How we can transform finance
January 9, 2015
This week Move Your Money joined a coalition of organisations in laying out what we believe would be the key tenets of a reformed financial system. Each of these reforms would make for a safer, stronger and more sustainable economy – one that serves the interest of people and planet first, and places the long-term interests of society at its core.
We’ve seen from the financial crisis the damage that can be wrought by banks that are too big to fail. The decimation of the welfare state and the savage and unnecessary period of austerity are a direct result of the banking crisis, yet the standard plc model of banking institutions that failed so badly remains intact as the dominant modus operandi.
Yet there is ample evidence that the solution to these issues could be much closer to hand than many people realise. Crowdfunding and peer-to-peer platforms are growing at an incredible rate, whilst community and stakeholder banks remained remarkably resilient to the crash – unlike their plc rivals. There is also evidence that banks that invest ethically according to values-based principles even outperform their more traditional competitors.
In short, for the safety and prosperity of our people and our society, we need to diversify the types of financial institutions that survive and thrive in our economy. The current Competition and Markets Authority investigation into retail banking provides a fantastic opportunity to explore this, and should be used to accelerate growth in mutuals, P2P lending, community and stakeholder banks.
Risky, speculative lending and ever-more complicated financial products got us into the financial crisis. Behind the curtain of the industry, this risky and speculative trading got out of control and the taxpayer was left picking up the pieces.
A financial transactions tax, or “Robin Hood Tax”, would be a fantastic first step in increasingly responsibility in financial markets, not only because it would reduce unnecessary and high-frequency trading volatility, but also because it would generate revenue for the taxpayer that could begin to repay some of the damage done by the industry in the financial crisis.
Pension funds and savings & investments vehicles are often notoriously opaque, obscuring what exactly they are doing with our money – even hiding this information from their own customers. Fund managers regularly misinterpret their “fiduciary duty” to mean maximising short term profits, often at the expense of long term stability, which was a key driver in the financial crisis. It’s also a key reason why funds are so invested in fossil fuels now, despite the fact that climate change poses one of the biggest threats of all to our social, environmental, and financial wellbeing.
With so much of our money invested in pensions, savings and investments, it’s imperative that we are able to scrutinise the investment decisions that are supposed to be being made on our behalf and for our benefit. Savers and other stakeholders have extremely limited ability to hold these decisions and the decision makers to account. It’s time to change that, with a Responsible Investment Bill that legally obliges funds to act in savers long-term interests, and allows for greater scrutiny and accountability for their investment decisions.
Unlike many other major economies, the UK has no state investment bank, and major infrastructure decisions are based on electoral cycles and short-term political interests. In 2010, however, all the major political parties agreed to the creation of a Green Investment Bank, with the explicit aim of creating long-term, sustainable investment for the future of the economy and the planet.
To create long-lasting sustainable change, the Green Investment Bank must be liberated, and granted further powers and a greater remit to invest in our society’s future. If we are willing to spend over £120 billion rescuing private banks that have monumentally failed, why is the government so reticent to use our money to run our own bank focused on our own needs?
Under such troubled economic times, policy makers have been using increasingly unorthodox methods to try and stimulate the economy. Under “Quantitative Easing,” the Bank of England pumped £375 billion in new money into the economy. But instead of stimulating a recovery, the Bank of England itself admitted that “the benefits from these wealth effects will accrue to those households holding most financial assets.” The Spectator went a step further, and has described QE as “the biggest transfer of wealth to the rich of any government policy in recent documented history”.
But the problem of money creation does not stop there. 97% of all money in circulation is created by private commercial banks, when they advance loans and mortgages. This new money is then paid back – with interest – fuelling a debt-based, boom-and-bust economy. Why is such an important function of society left only to unaccountable private profiteers?
Money creation has huge social, political and economic consequences, so money creation decisions should be subject to democratic control and accountability. The Bank of England should be mandated to conduct a full review of options to use monetary policy in order to influence the allocation of credit in the economy, with a view to harnessing monetary policy to the benefit of the many, not the few.