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David Boyle is a nef fellow, a writer and the editor of nef‘s newspaper, Radical Economics.
What is it about The Wizard of Oz that makes it so popular now? There was the new production at the Festival Hall last year. Now there is the success of Wicked. Well, I have a suggestion. It is to do with economic collapse.
The idea that Frank Baum actually wove his tale around the monetary battles of the 1890s only emerged in 1963, but I’m sure it is right.
Although Oz stands easily on its own as a tale, it was also a subtle tract urging more money in circulation on behalf of the agricultural workers (the Scarecrow) and the industrial workers (the Tin Man).
Baum was involved in the battle between the supporters of gold standard money – authoritative and scarce – and silver money (much more plentiful). So Dorothy sets out on the Yellow Brick Road wearing the Witch of the East’s magic Silver Shoes (they were red in the Judy Garland film) – shoes that neither she, nor the Witch of the North, nor the Munchkins understand the power of.
The poor deluded residents of Oz are required to wear green-tinted glasses fastened by gold buckles. They see the world through the colour of money. Oz, of course, was the well-known measure of gold – the abbreviation for ounces – and the Wonderful Wizard, the personification of the gold standard, was finally revealed as a fraud.
This is how Baum saw the wizard-bankers who defended the gold standard: “Toto jumped away … in alarm and tipped over the screen that stood in a corner. As it fell with a crash they looked that way, and the next moment all of them were filled with wonder. For they saw, standing in just the spot the screen had hidden, a little old man, with a bald head and a wrinkled face, who seemed to be as much surprised as they were.”
All of which is a way of saying that The Wizard of Oz is about economic collapse. The 1939 film certainly implies that, but the original tale is also about the pomposity and delusions of bankers.
The Populist movement that inspired Baum has all gone now, but actually these issues remain with us, seeking shape. We still regard money as one, indivisible, totemic, semi-divine, golden truth, issued from on high by an infallible Federal Reserve or Bank of England, and handed down to a grateful populace. Actually it is many things, and as adaptable to human ingenuity as it ever was. We still walk around, like the people in the Emerald City, wearing tinted glasses which can only recognise what Wall Street or the City of London says is important.
We still suffer from the way that these eyeglasses twist how we see the world, causing so much of what we value to disappear because it has no monetary worth: families, communities, forests, rivers. We still see the monoculture imposed by our money system driving out other cultures, species, languages, opinions, and forms of wealth. We find that financial services are so profitable that almost every other economic activity – and especially Aunt Em’s farming – is threatened. The big banks are now twice as profitable as they were even ten years ago. The rare occasions when they are not, we all of us find ourselves bailing them out.
In the UK, there is a particular problem of a serious shortage of banks after generations of consolidation and centralisation. Our businesses are now in a far weaker position than American or German competitors, and potential competitors, because we have no equivalent lending infrastructure. There are only 170 branches per million people in the UK, compared to 520 in Germany and 960 in France.
Meanwhile, the great corporations are striving to become banks themselves. They are shedding the real work until they are shells that just do financial services. Money, at least as we conceive it, is driving out life. We feel the hurricane of $3 trillion a day blowing through the world, but we have to remember it isn’t what it seems. It reeks of decay.
Could anyone write a parable along the lines of Baum, to put the same points as he did? Well, that was what was suggested to me some years ago, and I made an attempt. It is an updated Oz, still a mythic story in its own right, about also about money – a Wizard of Oz for the age of derivatives trading and Goldman Sachs.
It is on sale now, published through The Real Press. It includes a short essay about the meaning of the original Oz, my speech at the launch of the Brixton Pound last year, and some wonderful illustrations by Karin Dahlbacka, which are worth all the rest put together.
Veronika Thiel is a researcher and project manager on nef’s Access to Finance team.
