The race to reimagine finance: What Role will Money Play?

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Financial institutions have vast scope to redraw a more equitable, ethical and pleasant environment using ‘inclusive capitalism’. Giles Crosse assesses the proposals of Mark Carney, Governor of the Bank of England

Following the recent banking crash and global recession, analysts have been asking questions about the fundamentals of how we distribute and control money.

This is a question that comes down to more than overinflated house prices, or fragile pillars of lending based on money that does not exist.

The worries reach into the fabric of sustainable development. Institutions like The World Bank are charged with using money for good, minimising foreign debt and leveraging social change through funded projects. Yet global finance leaves a caustic taste, whether through development funds stolen by corrupt regimes to buy arms, or through corporate tax evasion. All this goes on while, in 2010, 21% of people in the developing world lived at, or below, US$1.25 a day, according to the Bank.

 

With today’s rates of progress to alleviate global poverty, one billion people will still live in extreme poverty in 2015. All in all, 2.4 billion people lived on less than US$2 a day in 2010, the average poverty line in developing countries and a common measure of deep deprivation. This represents only a slight decline from the 2.59 billion living in deep deprivation in 1981, little improvement in over 30 years of development work.

Money remains at the heart of this. The Bank notes that economic shocks, food insecurity and climate change threaten to undermine progress made in recent years. All these depend on how cash is moved, leveraged and shared throughout the planet.

What are the solutions? Speaking at a recent conference on Inclusive Capitalism in May, Mark Carney, Governor of the Bank of England, had some catalysing words for the financial community: “Inclusive capitalism is fundamentally about delivering a basic social contract comprised of relative equality of outcomes, equality of opportunity and fairness across generations. Different societies will place different weights on these elements but few would omit any of them.”

Carney argues that a society that provides opportunity to all its citizens is more likely to thrive than one which favours an elite. A basic social contract between the world’s states to deliver equality is failing. He does not mince his words. “Environmental degradation remains unaddressed, a tragic embarrassment now seldom mentioned in either polite society, or at the G20.

“Social mobility has declined in the US undercutting the sense of fairness at the heart of American society. Intergenerational equity is similarly strained across the advanced world. Social welfare systems designed and enjoyed by previous generations may prove, absent reform, unaffordable for future ones.”

Inequality, harm to environmental resources, climate change and the failure of the world’s businesses are the crops grown from these damaged seeds. But there are opportunities to avoid darker futures.

What does Carney recommend?

“To succeed in the global economy, dynamismis essential,” he argues. “To align incentives across generations, a long-term perspective is required. For markets to sustain their legitimacy, they need to be not only effective but also fair.”

Carney argues that finance needs to become trustworthy again, saying that just as any revolution eats its children, unchecked market fundamentalism can devour the social capital essential for the long-term dynamism of capitalism itself. Capitalism is not the problem from an ideological perspective. It provides the tools for a burgeoning, healthy world where goods and skills are used in a system that leads to development, resource equity and a happier planet. What is missing is the social contract that prevents capitalism from running haywire. When it does so, the unchecked greed of the few topples pillars of equality, leading to resource depletion, global warming, starvation or war.

What problems have damaged the world’s social capital?

– Major banks were too-big-to fail: operating in a privileged heads-I-win-tails-you-lose bubble
– There was widespread rigging of benchmarks for personal gain
– Equity markets demonstrated a perverse sense of fairness, blatantly favouring the technologically empowered over the retail investor.

What are the solutions?

– Ending too-big-to-fail
– Replacing such implicit privilege with the full discipline of the market
– Creating fair and effective markets
– Reforming compensation
– Building a sense of vocation and responsibility

Carney explains that when bankers become detached from end-users, their only reward becomes money. “Purely financial compensation ignores the non-pecuniary rewards to employment, such as the satisfaction from helping a client or colleague to succeed,” he said.

“This reductionist view of the human condition is a poor foundation for ethical financial institutions needed to support long-term prosperity. To help rebuild that foundation, financiers, like all of us, need to avoid compartmentalisation, the division of our lives into different realms, each with its own set of rules.”

‘Carney argues a society that provides opportunity to all its citizens is more likely to thrive than one which favours an elite. A basic social contract between the world’s States to deliver equality is failing.’

He argues that this process begins with boards and senior management defining the purpose of their organisationsand promoting a culture of ethical business throughout them. “Employees must be grounded in strongconnections to their clients and their communities. To move to a world that once again values the future,bankers need to see themselves as custodians of their institutions, improving them before passing themalong to their successors.”

With these changes there is hope of returning to a fairer capitalism that provides richer returns. These include meaningful development institutions and fair markets, encouraging environmentally benign products and practices. Other gifts from such change could deliver a culture of shared global resources, where poverty alleviation stems from allowing capitalism to embed an exchange of items, ideas and finances.

This system would waste less, open new markets and address new opportunities. These are fundamental development concepts that minimise climate change and deliver better States and societies. “Through all of these measures, finance can help to deliver a more trustworthy, inclusive capitalism, one which embeds a sense of the systemic and in which individual virtue and collective prosperity can flourish,” Carney concludes.

Will the world’s bank and financiers encourage this brave new world? Or will they undermine such change at the altar of greed and short termism?

Please share your experiences and views in the comment section

PHOTO CREDIT: Chris Potter on flickr

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