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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.
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.
I’ve spent the last week glued to the television. I hardly watch any normally, so this is enough to feel pretty exhausting. There is some opposition already about the coalition government, but – for some aspects at least of the new economics – it seems to me to open up some thrilling possibilities.
Yes, I am also a Liberal Democrat (I think I ought to declare my political leanings at this point) so my heart is bound to leap a little at the thought of Liberals being in government for the first time for 65 years.
But even if I wasn’t, the cancellation of the Heathrow third runway – in the face of all those corporate lobbyists, and all that money – would be enough to make me prick up my ears.
For the emerging new economics, there are at least four areas where things may now move quite fast:
- Tackling the banks: Vince Cable will be doing more than just putting in place the banking levy, the coalition agreement has set out a path towards breaking them up – and creating a more diverse, local and mutual banking system.
- Localism: it wasn’t clear whether there was anything behind the Conservative commitment to localism. Now there is: the coalition has committed itself to large scale decentralisation of power.
- Low carbon economy: did Cameron know what this was when he used the phrase? That isn’t clear. Why did Clegg repeatedly use the phrase ‘green sustainable growth’? That isn’t clear either. It is up to us to define it on their behalf, but it is clear that the political will is there for a major shift.
- Co-production: the same applies to the so-called ‘Big Society’. It wasn’t clear if there was any thought-through policy to support it. Now there is a commitment to devolve power to communities, and – if co-production is not explicitly on the agenda – there is a hole in coalition policy shaped like co-production.
But for some of these, if not all, the political rules have now changed. Two of the new cabinet in particular now control both elements of a potential Green New Deal, Vince Cable and Chris Huhne. But if Cable acts on radical reform of the banking system, he will do so in the face of bitter opposition from the City of London and elements among bankbench Conservative MPs.
What he, and those like him, are going to need is explicit political support – as well as research, information and basic cheerleading – if they are going to be able to press forward their ambitions.
Those of us in the voluntary sector, or in campaigning NGOs, who have become used to simply demanding things of politicians, are going to need to develop a more sophisticated strategy.
We are going to encourage and then protect those ministers capable of creating a new economic revolution. Tackling the banks and building a low-carbon economy is a matter of co-production, and our side of the work starts now.
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.
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.