Better Banking Blog
When it's rational to be irrational, then you know it's time to intervene!
I've been reading a fascinating (but admittedly heavy going) book about the credit crunch - 'How Markets Fail' by John Cassidy - which looks at the current financial crisis through the prism of economic and political theory. Okay I know that probably doesn't sound fascinating to most of you, but bear with me!
The book covers free-market heroes like Adam Smith and Milton Friedman and left-ish thinkers like Keynes and Minsky and shows how politicians and regulators distorted these theorists' ideas in justifying their actions. Nothing too surprising there, but what struck me was how polarised the debate about financial regulation and reform has become.
The arguments are too often presented a straight choice between, on one hand, liberty and the power of the market, and on the other, state intervention and socialism. Whereas in fact - at least from a theoretical perspective - the boundaries are much less clear and we should be able to have our cake and eat it!
For example, Adam Smith, the founding father of free market capitalism, was very clear in his writing that financial services was one market that could not be left to regulate itself. Smith's ‘invisible hand' - i.e. that supply and demand will ultimately find the equilibrium price - did not extend to banks and financial services, even before the emergence of things like mortgage backed securities and credit default swaps.
That advice seems to have been hopelessly ignored by the likes of former Chairman of the US Federal Reserve, Alan Greenspan, and even Gordon Brown during his time as Chancellor. US and UK politicians and regulators appear to have seen their role as getting out of the way as much as possible to let the market do its best. But the market throws up some very peculiar incentives, which are best described as ‘rational irrationality'.
Without boring you with ‘game theory' and ‘the prisoner's dilemma', what this basically means is that actions that may make sense for an individual (or an organisation) to follow can, when taken together, throw up a wholly illogical response. For example, it might make economic sense for one London Borough to transfer all its housing stock in order to reduce their maintenance costs, as people in housing need can be accommodated by neighbouring Boroughs. However, if all the London Boroughs were to follow the same (logical) path, it would lead to a situation that would be illogical (no council housing in London). The only way to sort out these perverse incentives is through government intervention and regulation.
The bailout of the banks has severely undermined the credibility of the efficiency of lax financial service regulation, but policy makers on both sides of the Atlantic continue to lack a clear vision of where we go from here. We need a new way of thinking about economics that acknowledges the usefulness of markets but also recognises their limitations.
Not so much a blog, more a list of today's successes...
Wow, what a day...we've seen such fantastic media interest in the Better Banking Campaign today that I felt I had to write it all down!
The day started off at 6.50am with Faisel Rahman, from Fair Finance, being interviewed about the campaign on the Today programme on Radio 4 and it's been almost non-stop since then. [if you dont want to listen to the whole programme then just move the timer to 53:45!].
There have been interviews on Radio 5 Live [scroll through to 08.16] and BBC News Live and BBC Radio York and the campaign was even discussed by Steve Wright on his Radio 2 show!
The Daily Mirror, the Daily Express, the Guardian Online, and the London Evening Standard all featured the campaign, as did the BBC's website. And the news services, Press Association and Community Newswire both distributed a press notice about the campaign. And (nearly there now) there have been pieces on the Debt Free UK and Claims Financial websites too!
And the press coverage has generated even more interest online, with Labour PPC, Jonathan Todd, lending his on twitter and John Kirby quickly posting a blog on the Today programme and why the campaign is so important.
Tomorrow we go to Downing Street to discuss bank reform with Ministers and their advisors, following a productive meeting with the Conservative Shadow Treasury Ministers last week.
Let's hope we can build on all this positive press coverage and support expressed for the campaign today.
Fingers crossed...more soon.
Why we support the Robin Hood Tax campaign
Today a new campaign led by Comic Relief, Oxfam, Unison and about 50 other charities and civil society groups including Urban Forum was launched. The Robin Hood Tax coalition is campaigning for the introduction of a Tobin Tax - a small levy on financial transactions between banks. The Tobin Tax is an idea that has been around for many years, but has received renewed interest in the aftermath of the global financial crisis. Just a tiny 0.05% tax on deals done between banks could generate a large amount of funds that could be channelled to tackle social and environmental problems in the UK and globally. Richard Curtis (the man behind Blackadder, Four Weddings and Funeral and co-founder of Comic Relief) has clearly got the bit between the teeth and has assembled the full force of celebrity support for the campaign. Media coverage is growing and there's been an explosion of interest on Twitter (#rht is currently ‘trending') and Facebook. Urban Forum is proud to support the campaign and we see it as entirely complementary to our own Better Banking Campaign - which now has over 150 organisations supporting it.
The campaign is already raising public awareness and providing a constructive channel for the outrage people feel over the bank bailout. That is a great thing and with the general election looming something we're delighted to see. But, like Billy Bragg's great ‘No Bonuses to RBS' campaign, it does raise some important questions and present some challenges.
Firstly, whilst it would be fantastic to see a Tobin Tax introduced, it won't on its own address what's wrong with our banking system. Our system rewards excessive risk taking and irresponsible behaviour and this needs to be changed. A Tobin Tax can only be part of the solution.