The topic of the day is unemployment. At the moment, more people in the UK are unemployed than they were before Labour came into power. Not a nice reflection on the track record of the current Government. Why were so many jobs lost? Of course, the financial crisis. Always the financial crisis. However, looking at the types of jobs that are lost, many of those would have been low-skill jobs in the service sector that are expendable when the going gets tough. Demand for dry cleaners, office cleaners, caterers and sandwich sellers disappears quickly when the people demanding these services (i.e. those working in financial institutions) find themselves out of a job as well. So, all we have to do is make sure these financial wizards get their jobs back, so that those caterers and cleaners can get back on track, right? Wrong. What the crisis very clearly shows is that a lot of the employment created through the bubble was fleeting, just as the billions or even trillions of pounds that have now vanished into thin air. The jobs were not embedded in the real economy, the manufacturing of goods or the provision of services that we all need every day – for example good quality child care. Instead, people worked hard for measly incomes, were mostly unable to save, and loose the few assets they have, e.g. cars (which are often needed in order to get a new job). At the same time, they can’t honour credit commitments any more, meaning they are frequently over-indebted – or have already applied for personal insolvency. The latest stats show another increase in this
number.
So what we need to do as part of the recovery is create jobs that allow people to build greater resilience against such crises in the future. There is little point in having millions of people relying on the hire and fire jobs that are so dependent on the economic cycle. In addition, people need help in building savings, skills and aspiration – now more than ever. However, as we discovered in recent research, many efforts to build assets and thus to improve crisis resilience are eroded during the current crisis. Governments across the EU are cutting back social support to the unemployed, and cancel grants to organisations that seek to help people in dire straits. Instead of nurturing the efforts of aspiring entrepreneurs and savers, there is little to no effort to help people help themselves. Particularly in the UK, asset erosion is happening on a large scale. Banks repossess houses at the earliest possibility instead of trying to find a solution with the client. Even worse, debt is sold off to debt collection agencies that sometimes use threats and psychological warfare to recover money, with an added fee on top. Credit card companies often refuse negotiations with debt advice organisations and insist on immediate payments. None of these practices are challenged by Government. Everything plays second fiddle to the financial institutions – it’s for them to get their books back in order, and the quickest way of doing this is to get rid of bad debt. In the long run, this practice entrenches existing and new poverty.
Our research found that organisations such as Toynbee Hall and Fair Finance see a huge increase in demand for their services. Scarily enough, many of the people now seeking advice and help are those that were considered well-placed in society: low- and middle-income families with a house and a steady income. Despite this increase in demand, not a penny of the stimulus packages has been allocated to these and other organisations to meet the increased demand. The consequences: bankruptcy and hardship. Poverty and destitution. This will cost a lot more in the future to rectify than investing in advice and support services now. The overwhelming majority of people wants to work and is seeking work – but they have to have the ability to do so. An undischarged bankruptcy, homelessness and a pile of debt and worries will not be helpful to this end.
Our report thus calls on the Government to support asset building efforts and to recognise how helpful they can be in helping people through tough times. Asset building should be part of mainstream politics, not a niche as they are now.
It is always better to make people self-reliant rather than having to feed them in times when money is tight. Cutting budgets for asset-building activities now is the worst way of going about it.
Veronika Thiel is a researcher and project manager on nef’s Access to Finance team.
A light at the end of a tunnel - or is it an oncoming train?
Barclays is said to be already recovering from the credit crunch whilst most of its clients, and the population at large, still are not even seeing a sliver of the light that could indicate the end of the tunnel is in sight. Small businesses still face cuts in their existing overdraft and credit facilities despite of the fact that their businesses are structurally sound. People with consumer debt still face increased interest rates. Personal insolvencies, as a result of redundancies, are at an all time high (link to insolvency services). Mortgage holders see their interest rates rising. Banks reposess houses more quickly than ever, and debt collectors are also becoming more aggressive.
So what does this increase in banking profits actually mean? Are we seeing a rehabilitation of our broken financial system? Or are we simply on the way to returning to business as usual, with the toxic loans written off?
The simple answer is – no-one knows for sure. There was certainly a gradual return of confidence, meaning that people will want to invest again. But there remains also a certain amount of question marks. As Robert Peston from the BBC argues, banks are reducing the amount of money they lend, so that they simply have more on their books.
In addition, however, the way that banks post their profits can change quickly as they can use different methods of valuing their assets. Asset valuation is not an exact science, and there are various ways of doing so.
