Last November, the New Economics Foundation published a paper, From the Ashes of the Crash: 20 first steps from new economics to rebuild a better economy in which they identified a way to build a financial infrastructure that actually did what the old order had failed to accomplish; the creation of fundamental social and natural operating systems. Here’s an extract with five of the most interesting ideas…
1. Segregate financial markets – by separating activities such as trading and retail banking
A central plank of the process of financial liberation has been the removal of restrictions on what activities different institutions can undertake. It took more than 50 years for policy-makers to forget the lessons of the Wall Street Crash of 1929, which led to the Glass-Steagal Act in the USA to prevent financial institutions exploiting their market position and power and profiting from conflicts of interest. Segregation was seen as ‘inefficient’ and was swept away by liberalisation. As institutions ceased to specialise and became financial ‘conglomerates’, they converged on the most profitable activities. During the boom this was largely trading (or speculative) activities, which paid handsome rewards, but also fueled the boom itself. The flipside was that less profitable activities – such as maintaining a branch network and providing financial services for low-income people – became ever more marginalised.
We need financial institutions to focus on specific functions and to do these well, not to chase the latest bandwagon. Formally segmenting the system by function ensures this diversity, but also allows appropriate regulation of each sector.
2. Bring onto the balance sheet, rigorously check and officially license all ‘exotic’ financial instruments
All such instruments should be brought onto the balance sheet and subjected to the same regulatory capital requirements as other activities. They should also be properly licensed. All derivative products and other exotic instruments should be subjected to official inspection. Only those approved should be permitted to be traded. Anyone trying to circumvent the rules by going offshore or onto the internet should face the simple and effective sanction of ‘negative enforcement’ – their contracts would be made unenforceable in law. Ultimately our aim is an orderly downsizing of the financial sector in relation to the rest of the economy.
3. Encourage the introduction of complementary, multilevel currencies to provide credit in tune with the needs of regions, towns, cities and neighborhoods, whilst helping to inoculate the economy from systemic financial shocks
Complementary currencies have a successful track record of providing local means of exchange, when money is running short in the local economy. Successful models are now running all over the world, keeping local resources circulating locally and providing independence for impoverished communities from government largesse. They can provide low-cost or free credit, and – in some countries – they underpin whole sectors of the economy. But they also do much more that that. Because they require face to face exchange, they build the relationships and understanding that productive economic and social life depends on. This close connection also means that they help to create responsive local economic eco-systems that are better able to predict and respond to shocks.
Many of them are modeled on the life-saving complementary currencies that grew up on both sides of the Atlantic during the Great Depression. Policy needs to be directed at enouraging a multiplicity of experiments, and providing an explicit legal power to local authorities to set up currencies systems – regulated by a new e-money regulator – and to accept them for local taxes and fines.
At the international level, the global financial system needs to be underpinned by a new global reference currency, along the lines of the bancor proposed by Keynes at the Bretton Woods summit, and backed by a basket of commodities. This will make currencies safer from sudden collapse, and will also provide an added underpinning to economies in developing countries that are wealthier in raw materials.
4. Tap into the hidden vale of time banking and grow the ‘core economy’
As communities and local economies face the stress of recession, time banking should be promoted as an alternative currency exchange that can knit communities together and reduce financial pressure on public services. Time banking allows more human assets, including those of people who are under, or unemployed, to be usefully engaged in the local economy. As faith in the money-based economy collapses, the value of time as an alternative means of exchange should be recognised and embedded into public services to increase individual and community resilience and reduce demand on hard-pressed resources. Time banking – a practical tool for enabling people to be involved in shaping and producing pubic services – could revitalise schools, hospitals, public housing and even the youth justice system.
Time banking is a tried and tested way of growing the ‘core economy’ – the abundant wealth of human assets that are largely neglected by the machinery of state and eroded by the market system. These assets are embedded in the everyday lives of every individual (time, wisdom, experience, energy, knowledge, skills) and in the relationships between them (love, empathy, watchfulness, care, reciprocity, teaching and learning). Another way of doing this is to ensure that the public services that depend on the financial resources drawn from taxation and professional expertise work in equal partnership with the people they are supposed to serve. Doing so would dramatically increase their resource-base and radically transform the way they operate, creating a positive upward spiral.
5. Increase stability and raise resources with currency and financial transaction taxes
Financial flows play a vital role in local, national and international economies, but too little of the vast edifice we have created has any relation to the real economy. Rather than a means to an end, finance has become the end in itself, with short-term, high-frequency trading strategies turning over trillions of dollars every day in global markets, often for no public benefit but – as we see all too clearly today – at a huge cost.
We need to discourage the short-term, speculative moving of paper assets but to encourage long-term, sustainable investment. A small tax on international currency transactions would discourage short-term, high-frequency trading (you pay the tax every time you trade) but leave longer-term, real investment unaffected. It is estimated that, globally, a tax of just 0.005 per cent would raise tens of billions of dollars annually, while also ‘throwing sand in the wheels’ of the global currency markets and reconnecting the financial and real economies.