Put Your Money Where Your Mouth Is - Macro Analysis
For where your treasure is, there your heart will be also (Luke 12:34)
For where your treasure is, there your heart will be also (Luke 12:34)
Jesus’ bold statement in Luke cannot help but make us realise that we do with our money is an extension of who we are. Finance is not a separate world, handily detachable from the other areas of our lives. We can easily espouse certain values, but where we put our money can reveal our true priorities. What we as individuals do with our money, demonstrates our own values.
But what is true for us as individuals is also true for us as a society.
We want to put relationships into the heart of the economy. We all know that being a social animal is at the heart of what it means to be a human being; but for far too long there has been an attempt to remove relationships from economic life. Whether we like it or not, the exchange of money creates a relationship between two parties; and like with any relationship, this comes with responsibilities.
We no longer want an economy where we are free to ignore the effects these economic relations have. Instead we want an economy which encourages good relationships and ensures that everyone takes responsibility. The economy, from the individual to the whole society, needs to see change and CSM is therefore proposing 6 points to address this.
Key to bringing relationships back into the heart of the economy, is to bring relationships back into the heart of business. Currently there is little encouragement for shareholders to take responsibility for the underlying business and operations of a company. Their involvement usually only extends to pressing for short-term financial returns. We at CSM are calling for shareholders to take responsibility for their investments rather than simply seeing them as a profit making activity.
Shareholder activism in the past has demonstrated the influence shareholders can have. Pressure from shareholders in 1970 caused General Motors to expand its board of directors to include (for the first time) a woman, an African-American and an environmentalist. More recently shareholders have used their power to vote against increasing executives pay deals.
To encourage more of this kind of shareholder responsibility, CSM believes that more long-term investments should be based on a strong relationship between the shareholders and the company. To do this, CSM wants to build on the Financial Reporting Council’s Stewardship Code and force all institutional investors to actively engage in the corporate governance of companies they have shares in, and report on how they are doing so. Though we believe the Stewardship Code is a step in the right direction, it does not go far enough. Having a legally enforceable framework would help to hold institutional investors to account as well as stop shares simply being seen as tradable commodities.
Having seen the success of the Fairtrade movement, we believe that legally forcing companies to act is only part of the story. This is why we are also supporting Relationships Global’s ‘Relational Business Charter’. This Charter restores relationships across and within companies: from shareholders, to directors, suppliers, to workers. It commits the company to encourage long-term, transparent shareholding and have face-to-face meetings between all stakeholders in a company. In practice, this would mean shareholders directly involved in corporate governance, rather than simply holding shares as a commodity. Shareholders concerned with long-term sustainable growth, rather than short term money making scheme.
Companies signing the ‘Relational Business Charter’ would be obligated to have a significant proportion of their shares owned by long-term, named individuals or family trusts. By encouraging companies to sign up to the Charter and deliberately supporting those who do, there would be potential to see a cultural sea change in corporate governance across all sectors.
When money is given to charity, everyone is quick to take credit for the good our money has done. We feel proud that we have played a role in providing a water pump for a remote community or helped a child in need. But this also has to be true when money is invested in companies. We are responsible for the good and the bad our money does. Just as we are responsible for who we bank with, shareholders are also responsible for who they invest in.
Financial Transaction Tax
In order to bring relationships back into the economy and to have conditions which allow them to flourish, we have to make sure that the system is just and fair. For a family to work well, responsibilities and rewards must be shared out fairly. If one member is taking all the income for themselves and then accepting none of the responsibility then we would describe this as an abusive relationship. This is the same for our economy. Relationships can only develop if the system is fair to all parties. Responsibility and reward must be shared out fairly. This is why CSM is campaigning for the Financial Transaction Tax to be implemented with immediate effect.
The financial sector is a critical and important part of our economy. It helps to fund both our public sector and private enterprise creating jobs for thousands of people. However, the past 30 years have seen the financial sector enjoying record rewards but failing to accept the proper responsibility when it all went wrong. It has enjoyed a long period of low tax rates and light touch regulation yet has done incredibly little to make amends for the damaged done during the financial crash and subsequent recession. In a time when the government is having to raise taxes and cut spending, the financial sector must take responsibility and pay its fair share.