Be that as it may, everyone is sighing a breath of relief that at least two banks don’t appear to go the way of Northern Rock (although there are interesting ideas around to breathe new life into it. That relief could be (and in certain quarters, is) giving way to complacency and a return to BAUBAB: Business As Usual and Bonuses Are Back. Despite Barclay’s assurances that bonus payments are reformed, an average of bonus £100,000 for staff at Barclay’s Capital still makes me think that this is more cosmetic.
We probably will have to repeat this until we’re blue in the face – but banking reform has not gone anywhere near enough to create a stable financial system in which systemic crises such as the current one are less likely to happen. And anyone who thinks that the crisis is over forgets that for the millions of unemployed, and those steeped into debt, it’s only the beginning.
Veronika Thiel is a researcher and project manager on nef’s Access to Finance team.
The Treasury Committee has published its last report on the banking crisis today, and it isn’t exactly diplomatic in its choice of words to describe the FSA’s failing and what needs to be done to prevent such a crisis from happening again.
The report says that the FSA failed ‘dreadfully’ in its banking supervision in the run-up to the crisis, and although there are apparent changes in the way it’s dealing with the market, the committee fears that these changes may just be a fad.
With that, they hit the nail on the head: it is to a certain extent quite fashionable now to talk about tighter regulation and letting banks not to grow too big. However, this rhetoric is rarely followed through with sufficient vigour. The Government, which is also heavily criticised in the report, should take the recommendations of the select committee to heart and act on them. They tie in nicely with our recommendations, so it’s well worth repeating them here:
– Separate retail and investment banking
– Ensure that no bank is too big to fail, or even too big to save
– Increase capital holding requirements for banks
– Don’t shy away from speaking out
The last point really must be emphasised. For too long, anyone who voiced criticism of the Finance-binge bonanza, be it a regulator, a banker, or a politician, was branded a spoil-sport and a doomsayer. I don’t want to excuse the FSA for its inactions and ineptitude, but even if it had taken a tougher stance, then it is quite likely that banking lobbyists and the Government would have told the regulators to back off. Hence the committee’s remark that the FSA must ‘develop the confidence to take unpopular decisions’ falls a bit short of the mark. The FSA must be given the authority and independence to be able to develop this confidence, to be able to be unpopular. Regulators aren’t there to make the banks all comfy. They are there to ensure the our money is safe. Let’s make sure that that’s not forgotten.
Veronika Thiel is a researcher and project manager on nef’s Access to Finance team.
Remember to think happy thoughts!
As promised yesterday a short summary of thoughts on the Government White Paper: Reforming the financial markets.
Unsurprisingly, but sadly, the bigger picture has been missed. There are many reforms that tweak the system here an there, but few that will change the overall picture. The paper isn’t really committing the Government to do too much whilst trying to give the impression that decisive action is being taken.
Most disappointingly, Darling will not move to break up the bigger banks, following the concept of: if it’s too big to fail, it’s too bit. Zero points for this.
The second biggest problem is the lack of immediate reforms. Many of the proposed measures will not be implemented immediately, giving the opposition (i.e. most of the financial industry) plenty of time to mount a counter-offensive. The City has one aim to restore business as usual and that bonuses are back (or BAUBAB as I like to shorten it). One journalist likened the current atmosphere in the City to the end of Terminator 2 – just when you think that that horrible robot has been smashed to smithereens, it is reassembling. It is thus crucial to work fast and seize the opportunity to reform the financial system in a meaningful way. Unfortunately, party politics and bickering defuse the potential of decisive and effective action that would reduce the influence of finance on UK politics and economy. It appears that no-one at the top of either banking or politics has understood that finance should be subservient to the needs of the economy, not the other way round.
Also zero points on the issue of bankers’ bonuses: Darling talks the talk, but certainly does not walk the walk. The short section on pay suggests to draw up a code of conduct buy February and banks will have to report on their compliance with this code yearly. However, there is no indication yet what will happen to the banks if they fail to adhere to the code. Basically, we’ll be none the wiser until then.
