You are currently browsing the tag archive for the ‘finance’ tag.

Bookmark and ShareJosh Ryan-Collins is a researcher in the Business, Finance and Economics team at nef.

You know that something is amiss in the world when the entire Greek civil service goes on strike as an indirect result of  hedgefunds speculating against the Euro. 

Perhaps an answer might be found in Gordon Brown’s reaction when questioned as to whether Britain might offer financial assistance to Greece, as now appears inevitable for Germany and perhaps other big beasts on the contintent: ‘This is a problem for the Eurozone and its a problem that the Eurozone members will have to deal with…’, he said with just a hint of smugness.  

Quite.  The UK is not a member of the Eurozone, for whatever complex political and economic reasons, and right now that is looking like a pretty good choice.  It is often forgotten in these discussions that currencies, if allowed to, can serve an important role in providing economic feedback to the markets about the health of particular economy.  Following the financial crisis, the UK economy was left in a bad way.  Sterling depreciated rapidly against the Euro and to some extent the dollar.  This naturally helped to make UK industry more competitive in terms of exports as well as encouraging more domestic demand for goods and services – or ‘import substitution’ (more people holidaying in Cornwall and Scotland than Spain for example).  This, in turn, helped us with our budget deficit.

But Greece and other less robust European economies – Portugal, Ireland and Spain (the delightfully named PIGS) – have no such economic feedback.  Instead, when their economies faltered, they had to borrow more and more in Euros to maintain public spending, with their native industries competing directly in terms of exports with economic powerhouses such as Germany and France. 

The late ecological economist Jane Jacobs had a clever biological analogy describing this kind of situation.  Imagine the Euzone countries as people each doing different kinds of activities – sleeping, swimming, playing tennis, collecting the rubbish – that require different amounts of oxygen.  These people are properly equipped with diaphragms and lungs but share only one single brain and breathing centre.  Their ‘brain’ receives consolidated feedback on the carbon-dioxide level of the whole group without discriminating among the individuals producing it.  Everybody’s diaphragm contracts at the same time, with potentially catastrophic results.

The Eurozone is made up of discrete economic units at different stages of development.  This worked more or less (although Italy would probably disagree) when the Eurozone was growing, as the larger states were happy to make up for the lack of natural feedback to their less developed cousins through large income redistributions and subsidies. But when a shock like the financial crisis hits the system and everyone faces budget problems, redistribution (or bail outs) suddenly becomes problematic and inefficient, with the danger of moral hazard raising its ugly head once more. 

Leaving the Euro is not an option for PIGS – their debt is in Euros and this would not doubt trigger another financial crisis.  Another option, suggested recently by Charles Goodhart in the FT and long-championed by nef, would be to allow the creation of dual currency systems in these states, following the example of California when it ran in to trouble and in Argentina during the Peso crisis of 2000.  An internal Greek IOU currency could be created, to enable teachers and binmen to carry on working and businesses to continue internal trading, at a devalued rate against the Euro, reflecting more accurately Greece’s real exchange rate.  It is a radical option but the alternatives don’t look promising – IMF style austerity measures resulting in mass unemployment and violent protest (the Greeks have a record on that) or a bail out which could permanently undermine the integrity of the Euro project.

Jacobs argued in ‘Cities and the Wealth of Nations’ that the City and its hinterland is the true economic unit and the optimum size for a currency in order to ensure efficient feedback and allow effective import substitution effects.   We are a long way from that but the financial crisis has revealed the danger of the merciless pursuit of economies of scale – both in terms of the size of financial institutions like banks and now also currencies – at the expense of diversity and increased economic resilience. 

Probably not what Gordon was thinking when he declined British responsibility for the Euro mess, but you can bet your bottom ‘dollar’ he’s glad the UK never quite passed those five tests.

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

1036311445_8b5fdf9c3c_m[1]

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.

 

ABOUT

This blog is operated by nef (the new economics foundation).

Follow us on:
Vimeo
Twitter
Flickr

ARCHIVES

CATEGORIES

Put People First
Airplot - join the plot
nef employees blog in their personal capacity. The opinions expressed here do not necessarily reflect those of the new economics foundation.