The policy itself would involve a small tax on either the sale or purchase of certain financial classes: this includes equities, bonds, foreign exchange and their derivatives with a proposed tax rate of around 0.05%. This could raise up to £250 billion if implemented globally and about £20 billion for the UK, protecting the most vulnerable from spending cuts. Not only is it fair and an effective way for raising money, the Financial Transaction Tax would also help to stabilise the system full of trades which Lord Turner, the chair of the Financial Services Authority, calls ‘socially useless’.
In order to have a good relationship with anyone, it is vital that you know who you are in a relationship with. If you don’t know the person, or if you don’t even know how many people are in the relationship with you, association becomes impossible. Relationships require clarity and openness on both sides. The failure by the financial industry to be open and clear with each other was one of the major reasons why the financial crisis was so serious. Complex financial products were being traded across a shadowy nexus of different banks and hedge funds, until the point that no-one really knew who owned what and who they were really trading with.
In order to clear up the system and protect consumers from the high risk world of shadow banking, CSM is advocating full legal separation of the banks. The Independent Commission on Banking, headed up by Sir John Vickers found that separation of the banks is the way forward. The government’s white paper took on board the commission’s findings but in effect kicked the can down the road by calling for banking separation in 2019, by which time this opportunity may have passed. Splitting the banks would stop high-street banks from being able to get into the same position they were in during 2008, when no-one knew how much bad debt they were holding. It would also mean that institutions which wanted to have an high risk investment strategy were doing so at their own risk and not that of the tax man.
The often cited adage; “that banks are too big to fail” is perpetuating a culture that bigger is better and that there is no room for change. However, CSM strongly disagrees. The Nobel Prize winning-economist Joseph Stiglitz argues that: “most economists have the opinion that something must be done, almost nothing has been done yet.” The banks proclaim that the break up would affect their efficiency, but there is minimal evidence that this is true, and even less evidence that it would affect customers.
Imagine strapping your entire family into a car and then entering a F1 race. Before too long you will crash and it will put everyone in the car at massive risk. If you want to take high-risks, you should be using a suitable vehicle. Furthermore, it isn’t fair to also place everyone else at risk, especially if they had no idea what they were getting themselves in to.
Regulation of Credit Creation
The financial sector creates credit and wealth, which in turn stimulates the economy, or so the argument goes. Unrestrained credit creation will bring nothing but growth and prosperity. Most of the time, this is true. Credit creation allows businesses and individuals to invest money that they would not normally have and thus it gives them the chance to grow. However, credit creation is not always a force for good.
The financial crisis, in large part, was a result of banks, who had become reckless in their creation of credit. This credit was used for speculative purposes: being used for high-risk, short-term trading rather than long-term, sound investments. This meant that a credit ‘bubble’ was formed, and when that credit ‘bubble’ eventually burst, it lead to the inevitable: a credit crunch.
Many, such as Ann Pettifor, have argued that it is liberalisation, or, the freeing of the financial sector (the banks especially) from central regulation, that has caused economic instability and financial crisis.
In an argument reflecting the economist Keynes, Pettifor states that it is re-regulation of banks that will stabilise the system. In order to ensure that the credit created is not used for speculative purposes and is instead directed into encouraging long-term, sustainable growth, CSM believes that there must be strict controls over lending. This has two positive results: firstly, it will keep inflation under control, as too much credit creates inflation, and secondly, it avoids deflation, which can lead to a deflation spiral and lack of jobs and income.
More simply, the idea is simply that lending must be responsible. As we have seen, left to it’s own devices, the banks let lending get out of hand, which had catastrophic global consequences. It is clear that there must be some central regulation, assessing lending for its contribution to the real economy and monitoring the level of risk.
The Bank of England believes that there must be an international arrangement, but it must lead by example. The ethical and financial consequences of ignoring the problem are too high. Now that we’ve seen how the bridge broke, and know how many people were hurt when it fell, we must fix it. It makes no sense to build it in the same way and leave it free to fall again. Instead, we should learn from our past mistakes, adding strength to ensure its durability.
