|The Ecology of Finance|
Instead of a monoculture of mega-banks deemed too big to fail, the financial system should form a highly diverse ‘ecology’ of institutions that are adapted to the complexity and long-term goals of the economy, says a report by the New Economics Foundation.
17th November 2009
12th November 2009 - New Economics Foundation
The financial system needs to start working like a productive ecosystem. It should be characterised by diversity and an ability to sustain specialised and adapted life in the face of external shocks. Instead of a monoculture of mega-banks deemed too big to fail and answerable only to the demands of private shareholders, an ecology of finance would involve a range of different financial institutions.
Only radical reform of the UK banking and financial sector can deliver institutions capable of investment and lending that is economically and socially productive. Rather than seeking a technical fix for our sick financial sector Government should be having a philosophical rethink. A return to business-as-usual would prevent the Government’s own stated ambitions of a more competitive and diverse sector from being realised.
The Ecology of Finance calls for recasting the entire banking and financial sector according to what the proper function of finance should be. No longer wedded to short-term and profit-driven models of lending and to risky, volatile speculative investment, the banking sector would, instead, form a highly diverse ‘ecology’ of institutions that range in structure, market sector and scale; adapted to the complexity and shared long-term goals of the economy.
To realise the vision of a stable and productive financial system, which we have termed the ecology of finance, then preventative reforms to rein in the excesses of the financial system must be combined with positive measures to harness the potential of both mainstream and alternative financial institutions.
Recommendations include calls for green investment banking, post office banking, the growth of credit unions, co-operatives and mutuals, community land trusts and social investment banking. The report also calls for new legislation to bring transparency to the financial sector and to link large commercial banking with community finance via a UK version of the Community Re-investment Act.
13th November 2009 - Sargon Nissan, NEF Triple Crunch Blog
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.
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.
- 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.
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