Our Civil Society needs a Civil Economy to match
We are all understandably angry about banker’s bonuses and the seeming irresponsibility of the capital markets. They have cost us a fortune; in wealth, in jobs, in public spending. But railing against the capital markets won’t get us very far unless we have an alternative.
So here is the big question: “What should our capital markets look like? What functions should they carry out, and how would you judge if they are doing a good job?” Answer that, and we might get a better handle on how policy and action can create the world we want to see.
It seems to me that capital markets should do two things. First, they should be able to take our savings, and provide it to those who can best invest it. They should do this in a way which is low cost, which is in the best interests of the savers they seek to serve, and of the broader “stakeholders” who depend on the success of the financial community.
Second, financial markets can help defray risk. For example they can offer life insurance. If you are a small farmer in Kenya, you can sell your autumn crop in the springtime to help pay for fertiliser. More basically, we can write or receive a cheque or a credit card payment, and know that the risk of default is very small.
All these services are very important to our economy. Indeed, absent them it is difficult to see how our economy would survive. So, working properly, capital markets are a good thing. But how do we get them to work properly. How can we trust those that look after our wealth to do so responsibly?
Well one thing we could do is to regulate. And regulations are necessary. But regulations don’t make people trustworthy. Indeed, if you just depend on regulation you may damage the sense that our agents need faithfully to be serving us.
Better, if you want people to be trustworthy, is to make them accountable. So boards of banks should be accountable to someone for what they do, and those to whom they report should carry out their task responsibly, and themselves be accountable. And for the system to work it needs reliable and independent information. And it needs the vigilance of everyone; regulators, customers, journalists and others.
We all know what a “civil society” looks like; freedom of speech, democratic accountability, separation of powers, rule of law. We get very upset if any of these principles broken. For capital markets what we need is a “civil economy”; we need to be explicit about who is responsible and accountable, with independent relevant information available, and a heavy dose of scrutiny. And we need to get very upset if any of these principles are broken.
If we did, it would suggest a whole number of reforms to the way that our current system works. For just one example, consider the “credit default swap” (CDS). It is like a life insurance on a company, and therefore a perfectly good thing if used properly. But you can buy a CDS entirely anonymously. That can’t be responsible, any more than it would be responsible to allow people to buy life insurance contracts on others without telling them.
Responsibility and accountability are all very well. But they raise the question; to whom should the system ultimately be accountable? Consumers? Society? The workforce? The shareholders?
Today, the law says that much of the economic system should be run for shareholders. Who are those shareholders? Well, if you look at the shareholder registers of the banks you will discover the names of lots of fund managers. But they don’t own the capital they invest – It is usually money which belongs to pension and insurance companies from around the world. It represents millions of people’s savings. Indeed, two thirds of the adult population of the UK have a stake in the shares of the world’s largest banks. It is for them that these banks should be run.
What about consumers? Many say that the best thing we could do would be to start consumer banks and savings institutions. Great idea. Not least because most of our current savings products just don’t work well. Take for example, the cost of a personal pension.
Imagine you’re a 25 year old setting aside £10,000 for retirement at 65. Then look at how much you will pay in fees over the 40 years of savings. (The last time I tried the FSA’s personal pensions comparison tables one supplier, due to compounding of interest and charges, was taking more than £90,000 in fees over 40 years!).
So there is much to be done.
But the good news is that, as “citizen shareholders” we can have huge influence how the banks we own will work. With proper thought, we could establish a responsible long term savings industry in this country. This prize if we can do so is simply huge.
But responsible capital markets, like responsible government will come, not just with regulation. It requires the development of the “civil economy” which we all can trust, and in which we all can participate.
And it will be in debates, such as those hosted by the TUC, that the ideas and institutions of the Civil Economy can develop. Not just by global regulatory master plans. Like civil society, the civil economy will depend on the creativity and social entrepreneurship which can deliver trustworthy, responsible and accountable savings and investment institutions.