International cooperation on the regulation on credit creation is part of a wider need for global action. States are more dependent on each other than ever and with close national relationships cultivated through global politics, communication, and the advancement of technology, we cannot avoid global inter-dependency and the increasing shift from the state to the global stage. The state is not unimportant and certainly has a role in politics, but we have seen the rise of international and supranational organisations that are equally important too.
Though there are global institutions, such as the International Monetary Fund and the World Bank, there is little to no international scrutiny. International cooperation is possible; the Bretton Woods Project, just after World War 2, is a great example of what can be achieved between states. In this time of crisis, we need a new Bretton Woods. There must be more oversight into the work that these organisations undertake, as they are big players, with huge global influence over development and economics, as well as a respected opinion on global issues.
Cosmopolitanism sees people as global citizens, where borders are imaginary and neighbours are equals. Habermas notes that the European model of citizenship, that allows citizens to move between states with little difficulty, has had a big impact on the rest of the world. The importance of national citizenship is eclipsed by free movement between states, but global citizenship is immutable. Kant stated that the earth belongs to “the human race in common”, and even Jesus is spoken about as a universal figure, a man without a country.
In this context, the cosmopolitan ideal of ‘global responsibility’ is especially necessary. It is no use treating only the heart when the whole body is sick. CSM believes that the world community must act as one in order to facilitate real change. The financial crisis of 2008 knew no boundaries; many countries were affected by a credit bubble that started in US. The protest movement Occupy, mirrored this. This crisis was global, thus the call for global responsibility to avoid future crises has never been stronger.
This final macro point is concerned with the fairness of wages. Following a Unison call for a scale of wages that has a maximum difference ratio of 20:1, CSM champions this initiative in order to address the unfair pay differences between those at the bottom, and those at the top of the pay scale. The Hutton Report highlights that executive pay, both in the public and private sectors, is increasingly above inflation whilst ordinary workers are receiving a pay freeze. Many companies’ stress on Individual Performance-Related Pay is often discriminatory against women, disabled workers and ethic minorities, as reports find that it tends to favour white and non-disabled men above the rest of the staff. PRP is also seen as divisive and demoralising. Moreover, Unison’s submission to the report points out that the inequality of income trend that has been rising since the 70’s has been attributed by some economists to the rise in private debt and speculative activity, which in turn led to the 2008 financial crisis.
We teach our children that it is good and right to divide sweets equally amongst friends. Why then do we allow them to grow up in a society where unequal distribution is the norm? In Richard Wilkinson and Kate Pickett’s ‘The Spirit Level’, we see that this inequality has many unintended wider social effects on society. From health, education, community and social mobility to crime and punishment, income disparities matter and make a difference. In 2010, Ed Miliband even mentioned the book, stating that “the gap between rich and poor does matter. It doesn't just harm the poor it harms us all.”
Fair wages don’t only help tackle social issues, they also foster respect and strengthen relationships between workers at both ends of the scale. One Society has calculated that in the FTSE 100 companies, the pay difference between those at the top and those at the bottom is 262:1. This is exemplified by the head of Tesco earning 322 times the median income in the UK. That’s 599 times the National Minimum Wage. On the side of the business, this has the adverse effect of damaging both company and individual performance.
A smaller pay ratio is not only appealing to business, but is popular with the wider population too. In 2011, Yougov found that 78% of adults thought that the government should be taking action against excessive pay ratios. The public sector pay ratio is lower, at 15:1, yet the study showed that 82% of those that were for lowering of the ratio thought that it was necessary in both the public and the private sectors. A study for the Department of Business, Innovation and Skills by the Institute of Fiscal Studies showed that countries with higher pay ratios tended to have lower social mobility, which is particularly relevant to the UK, as our rate of social mobility is one of the lowest in the developed world.
CSM believes that a lower pay ratio is a strong first step away from social immobility and towards a society that encourages respect between colleagues, rejects discriminatory pay rises and champions a fair distribution of wages.