The paper scores slightly better on the issue of pre-funding. Basically, pre-funding would mean that banks have to pay a part of their money into a pot as insurance against their potential collapse. This pot of money would then be used to repay depositors. There are some obvious advantages to this: instead of the Government having to cough up vast amounts of money at a moment’s notice, there is already some earmarked for it. A bank collapse will still be unpleasant, but it will be slightly less painful. Also, from a behavioural point of view, a levy on banks would remind them regularly of the potential of failure. Banks are, unsurprisingly, against this levy, as it reduces the amount of money they can use to invest. In addition, they say it’s expensive and puts an additional burden on them when they are trying to get back on their feet (needless to say they fail to point out that they stumbled over their own feet in the first place). But there are other factors at play: banks, as we all have learnt over the past year, rely very strongly on trust. So banks have to be trust-worthy institutions in order to attract clients and make investments. That’s why individual banks cannot say that they will insure themselves against failure – that would be paramount to suggesting that they are not sure that their bank’s strategy is foolproof. Bankers might say that banks in general collapse once in a while, but they would not be able to concede this possibility for their own bank – investors would be scared away (I personally would trust a bank that was a bit more realistic and didn’t pretend it would know everything, and hence took out insurance against failure. But then, that’s just me….)
To get over this dilemma is simple – make it compulsory for every bank to have insurance. Of course, this may still tar the reputation of the whole of the banking sector a bit, as it indicates that banking collapses are not as rare as some would have you believe. That again could be a good thing: prudence is also required on the side of the consumer. So, if Darling really introduces this levy, that would be a step in the right direction.
There are also some great ideas on counter-cyclical measures: make sure that banks build capital in the good times to use them in the bad times. That kind of thinking is definitively the clever one, and if the regulations are strong enough to prevent banks from getting around them, then they will do more for financial stability than many other suggested measures. The question-marks are around the how and when – and especially the ‘when’ is urgent because of aforementioned efforts to reinstate the previous state of affairs.
If you want a digested read digested: we don’t know what will happen until it may be too late.
On that cheery note, I recommend you read some something relaxing now – such as our suggestions on five ways to well-being. Money, after all, isn’t everything.
Veronika Thiel is a researcher and project manager on nef’s Access to Finance team.
The ClubCard creates a huge database about customer spending habits. Tesco's new current account will only add to the supermarket's knowledge about the way we shop.
Yesterday, Tesco has announced plans to provide current accounts in thirty of its stores. If this pilot scheme is successful, then the supermarket giant will roll-out banking services nationwide.
In principle, this isn’t a bad move. Britain’s banking sector isn’t really a competitive one anymore. According to an Office of Fair Trading report written before the Lloyds TSB-HBOS merger, 79 per cent of current accounts held by four high street banks. Any injection of competition into the market is, therefore, a welcome thing. And with 2,115 stores across the country, Tesco outstrips the network reach of any single bank.
But those 2,115 are also turning our high streets into Clone Towns, robbing the UK of its retail diversity. And although Tesco has successfully monopolised the nation’s grocery shopping, it shows no signs of slowing down. Tesco is quickly becoming a cradle-to-grave company. You can buy your baby food, school uniform, kitchen appliances, computers, books, internet access and telephone (both mobile and landline), fill up your car and get it insured, get a health check and prescription and, yes, even plan your funeral at Tesco. In many communities, the only pharmacy is in Tesco. It’s becoming the one-stop-shop for your entire life.
In this light, Tesco’s banking plans hardly look like a diversification of the market or the creation of some healthy competition.
Tesco also has one of the biggest databases storing customer information. If you use your Tesco ClubCard regularly, then you can be sure that the supermarket has a wonderfully clear map of your spending habits: what you buy, where you buy it, when, and how often.
Now that they’re throw banking services into the mix, they’ll have another database at their fingertips. My bank can quite easily tell what I do from my transactions: whenever I pay with a card, they know what I bought. That’s why I quite often use cash. I don’t have loyalty cards: they save you very little money, but they do make you a perfectly observable consumer.
