin Hood Tax website.

Bookmark and ShareAndrew Simms is nef‘s Policy Director and head of nef’s Climate Change programme.

If economics was subject to the same evidence-based scrutiny as climate change, our world would be run very differently. Photo by genericface via Flickr.

The world is not run according to climate science. Amid the almost hysterical jeering since the Copenhagen climate summit, it’s a fact worth remembering. If things were done with one eye carefully checking the planet’s ecological engines and the resource levels in its fuel tank, it would look very different The largest indoor snow park in the world would not, for example, be in the roasting Middle Eastern emirate of Dubai. Public transport would be quick and cheap, and Richard Branson would be an unknown gardener, quietly cycling back and forth to his organically-run allotment.

Yet fear of the likely adjustments needed to halt dangerous climate change seems to fuel the vitriol of the vociferous minority attacking climate science. It’s odd when you think what those changes might be. A cartoon currently going around sums it up. An academic-type gives a lecture, listing the outcomes of climate action: energy independence, clean water, clean air, green jobs, liveable cities, healthy children etc etc, while a man in the audience blusters, “But what if it’s a big hoax and we create a better world for nothing?”

And, it’s not, of course, a hoax. The basic chemistry of global warming has been understood and remained unchanged for around 200 years. Stories concerning the science in recent weeks have been of the type, “how long can you hold your breath?” Not “can we actually breathe underwater?” At the same time, observed trends on greenhouse gas emissions, measured since the last major report by the Intergovernmental Panel on Climate Change (IPCC), reveal the opposite of scaremongering.

If anything, the IPCC has been too conservative, having underestimated how quickly we would be pushed toward dangerous change. Actual carbon emissions have been beyond even their “most fossil-fuel-intensive scenario”. Crowing over the inclusion in its last report of an erroneous date for the melting of Himalayan glaciers drowned out a new report from the World Glacier Monitoring Service, that detailed an “unbroken acceleration in melting” of glaciers around the world.

Sadly, right now, the climate change deniers have little to fear. We have no policies or actions remotely equal to the threat. Why is that? It is partly because the world is not run in respect of basic, well-understood physical laws. It is run according to the dictates of an altogether more variable discipline, economics, whose insights and proposals are subject to a weaker scrutiny. The real world ticks reliably according to the laws on thermodynamics and the conservation of energy. Such consistency cannot be claimed for the notion that a deregulated, greed-driven approach is the most efficient way to organise banking. But what if economic policy was subject to the same standard of evidence and review as climate science?

What would natural science make of the assumptions underlying mainstream economic models? They include the classic assertions that we are all perfectly rational, make choices that are unaffected by the behaviour of others, and that we have “perfect information”, knowing everything important there is to know. Or there’s the one in which an infinite number of small firms compete in open markets with no barriers to entry (think Walmart, Microsoft, Amazon, Tesco, Google). And the idea that consumption can grow infinitely on a finite planet.

Orthodox economics is based on simplifications that so distort the real world as to make it unrecognisable, yet its basic tenets are credulously repeated on an almost daily basis in national newspapers and on television news. A genuinely evidence-based approach to economic policymaking would not produce a system remotely like the one we have, the business-as-usual version that many climate sceptics seem so eager to defend. Given its task, the vast range of subjects covered, the thousands of scientists involved, and the sheer size of its reports, what’s stunning about the IPCC’s work is that comparing it to any economic analysis used to actually run the world is like comparing the complete Oxford English Dictionary to a guide to slang published by the Sunday Sport.

Elsewhere, some voices have called for there to be a separate climate sceptics’ report. On one hand, this misses the point. If the sceptics’ science was good enough to be published in decent, peer-reviewed journals, it would be considered alongside everything else by the IPCC. But on the other hand, subjecting the deniers to the same degree of rigorous review as everyone else is a rather delicious prospect. If that was done, the final report would likely be short indeed.

And, on current trends, it is still the case that by the end of the year 2016, the amount of greenhouse gases in the atmosphere will make it unlikely that we’ll stay below the critical 2°C temperature rise. It’s 82 months and counting

Bookmark and ShareSargon Nissan is a researcher in nef‘s Access to Finance team.

Listening to the debate on bankers’ bonuses over the past week is enough to make anybody seasick. It veers terrifyingly from righteous vengeance to doom-laden warnings.  The Chancellor says he “won’t be held to ransom” by the RBS directors.  Then we hear that taxing wealth-creators is bad and counter-productive.

