FairFin Workshop London 11th September 2013
nef (the new economics foundation)
Agenda 11:00 – 11:10 11:10 – 12:45 12:45 – 14:00 14:00 – 16:30
16:30 – 17:00 17:00 – 18:30
nef (the new economics foundation)
Welcome Vision for financial reform Lunch at the Black Dog Pub Methods and action models on financial reform and democracy: changing the system Coffee Vision for monetary reform
Vision for financial reform London 11th September 2013
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Session 1.1
Context: why we need a transition to a new financial system
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CONTEXT: 4 U’s of Economics
1. Unsustainable 2. Unfair 3. Unstable
4. Unhappy nef (the new economics foundation)
Unsustainable: World Footprint
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Unfair: Inequality & Unemployment Youth unemployment in Spain over 50% Over 50 million new jobs needed in Middle East/North Africa, alone, over next 10 years Top 400 Americans have more wealth than bottom 155 million Americans
Ratio of FTSE 100 CEO’s pay to average employee has risen from 69 times in 1999 to 145 times in 2009
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Unstable: Systemic crises
EURO CRISIS
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CHRONIC FISCAL IMBALANCES
SYSTEMIC FINANCIAL RISK
BUILT SYSTEMS FOR EFFICIENCY RATHER THAN RESILIENCE
Unhappy: Stagnant Well-Being UK life satisfaction and gdp over time
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Myths & Half-Truths
Infinite growth Markets are fair
Prices tell the truth Salaries reflect value
More income equals more happiness
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We need a
GREAT TRANSITION to an economy which
Maximises Well-Being and
Social Justice within
Fair Ecological Limits nef (the new economics foundation)
Session 1.2
Money: a brief introduction
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The most important story ever told? The Butcher, Baker, Brewer and barter…..
“In order to avoid the inconveniency of such situations, every prudent man in every period of society, after the first establishment of the division of labour, must naturally have endeavoured to … have at all times by him … a certain quantity of some one commodity or other, such as he imagined few people would be likely to refuse in exchange for the produce of their industry” Adam Smith (1776) An Inquiry into the Nature and Causes of the Wealth of Nations Book I, Chapter IV. Of the Origin and Use of Money. I.4.2 nef (the new economics foundation)
...is a work of fiction “To see that society benefits from a medium of exchange, imagine a barter economy” Begg, Fischer, and Dornbusch (2005) Economics “Imagine the difficulty you would have today if you had to exchange your labor directly for the fruits of someone else’s labor” Maunder, Myers, Wall, and Miller (1991) Economics Explained
“One can imagine an old-style farmer bartering with the blacksmith, the tailor, the grocer, and the doctor in his small town” Stiglitz and Driffill (2000) Economics
“Imagine you have roosters, but you want roses” Parkin and King (1995) Economics nef (the new economics foundation)
So, what is money? “to this day, no one has been able to locate a place where the ordinary mode of economic transaction between neighbors takes the form of “I’ll give you twenty chickens for that cow.” David Graeber
“Money is not metal; it is trust inscribed”
Niall Ferguson
“An agreement within a community to use something as a medium of exchange” Bernard Lietaer
Money is a social/political relationship nef (the new economics foundation)
Where does money come from? “When banks make loans they create additional deposits for those that have borrowed” Bank of England (2007)
“In the Eurosystem, money is primarily created through the extension of bank credit… The commercial banks can create money themselves.” Bundesbank (2009)
“Over time… Banknotes and commercial bank money became fully interchangeable payment media that customers could use according to their needs.” European Central Bank (2000) nef (the new economics foundation)
Session 1.3
The benefits of banking diversity
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Diversity of ownership and governance
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Diversity of scale
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Social purpose – credit unions % of population who are members of a credt union 46%
45%
31%
16%
7% 2% Canada
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US
Australia
South Korea
New Zealand
UK
Public interest – national investment banks Balance sheet of national investment banks as a % of GDP 20% 18%
16% 14% 12% 10% 8%
6% 4% 2% 0% KfW (Germany)
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BNDES (Brazil)
JFC (Japan)
GIB + BBB (UK)
What is a ‘stakeholder bank’? • • • •
1. 2. 3. 4.