Now, I’m not suggesting that Tesco will breach customer confidentiality or abuse the data that they collect. Due to banking rules, they will be unlikely to be able to match a bank account with the data collected on a Tesco ClubCard.
Nevertheless, the information that Tesco will hold about a person with a ClubCard and a current account would reach frightening proportions. This concentration of information is worrying. If you think that the Government holds way too much data about your person, then think again. Tesco is likely to know more about you than your local council or your GP. And if you are lured by their offer of a current account, they will soon know even more.
Whilst Tesco’s move into banking is, on the face of things, a welcome addition of diversity to the retail banking market, it also is the opposite: concentration. Concentration of the provision of goods and services in one company, and concentration of data collection.
Let’s make sure that Tesco isn’t the only new bank on the block. Support our campaign to offer banking services at the Post Office. Write to your MP and tell them to support Early Day Motion 1082. Chose to bank at a place that you trust and that will also support your local community: the Post Bank.
UPDATE: You can now sign a petition supporting the Post Bank.
To mark the publication of I.O.U.K.: banking failure and how to build a fit financial sector – nef‘s new report on banking – the nef triple crunch blog is staging a debate. Sargon Nissan, one of the authors of the report, kicks things off. Replies from our special guest bloggers will be posted below.
Banking unfit for purpose
Sargon Nissan is a researcher in nef‘s Access to Finance team.
When Lord Mandelson said, last November, ‘It’s completely unacceptable to the Government and to business in this country for banks indefinitely to stop functioning as banks.’, he inadvertently revealed policy makers’ confusion over what to do amidst this unprecedented crisis of banks and the financial system.
They’ve recog
nised banks have stopped functioning (who hasn’t?) but not that they’ve become unfit for purpose.
Our banks have become far removed from their roots as lenders and investors in communities and businesses, as we reveal in our new report, I.O.U.K.: banking failure and how to build a fit financial sector. Decades of banking sector consolidation have been encouraged by lax regulation. There are now fewer bank branches than post offices in this country – and the number is set to drop still further. Meanwhile, Community Development Finance Institutions (CDFIs) have been starved of support while attempting to address this failure directly.
Increasingly desperate Government bailouts – witness Monday’s £260 billion underwriting of Lloyds and Barclays now reportedly ‘mulling’ the Treasury’s offer to underwrite its toxic assets – are having little effect bar robbing the taxpayer.
The Government is throwing good money after bad. Read the rest of this entry »
Josh Ryan-Collins is a researcher in the Connected Economies team at nef.
If anyone is wondering what people mean when they talk about a credit/banking bubble, this wonderful graphic produced by JP Morgan last week sums it up quite nicely. The blue bubbles show the major bank’s market valuation in Spring of 2007 when everything was still fairly hunky dory. The considerably smaller green bubbles (one might even call them dots in the case of Citi-group and a couple of others) show their market value now.
One wonders if there is a hint of irony in JP Morgan’s footnote: ‘while JP Morgan considers this data to be reliable, we cannot gaurantee its accurancy or completeness’.
Thanks for that JP.
Veronika Thiel is a researcher and project manager on nef’s Access to Finance team.
The Government, or rather the Department for Business Enterprise and Regulatory Reform (BERR), has just announced the introduction of a new Government guarantee scheme, the Enterprise Finance Guarantee. Many papers imply that the taxpayer may ‘commit to guaranteeing up to £21bn of bank lending’ to small and medium enterprises or SMEs.
But don’t worry, we’ll never have to pay this vast amount. Because in essence, the scheme aims to get banks to do what they usually do, which is lending to businesses with very little likelihood of going bust, just like they did before the crunch.
Why? Bear with me while I briefly delve into the loan guarantee schemes. These schemes are principally designed to encourage lenders, e.g. banks, or CDFIs , to lend to enterprises that they normally would deem to be too risky to lend to, for example because the entrepreneur does not have a good credit history, or trades in a niche markets the bank has never heard of before.
In Britain, this scheme has existed for quite some time under the name of the the Small Firms Loan Guarantee Scheme, or SFLG. Under the scheme, the Government guarantees 75% of the loan, i.e if the business goes bust, the bank can rest assured that the write-off is only 25%.