Rather than being dogmatically for or against bonuses, we should take a step back and ask: what is the point of a bonus?

Bonuses are incentives. And we know that incentives are powerful and do work. So while there is a question about size – City bonuses are obscenely large and out of all step with pay in the much vaunted “real world” – the most overlooked question seems to be: are we using bonuses to incentivise the right kinds of actions and behaviours in the City?

Put like that, it is obvious that there are fundamental flaws with the City bonus systems.  The current bonus system in the financial sector encourages the behaviour that wrecked our economy. My own experiences as an investment banker echo the observation by Lord Turner and now many others: much of it is indeed socially useless. It also has the potential, as we’ve seen, to bring the economy to its knees. It is dangerous and useless primarily because the opaque bonus system breeds short-termism and speculation.  It pushes bank staff into overstretching their institutions’ capacity to bear risk. My experience is that even if traders want to invest long-term, they find they can’t because they are not paid to. When I traded shares for an investment bank, the managers’ patience for losing money was counted in days, not weeks or months.

A recent Harvard Law School study documents how executives from America’s two biggest failed banks were rewarded hugely for their efforts in the years leading up to the crisis.  We now know that they were being paid so handsomely to bankrupt their own institutions and threaten the world economy.

I have just taken part in a Royal Society of Arts debate about whether the bonus system could possibly exist in an effective finance sector. The City insiders who defended the system inadvertently revealed the two reasons why this debate continues going in circles.  First, they over-estimate the contribution of the sector’s high-paid.  Second, they believe,  wrongly, that bonuses reward good performance.

Even the Bischoff Report, commissioned by the government, makes this same mistake.  It assumes that because the financial sector is vital that the bonuses must be vital and, crucially, that there is nothing wrong with the way bonuses are structured.

In reality, the sector’s contribution to the economy is not dependent on the bonuses likely to suffer from a windfall tax. Most bonuses that non-bankers receive (including doctors, teachers and many other private sector employees) are no more than a portion of overall annual pay.

A windfall tax will send a strong signal that bonuses have gotten too big. But a windfall tax is not enough. Incentives, rules and regulation are not encouraging the behaviour our businesses and economy need.  They have encouraged the banks to become casinos and their staff to bet the house and our economy.

For banks, just as for bankers, it isn’t that incentives are the problem.  Bad incentives are the problem.

Bookmark and Share David Boyle is a nef fellow, a writer and the editor of nef‘s newspaper, Radical Economics.

Vince Cable was quite right on the Today programme. The response to the RBS director’s threat to resign if they are not allowed to pay the bonuses they want to their failed, cash-strapped, state-owned bank should be to say: go ahead.

But we need to look a little more closely at the business of banking bonuses. They are paid out of a percentage of the profits of the investment divisions, sometimes up to fifty per cent. The money would otherwise go to the shareholders – the same ones who failed to exercise proper control over the bank they owned.

There are some, and Fortune magazine is among them, who would say that they are better shared with the staff than shovelled at the owners – and that’s right as far as it goes.

But the real question is not why the bonuses are so high. It is why the profits are so high. They come, after all, out of all of our pension investments, or the debt that goes to build productive business, or capital investments in public infrastructure. The real scandal is that these bonuses are paid out of fees which ought rightly to stay with the small investors who are watching the value of their pensions falling.

The fact that the banks are able to award themselves such hefty fees is purely because we have allowed a semi-monopoly to build up in banking, both domestic and investment banking. So here is the real solution: slash the bonuses, accept the resignation of the directors, put in their place bankers who are prepared to do what is necessary to break up RBS into its constituent businesses and regions.

Bookmark and Sharelindsay-mackie2Lindsay Mackie is a consultant at nef. She is leading nef’s post office campaign and works on Clone Town and Ghost Town Britain.

The Post Office consultation announced today is a most baffling affair. It’s billed by Lord Mandelson and his department as containing “exciting proposals” on which he wants our views. He wants to see the Post Office at the forefront of mortgage provision and he says it is “ideally placed to bring banking services to the heart of people’s communities”.

The consultation will ask us if we want the Post Office to have its own current account, a children’s savings account, business accounts, the ability to manage our money on a weekly budgeting account, and links between the Post Office and credit unions.