Secondly, a Tobin Tax needs to be implemented internationally for it to work. The good news is that the IMF (International Monetary Fund) are currently looking at it, as one of a range of possible options for financial reform. The bad news is that (as I understand it) the Obama Administration aren't keen on the idea and introducing it without their support will be almost impossible. However in an interview in the Financial Times, Gordon Brown suggests international support for a Tobin Tax is growing.
These points in no way detract from the campaign - anything that raises public awareness and puts pressure on politicians for real change is great. However, it's essential that we keep sight of the need for a range of reforms that shift the incentives away from irresponsible behaviour to rewarding more socially useful practice. A Tobin Tax campaign moves the debate on to practical solutions (beyond simply anger) and Urban Forum is proud to support it alongside the Better Banking Campaign.
US citizens' lead the charge towards better banking
A few months ago I wrote about what we can learn from the US banking system (albeit a system that caused the global credit crunch and subsequent recession) (Community Reinvestment: learning from the US) . This week President Obama announced a new "financial crisis responsibility fee" to claw back some of the public funds that US banks have received - generating up to £72bn in tax. These banks are now in sufficiently rude health to be planning to pay bonuses totally billions of dollars. There are number of things about Obama's approach that are interesting.
The language President Obama used in announcing what is effectively a tax on banks, is pretty strong stuff. He said: ‘we want our money back and we're going to get it'. Fairly unambiguous language. Hugely populist stuff, though hardly surprising for a president swept to power just a year ago on a platform of change. But Obama seems unconcerned with upsetting the banks and damaging a still fragile US economy. This is in stark contract with our own politicians, who seem nervous of a mass exodus of financial services to more favourable locations overseas.
The tax only applies to banks with assets over $50bn, directly targeting the ‘big boys' but not penalising the smaller community banks (of which there are many in the States). In the US the $700bn or so spent bailing out ailing institutions went not only to the banks, but to insurance companies (most notably AIG) and the car industry. The banks have in fact paid back far more of the money they received than the other sectors, but it is the banks that are directing the public's anger and the banks that Obama have chosen to target.
Interesting stuff and something for our timid politicians to think about as we go into the general election.
The other thing I became aware of just last week was a citizen-led response to the financial crisis. The ‘Move Your Money' campaign was established in response to the greed and excessive risk taking of banks that has resulted in suffering for communities in the US. It suggests that if people are dissatisfied by these banks, then they should move their money (or mortgage) to somewhere else more ethical. A simple message and a logical action to take. The campaign is attracting significant media attention and increasing numbers of people are now switching their accounts to institutions that are not paying obscene bonuses to their employees or acting in ways that harm society.
Like any great campaign, it's so simple in conception that it makes you wonder ‘why didn't I think of that?' There seems to me to be huge potential for a similar campaign in the UK. Why wouldn't people unhappy with the way banks are acting not move their accounts to better institutions? I would.
Of course we need to think some things through...like where to move our money too. And how to make it as easy as possible for people to move accounts - cut through some of the inevitable bureaucracy and research needed. But these are surely things we can accomplish if we give it some thought.
Interested in the idea of ‘move your money', then I'd love to hear from you. Meanwhile, watch this space.
Chancellor signals his support but a hard slog ahead
Although the headlines about the Pre Budget Report will inevitably be about the tax on bankers' bonuses and the Social Investment Bank being set up, the real news from my point of view was a commitment "explore options" on better disclosure of how banks provide services to disadvantaged communities.
Stripping aside the jargon, what this means is that they want banks to disclose information about how they are meeting the needs of poor communities - the first and most fundamental of our four campaign proposals. Of course there are one or two caveats and a lot of detail still to be worked out, but I think that's cause for some celebration.
Although it's easy to become obsessed with the semantics of the statement, the main weakness in the announcement is that they're talking about 'services' which may not include 'investment' in poor communities. Clearly services are important but so too is the flow of money in and out of deprived neighbourhoods.
But whichever way you look at it, it's real progress and an important first step towards achieving our aims. I'm certain that we would not have seen today's announcement without the effort that Urban Forum and our partners have been putting into our campaign.
It seems as if the calls for a Community Reinvestment Act and a credit cap are growing almost daily. Great to see Save the Children's new campaign calling for a CRA and the London Citizens' campaign which includes both a CRA and a credit cap. And Debt On Our Doorstep are lobbying Peter Mandelson to introduce a credit cap campaign, on the back of an excellent Dispatches programme on Channel 4 investigating predatory lenders.
It appears as if the politicians are starting to take note. There are some very encouraging noises coming out of government and the Guardian's headline on Tuesday ‘Labour opens new front in battle with the City' suggests policy-makers in Whitehall may be warming to our proposals.
I think that we should all be very pleased with this progress...but we've still got a long way to go!
Well done and thank you for all your support. Let's hope this is the start of even greater things to come!