Cooperatives Credit unions Community development finance institutions (CDFIs) Public banks
A goal of creating value for stakeholders, not just owners Have both social and financial objectives No direct claim on profits Geographical restriction on activities
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Why is diversity important? A diverse banking system: • is more stable • is more competitive • is less risky • is more focussed on high-street banking • is better at lending to SMEs • leads to lower regional inequality • is more inclusive nef (the new economics foundation)
Financial stability – lower risk
Stakeholder banks are typically less risky nef (the new economics foundation)
Financial stability – lower volatility Swiss banks' profits 20.000 10.000
CHF millions
-
2003 2004 2005 2006 2007 2008 2009 2010 (10.000)
Cantonal banks
(20.000)
Large commercial banks
(30.000)
German banks' financial returns
(40.000)
(return on capital)
30
(50.000)
20
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%
Stakeholder banks have more sustainable business models
10 Large commercial banks
0 1999 -10 -20 -30
2001
2003
2005
2007
2009
Sparkassen
Counter-cyclical lending
Stakeholder banks often stepped up lending during the financial crisis nef (the new economics foundation)
Supporting SMEs Stakeholder banks are typically local, and so are powerhouses of SME lending 2012 market share of business lending in Germany Public banks 46%
Commercial banks 45%
33% 20%
Short-term lending
Long-term lending
Source: Bundesbank statistics
National investment banks need stakeholder banks nef (the new economics foundation)
Why is diversity important? To get a fair deal for customers, you need different types of banks, not just more of the same. Competition is terrible in the UK, but market concentration is actually acceptable. UK banks collectively take advantage of ‘information asymmetries’ and ‘behavioural biases’.
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How can we get a diverse banking system? 1. Grow existing community finance sector Learn lessons from overseas, e.g. develop shared infrastructure to enable community finance to compete with big banks, without losing the benefits of localism. 2. Break up RBS Sell off international and investment banking operations Break UK retail bank down into a network of local, collaborating public banks. Publically owned does not necessarily mean publically run. 3. Set up new local banks from scratch.
Must also introduce legislation that protects stakeholder banks! nef (the new economics foundation)
Session 1.5
Does the financial sector create real wealth?
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What is banking for? To facilitate the allocation and deployment of economic resources, both spatially and temporally, to ecologically sustainable activities that maximise long-term financial and social returns under conditions of uncertainty nef (the new economics foundation)
Where does bank credit go? Total stock of lending in the UK 1997-2012
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Bloated banks.. Bank balance sheets have grown enormously...
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...driven partly by derivatives trading
The cost of being too big to fail £ billion
2007
2008
2009
2010
2011
Barclays
2.6
16.1
13.0
10.1
10.0
RBS
3.3
19.3
18.9
13.2
10.9
HSBC
2.6
11.8
9.2
6.6
4.5
Lloyds
1.1
3.2
12.9
14.8
8.9
9.5
50.4
54.0
44.7
34.4
Source: Prieg & Greenham (2011) ‘Quid pro quo: redressing the privileges of the banking industry’ (London: nef)
• Credit ratings price in government support and reduce borrowing costs • Reduction in 2011 is due to shrinking balance sheets nef (the new economics foundation)
Where does the power lie? “Yet there is one key difference between the situation today and that in the Middle Ages. Then, the biggest risk to the banks was from the sovereign. Today, perhaps the biggest risk to the sovereign comes from the banks. Causality has reversed.� Andrew Haldane Executive Director of Financial Stability Bank of England
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Banks resist change..... “Elite business interests—financiers, in the case of the US—played a central role in creating the crisis, making ever-larger gambles, with the implicit backing of the government, until the inevitable collapse. More alarming, they are now using their influence to prevent precisely the sorts of reforms that are needed…. The government seems helpless, or unwilling, to act against them.” Simon Johnson former Chief Economist International Monetary Fund nef (the new economics foundation)
...will politicians cave in? “[Central bankers] can see no way of restoring sufficient discipline in the financial system so long as governments are unwilling to stand up to the financial lobby. Governments have shown they have no stomach for this fight…This goes beyond the wellknown phenomenon of “regulatory capture”. It is a matter of the influence of private financial interests over policy making at the highest levels of government.” R Pringle Editor, Central Banking nef (the new economics foundation)