The department for business, innovation and skills (BIS) also wants the banks that don’t allow their current accounts to be accessed at the Post Office – hang your heads RBS and HSBC – to do so. (They could just tell them to do it – why consult us?)

The thing is though, these proposals are good. The Post Office should adopt all of them, and has indeed in the past announced that it will, for instance, offer current accounts. The big criticism is they don’t go nearly far enough. A Post Bank – where all the profits go back into the Post Office and are not halved with the Bank of Ireland as at present – would be a really practical and visionary step. It would introduce diversity into the banking system too.

So why have a consultation? These are mainly business proposals that would extend the Post Office’s thriving and well-run financial services. It’s hard to see the populace rising up in indignation at the idea of Post Office children’s savings accounts. (“How outrageous. I am so against this!”). It’s not like that. Why are we having a three-month consultation on financial developments?

If BIS was serious about quickly expanding and strengthening the Post Office it would say to Alan Cook, its head, that he should just get on with providing these sensible and desirable new services. Whether people want them or not will show up in the market. At nef and in the Post Bank Coalition we think that people love and trust the Post Office and will use these new offers and thus make these extended financial services popular.

The consultation is really worrying on two counts. The main one is that these mouse-like developments – in fact any self-respecting mouse would have a bolder vision than this – don’t tackle the neglect and the lack of government support from which the Post Office has suffered for decades. A third of sub-postmasters and sub-postmistresses have seen their revenues decline in the last year. This is just not sustainable. The government has recognised today that the Post Office is a great British institution but it needs to treat it like one.

That means that it doesn’t need this consultation (reporting cunningly just before the election, when the long grass will be even longer) but it does need to follow the excellent advice of the BIS select committee report last July – on, yes, the future of the Post Office. Having massively consulted, it concluded that financial services should be expanded and that, crucially, the government must put its business through post offices and recognise the Post Office’s potential as an unparalleled social, community and economic network.

Mandelson’s department needs to be more radical, more profoundly committed to strengthening the Post Office, more committed to helping small businesses have the financial advice and help they need, than is allowed for by these virtuous proposals. Consulting us on a Post Bank, on using Northern Rock, on making the Post Office the public alternative to our present dreadful banking system – now that would be worth consulting on.

Bookmark and ShareSargon Nissan is a researcher in nef‘s Access to Finance team.

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The financial system must contain a diversity of institutions with different structures and focused on specific market niches, something more like an ecology than a monoculture. | Photo by Panoramas, via Flickr

Quantitative Easing. Bank bailouts. Building society rescues. Fiscal Stimulus packages.

What do they have in common? They are all preventative measures. That is to say, they are trying to stop something bad from happening; in this case stopping the financial crisis metamorphosing into an economic depression.

While the jury is out on how well they succeeded, it is clear there is widespread acceptance of the need to have done something.

Now the question becomes, what next? Prominent commentators and regulators have weighed in but without providing a huge amount of detail. Adair Turner, head of the Financial Services Authority, defined the problem succinctly when he reminded us that

British citizens will be burdened for many years with either higher taxes or cuts in public services – because of an economic crisis whose orgiins lay in the financial system, a crisis cooked up in trading room swhere not just a few but many people earned annual bonuses equal to a lifetime’s earnigns of some of those now suffering the consequences. We need radical change.

But that doesn’t take us any further to understanding what needs to be done. The Treasury’s summer white paper, Reforming Financial Markets, set itself this task and concluded that to achieve a well-functioning financial system that would be stable and effective, what was required was greater scrutiny, competition and diversity. Increased scrutiny, especially of ‘systemically important institutions’ (bailed out banks that were too big to fail), greater competition and an increased role for diverse institutions such as building societies would ensure that a crisis of this kind would not happen again. Yet if we scratch the surface of this gathering consensus, it seems there is little substance underneath.

Despite almost two million people excluded from even having the most basic banking services, the Treasury’s solution boils down to more money for financial capability training rather than difficult decisions about what financial services should be for, and which ones are exploitative. As Faisel Rahman, chief executive of Fair Finance in London’s East End that battles predatory lending amongst excluded and vulnerable communities, reminded me last week; there are almost eight million people reliant on ‘unorthodox’ credit in the UK, meaning often doorstep lending at rates of several hundred per cent, yet while this problem grew we in the UK celebrated having the most sophisticated financial sector in the world, on the doorstep of the communities Fair Finance works with.

