PAUL SALTONSTALL reports from a recent seminar on how to reform capitalism from the inside
The talk was given by Michael Green, one of the authors of The Road from Ruin: A new capitalism for the Big Society, and the host was the Institute for Public Policy Research (IPPR). This was one of their quarterly series of informal seminars held under the title Cafe Politique in Manchester Museum’s cafe.
Green, an experienced financial journalist, said his book tries to draw lessons from financial crises since the 17th century and attempts to sketch out what can be done to create ‘a better capitalism which serves humanity’. His message contains elements to please both left and right but his aim is to identify how to move to a more socialised economic system.
Green believes blame for the financial crash of 2008/09 should not lie with bankers alone, nor with ‘financial innovations’ such as collaterised debt obligations which are usually identified as the underlying cause. In fact, he says, these instruments have their uses and potentially can play a part in future economic development. He drew a parallel with the South Sea Bubble, and its French equivalent, pointing out that when Britain did not ban paper money the consequences were quite different and more fruitful than those suffered by the French who took a more stringent path.
He looked at the current alternatives for building a better financial system and dismissed them.
First, he disagreed with the premise that financial innovations should be treated as inherently toxic. Then he went on to say that the remedy contained in the ‘Basle 3’ agreement – that is, that banks should hold higher capital reserves – would prove to be a ‘Maiginot Line’ in the battle against further crises and would simply be out-flanked by the banks. In any event, Lehmann Brothers – whose demise famously came to symbolise the crash – had higher capital reserves than those required by ‘Basle 3’. Finance capital, he observed, would simply ‘find ways to cheat around the rules’, although he didn’t question the lack of accountability and transparency within finance capital that this implied.
He also dismissed the idea that banks should be allowed to go under saying that our finance system was too interconnected for this to happen in isolation. He was able to point to two crashes in the USA (one in the 1890s, the other in 1907) which were worsened by a similar approach. Because of this, the notion that investment and lending functions of banks should be separated is false.
Finally, he also dismissed the idea of a Tobin tax on financial transactions because, he said, such taxes do not make markets more stable. Banks have considered the impact of the tax and have already devised ways of using it to their advantage to generate profits. Where they are unable to do this, they will pass on the extra costs to customers. He also posed the question: is market volatility a cause of crisis? Presumably, the answer is ‘not as much as some people think it is’, although he didn’t elaborate.
Instead of these approaches, Green suggested that we need different measures of economic success. At the moment, economic theory is dominated by the ‘efficient market hypothesis’ which claims that shares generally represent the true value of a commodity. The recent financial crisis was so profound as to indicate this is not the case. Ratings agencies and accounting must change. He cited the Institute of Chartered Accountants as unexpected pioneers of a new way forward in their recently founded ‘financial innovations laboratory’.
More radically, he stated that GDP as a measure of economic growth is at best ‘a questionable tool’, which does not measure the real wealth of society. However, he was careful to acknowledge that this is not an original criticism. In fact, the economist who invented GDP eventually disclaimed it because it did not take account of domestic work.
He also said that the governance of financial institutions was in need of substantial improvement. Boards are often poorly qualified and stuck in ‘group think’. Investors do not scrutinise them and are content to track portfolios (misled by efficient market hypothesis). Pension funds in particular need to be reformed and the fiduciary responsibilities of board members must be expanded from their current limited role in scrutinising efficiency, honesty and reasonableness, to include wider ethical aspects.
The following discussion ranged around a number of subjects, but again and again people asked him, in one way or another, if it wasn’t really capitalism that was the problem. His response was simple: ‘I can’t think of an alternative system.’
A French woman challenged his scepticism about regulation. ‘In France,’ she said, ‘capitalism is more muzzled… The laws are powerful because the people are powerful.’
Green said that regulation leads to perverse consequences and cheating. Instead, there should be a different paradigm for capitalism. He pointed to Fair Trade, which is developing a more sustainable market in basic commodities, comparing it to the finance sector which offers poor products often sold badly. Finance, he said, needs to come up with something like the Fair Trade label, and develop a more empowered consumerism.
He praised microfinance and the social impact bond introduced by the last Labour government. And he mentioned other developments and initiatives which are trying to define a more ‘long-term’ capitalism, including ‘tomorrow’s company’ and the UN Principles of Responsible Investment.
Overall, I don’t think he was saying anything new but that at least he recognised our economic woes are a result of systemic failures in capitalism rather than public sector waste, and that these failures cannot simply be addressed by technical alterations to financial regulation.
The book sounds like a piece of journalism – surveying the field rather than opening up new terrain – but it serves as a useful reminder that there is no great private sector recovery waiting to charge over the hill to our rescue. Indeed, all of us, whether employed by the private or public sector, can expect some hard times ahead. Indeed, as Green alluded to, there may be much worse on the horizon if the far east (China in particular) is also riding a real estate asset bubble.
The Road from Ruin: A new capitalism for the Big Society, by Michael Green and Matthew Bishop, is published by A&C Black. £14.99. More information at: www.theroadfromruin.com
Deputy Prime Minister Nick Clegg will launch the IPPR’s Northern Economic Futures Commission to develop a ten-year strategy for economic growth in the north in Leeds on 20 July. More information at www.ippr.org