What’s the problem?
Would you put all your eggs in one basket? What if you drop it!? In agriculture we are beginning to understand that diversity is best: planting vast fields of one crop means that you lose everything if disease strikes. Planting a mixture that thrives in slightly different conditions and that complement each other is a much wiser strategy (something of course that humanity understood for thousands of years before industrial farming came along!) The problem we face in changing the way we grow our food is the enormous pressure to extract short term profit rather than build long term, safe and sustainable, diverse food systems.
You won’t be surprised to hear that the problem is much the same for finance. Short term profit-seeking dominates long term thinking and this leads everyone to look, feel, smell, sound and, above all, behave the same. In 2008 the system was dominated by a handful of very large firms with pretty much the same incentives and the same ways of operating – and in 2018 nothing much has changed.
What’s so bad about that?
A financial system dominated by only a few types of firm is likely to be unsafe because they tend to behave the same – so when things go wrong, they go wrong for everyone. This is not news… the famous economist Keynes wrote in the 1940s that it was easier for investors ‘to fail conventionally than to succeed unconventionally’. Fifty years later in the LTCM crisis a large part of the problem was that everyone wanted to be like LTCM, so everyone placed the same bets, so when they went wrong everyone was in trouble. Before that the great crash of 1929 looked much the same. In the great tulip bubble of 1637.. well you get the picture.
10 years ago in the latest crisis we saw it yet again as the largest banks and insurance funds were all in trouble for much the same reasons. Today’s financial sector is even more concentrated and dominated by a few big firms with similar business models than ten years ago. The exact nature of the next financial crises is very hard to predict but, just as in agriculture, a monoculture makes us very vulnerable.
What’s the alternative?
The alternative is a diverse mix: different types of banks, insurers, pension funds, long-term investors and so on. Some bankers claim that today’s firms are safe because they are diversified on the inside – i.e. they have lots of business units inside them. But diversification on the inside is not the same as diversity outside. Those big firms have similar weaknesses; they do not make up a resilient ecosystem. We need some public, some private institutions, more mutual and cooperative structures, more stakeholder organisations that answer to the needs of employees, savers and borrowers. Some larger than others, but none so large that they dominate, lead others astray or threaten the whole system. Some types of organisation we have seen before and some we have not even thought of yet.
How will it help?
A mix of different organisations in the financial sector will be able to meet our different needs, to thrive in slightly different conditions, to complement each other and to respond differently to difficulties, so they don’t all fail at the same time and threaten our societies and communities.
What steps could we take to get started?
- Promote public banks, stakeholder banks, network of people’s banks, ethical banks, and small banks.
- Promote local, mutual and cooperative banks, pension and insurance providers and other financial institutions to give stakeholders a say in what gets financed.
- Promote democratically accountable multi- and bi- lateral development and investment banks, including green investment banks.
- Remove state aid, fiscal accounting, and other barriers to public banking.
- Launch citizen wealth funds where the people have a direct input into which projects are financed.
- Ensure broad and diverse stakeholder representation on the boards of private financial firms. For example, include employee, customer, pensioner and citizen representatives and gender diversity.
- Bring an end to Too-Big-To-Fail by shrinking and breaking up Systemically Important Financial Institutions (SIFIs).
- Separate banking activities, so that the commercial and investment activities are distinct (e.g. using a ring-fence).