Released yesterday, The Ecology of Finance: An alternative white paper on banking and financial sector reform tries to take up this challenge. We argue that radical reforms are needed, but preventative measures will not be enough. To deliver a landscape of financial institutions capable of lending and investing a manner consistent with fairness, inclusivity and long-term economic sustainability an entirely new approach is required.

To achieve the ambitions of a competitive and diverse sector, The Ecology of Finance breaks down what the finance system should be for and used to provide. The short-term profit models of ‘plc-finance’ needs to be constrained by a diversity of institutions with different structures and focused on specific market niches – more like an ecology.

Don’t just take it from me either. Andrew Haldane, the Bank of England’s Executive Director for Financial Stability, has identified the need to look to ecological and epidemiological lessons for better understanding how complex systems – be they ecosystems or the financial system – behave. It is not simply a question of more complexity is always better, but rather that there are lessons to be learned from the robustness and the vulnerability of things as diverse as rainforests and outbreaks of epidemics.

Hence, to create a financial system fit for our complex society and economy, we identify preventative and positive financial reforms that could ensure the health of our economy and also enable a greater diversity of institutions to flourish.

We recommend

  • Separating retail from other banking and preventing deposit-taking banks from engaging in other, risky activities
  • Setting up a social investment bank, a green investment bank and a Post Bank
  • Regulating financial institutions according to their functions and how risky their activities: the bigger the bank the higher the capital requirements
  • Reforms to encourage more mutuals,  co-operatives and community finance institutions
  • Legislation to force banks to be open about their lending and to lend to the financially excluded.

 

Bookmark and ShareAndy Wimbush is nef‘s Communications Assistant and blogmaster.

I am trying to make this a regular Friday thing…

The good news:

  • The billions we currently spend on unemployment benefits could be used more effectively help deprived communities weather the recession. So says nef‘s latest report Benefits that work.
  • Breaking up the banks is no longer a marginal idea: it seems that everyone from Andy Haldane at the Bank of England to Alistair Darling now thinks that breaking up the mega-banks would be sensible. nef called for this earlier in the year in our report I.O.U.K.
  • Age of Stupid director Franny Armstrong was ‘saved’ from a mugging by Boris Johnson . The Mayor of London just so happened to be cycling past as Franny was being intimidated by a group of teenagers wielding an iron bar. Saving a green activist while riding a bike has got to be the act of eco-friendly Good Samaritanism par excellence. Let’s hope Franny managed to get Boris to sign London up to 10:10.

The bad news:

  • Climate change could lead to a new era of global insecurity, so say the top military figures who make up the Military Advisory Council at the Institute for Environmental Security in the Netherlands (via New Scientist).
  • Ed Miliband has admitted that the chances of a global deal at COP15 in Copenhagen is increasingly unlikely. The Minister for Climate Change and Energy said that a full treaty could be up to a year away.
  • Lord Griffiths perpetuates the myth that inequality is somehow ‘good’ for us. The Conservative peer – who is also the vice-chair of investment bank Goldman Sachs – tried to justify the bonus culture of the City by telling an audience that “inequality is a way of achieving greater opportunity and prosperity for all“. Richard Wilkinson, of the Equality Trust, provided a rebuttal, while nef‘s own research in The Great Transition shows that inequality could cost the UK alone up to £4.5 trillion over the next forty years, because of the social problems it causes.

Bookmark and Share Dr Stephen Spratt is Director of nef‘s Centre for the Future Economy.

Mervyn King has annoyed Gordon Brown and Alistair Darling again with his call for UK banks to be split into smaller groups focusing on either retail or investment banking, but not both. King does not share the government’s belief that stricter regulation would prevent banks heading straight back to the casino, describing such thinking as a “delusion“.

He is almost certainly right. Banks like being big, and they particularly like being too big too fail. With the backing of the taxpayer, should their gambles go wrong, they can borrow cheaply and make huge bets in the market, safe in the knowledge that they will capture any gains but be protected from losses.

It is not surprising then that the banks also oppose King’s idea. Of course, they say that this is because of the enormous complexity, or “practical difficulties”, that implementing it would involve. Another reason is more likely. Simply, they are able to make a lot of money from leveraging their depositor base to support speculative activities elsewhere.