An example may help. Let’s say I want to open a business dealing in something rather obscure, say, in German delicatessen such as Weisswurst. For this, I need a loan of £5000. There isn’t much evidence of the market size in the UK for Weisswurst, and hence the CDFI is reluctant to lend me the money as they can’t be sure I’ll succeed and pay the loan back, interest and all. But because of the SFLG, they will lend me the money anyway as the government will guarantee 75% of it, or £3750. This obviously greatly reduces the potential loss should no one decide to embrace the pleasures of Weisswurst.
BERR’s new scheme ostensibly still does the same – but in fact, it is a much reduced version of the SLFG. At first sight, it sounds like a good deal, because the minimum and maximum loan levels it can be used for have been extended. Under the old scheme, only loans between £5000 and £250,000 would be guaranteed. Under the new scheme, this is expanded to include loans of £1000 to £1m. But, and this is where it gets tricky, there is a claim limit of 13.75%.
This means that if a CDFI lends £100,000 of guaranteed loans, it can only claim a maximum of £13,500. So it loses out, big time. Under the rules of the old scheme, CDFIs could claim £75,000 of the £100,000 back. So the new scheme is a whopping 82% reduction compared to the old guarantee!
This much lower guarantee will prompt lenders to only lend to those businesses that seem to be low-risk – thereby perverting the original aim of the Guarantee Scheme to provide credit to business that is slightly less ‘normal’ than what the lender thinks it is.
Hang on – isn’t this what banks are supposed outside of these guarantee schemes? Err… yes. But they don’t. That’s why they need more incentives. In addition to the billions of pounds of public money they have just received, the interest cuts, etc. So what happens to all those businesses that fall of the way-side of banks’ tight credit scoring?
Given that the definition of what is risky or not lies with the banks, and banks currently don’t seem to be too keen on the old lending business, there may well be thousands of businesses who will suddenly find themselves on the wrong side of the credit score, without any recourse to credit, because the guaranteed loans all went to those businesses that do not present a risk. So they will go bust. That’s exactly what the scheme was supposed to prevent – but is perversely quite likely to encourage. So, our taxpayers money is safe – until it has to be spent to help those millions who have lost their job to find new ones.
Dr Stephen Spratt is Director of nef‘s Centre for the Future Economy.
The predictable crisis in the global system is the most important sign yet that a new economics is emerging. The tragedy is that the crisis-ridden financial system has long since failed to do the basic job required – to underpin the productive economy, and the fundamental operating systems upon which we all depend. These have been variously neglected, taken for granted or cannibalised by finance. They include the core economy of family, neighbourhood, community, and society, and the natural economy of the biosphere, our oceans, forests, and fields.
Worse, even when the financial system has been working at full throttle, it corrodes the real economy by its sheer profitability and faulty measuring and dominates the policy priorities of politicians.
If nothing else, the crisis provides an opportunity to rebuild a financial infrastructure which does the job, which means investing – not just bailing out failed banks – but in loan facilities for an interdependent network of productive local economies that genuinely underpin life and works within the tolerance levels of the natural environment. This is now possible because the state owns a large slice of the financial system.
The priority of politicians is to restore the normal functioning of the banking and financial system. A rapid return to ‘business as usual’ is the plan, which will hopefully be accompanied by an ‘upside’ for taxpayers as governments are able to sell their equity stakes at a profit when normal market conditions return.
This is all very comforting of course, but is it actually such a good idea? After all, it was ‘business as usual’ that got us into this mess in the first place. We now have a unique opportunity to pause and consider what the financial sector is actually for and to put in place institutional and regulatory structures that enable it to perform these functions well.
new economics regards finance as a means to an end: to support inclusive, equitable and sustainable economic activity that creates real value – economic, social and environmental. It is difficult to argue that much of what the financial sector has been focusing on relates positively to these factors, or that a return to ‘normality’ would change this.
If our current system does not support these outcomes, the question arises as to what would. The following six principles are the starting point for rebuilding the financial system so that it supports, rather than corrodes, the real economy.
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