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Photo by plαdys via Flickr

Sargon Nissan, a researcher in nef‘s business and finance team, recently spoke at the Transact Conference on financial exclusion, where he debated with Stefan Marx of the British Bankers Association on the subject of financial reform.

You can now listen to selected experts from the debate, and other clips from the conference:

http://neweconomicsfoundation.podbean.com/mf/web/5ksi3s/TransactConferencePodcast1.mp3″

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 ShareRupert Crilly is a researcher in Environmental Economics at nef

Financial markets are treacherous. I’m not saying this because I’ve lost a lot of money to them recently- oh wait, we all have! – but because they’re pathologically antisocial yet somehow exotically enticing. They’re the new femmes fatales. No matter how many times we wine and dine them, and how many times we pay for it, they’ll keep us hooked.

The financial markets have been jittery with speculation about Greece defaulting on its debts- unsurprisingly, really, if we consider that Greece has the highest gross government debt as a percentage of GDP in Europe- somewhere around 125%. And, many ask, if Greece does default, what will happen to other countries with high debts, such as Spain and Portugal? Will they survive the same financial attacks – if interest rates rise the deficit effectively increases because of rising interest on the bonds – or will they show more ‘fiscal responsibility’.

Lecturing for Stable Economics
On Monday evening the Nobel-prize winning economist Joseph Stiglitz gave a talk at the London School of Economics in which he noted:

“The irony of this attack should not go unnoticed: the fact that Europe and America were brought into the current mess because of the failures of the financial system. Their deficits grew in the attempt to save the banks and the economy as a result of the financial system failure, and now the financial systems are lecturing the governments about the size of the deficits that their behaviour created…the fact is that the financial markets are again exhibiting the same kind of irrationality and short-sightedness they continually exhibited. What matters is not one side of the balance sheet, it’s both sides. Deficits are a liability, but on the other side are assets: it depends on how you spend the money. And if you spend the money well, on education, on technology and infrastructure, the returns only have to be 5-6% for the long-run national debt actually to be lowered, and the banks should understand this.”

In other words, a ‘credible’ response to tackle the Greek government’s debts does not mean cutting money from health, education, technology and the environment to pay back bond holders – it means instead that lenders understand that investment in these sectors will secure their repayment over the long run. The economic cases for more regulation and a ‘Robin Hood’ tax are also strong. But, I suppose, the markets are worried. And we’re still hooked.

The governments of Europe and America bailed out the financial sector and stimulated the economy. The deficits now need repaying, and it’s becoming clearer who’s going to pick up the tab. Our message to the banks is clear: “don’t worry, we’ll get that”. Because, honestly, we really will get that, and we really, really don’t want you to worry about it.

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 ShareAndy Wimbush is nef‘s Communications Assistant and blogmaster.

The Tobin Tax is back in the headlines again, with Gordon Brown now insisting that support for a levy on financial transactions is growing. I’ve also noticed that our friends at the World Development Movement are starting to campaign in this area. nef made a case for the Tobin Tax way back in 2001, with our report Robin Hood Tax.

All of which gives me license to reprint a cartoon I published in the last edition nef‘s newspaper, Radical Economics. Enjoy!

(click for a bigger version)

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 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.

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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.