But this creates strong incentives to focus on the more “exciting”, and highly lucrative, gambling activities at the expense of the “boring” business of providing banking services to individuals, families and small businesses. This is nothing new in the UK, where financial exclusion remains a huge problem and small businesses struggle to access finance at all. The closure of branch after branch, particularly in disadvantaged areas, is just the most brazen example.

It seems very hard for banks to concentrate on providing a good service to these parts of their customer base when the global casino beckons. If some banks want to roll the dice in the markets, fine – they just shouldn’t be allowed to gamble our money to do so, and they certainly should not have these bets underwritten by the taxpayer.

For banks to serve their retail customers well, they should be dedicated to this essential function, and only this. By cutting banks down to size we could bring them closer to the communities they should be serving, and so better able to meet local needs.

At nef we would go further. Will Hutton on this site rightly calls for root and branch reform. Here are a couple of ideas of how that process might start. Most “investment” banks don’t really do any real investing. They are trading banks. But we do need real investment banks that focus on long-term needs, and nowhere is this more obvious than with green energy and transport infrastructure.

As well as separating out retail banking, why not also restructure the investment side? The government, on our behalf, retains its stake in the banking system, and it could use this as the means to form a green investment bank, charged with financing these long-term investments. And why stop there? A national housing bank to underpin a more stable housing market that meets people’s needs is an idea whose time has come.

For a while not so very long ago, people remembered that the purpose of banking was not to feather its own nest, but to provide the vital financial services and long-term investments that underpin our economy and society. King seems capable of seeing through the hard sell of the financial lobby to recall this. It would be good if the chancellor and prime minister could do likewise.

Bookmark and Sharelindsay-mackie2Lindsay Mackie is a consultant at nef. She is leading nef’s post office campaign and works on Clone Town and Ghost Town Britain.

The Prime Minister’s commitment to bringing Post Office banking into the heart of communities, and to giving the Post Office a much greater role in the economy, is a brilliant and simple declaration that this government will protect the public realm, that community matters, that localism matters and that it wants to offer diversity within our astonishingly monolithic retail banking system.

It was also the commitment that got one of the biggest cheers of the Prime Minister’s speech.

If we can now, fast, build up the people’s bank at the Post Office, now that it has effectively been given the wholehearted stamp of approval by the government, it will safeguard the Post Office network – no more dreadful and unnecessary closures – and will offer a real banking alternative to people who think banks should be about more than slicing consumers and then gambling with their money.

So Gordon Brown has done the right thing with his one-line announcement. It’s great.  nef has been campaigning all year, with the Post Bank Coalition, for a Post Bank).

The idea is that the Post Office can also have a Post Bank, such as those that have been set up so successfully in other countries (France, Italy, New Zealand). It is a simple and practical way into a future where community, key information points and financial diversity will be needed more than ever.

A Post Bank will revive and protect the Post Office network, support local economies and small and medium-sized businesses, combat social exclusion and financial inequalities and introduce banking diversity.

Really there is hardly anyone who doesn’t warm to the idea of a great increase in Post Office banking services. (Apart from the British Banking Association, which thinks banks are doing a fine job without the need for another model. Where to start on this peculiar view?) The key now is to make it work.

Sources close to the prime minister are apparently saying we could see increased and improved Post Office services by the end of the year – we need to keep Whitehall to that.

But we also need, in comradely fashion, to ensure that what we get is a true, independent, proper Post Bank and that it keeps its radical roots. The UK has an amazing history of non-shareholder driven banking models – mutuals, trustee savings banks, co-operatives – and Post Banks must be set up using these.

There are all sorts of nifty technical innovations a Post Bank could use to bring in younger clients such as versions of mobile phone banking. And the Post Bank provides the reach to give practical financial advice and help to the poor and the debt-laden. There are very interesting systems available now that can offer planned financial systems to individuals at either no or low cost. Antony Elliott’s Fair Banking scheme is one.

And we don’t need to start from scratch in making the Post Bank a full banking alternative. As an initial step, building a Post Bank around an existing 100% publicly owned bank, Northern Rock, is a logical and brave step. Don’t sell it off to Tesco or whoever – will they provide a true People’s Bank? – keep it working for the public who own it .

In the worst of the crisis last year people flocked to put their money into the Post Office. It’s trusted, even loved. Today’s news is just what we need to keep it like that.

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nef employees blog in their personal capacity. The opinions expressed here do not necessarily reflect those of the new economics foundation.