Rehumanise yourself: how to get money where it's needed

Dave Powell

08 September 2013

"There need never ever be a shortage of finance, so the question becomes, once you create the finance, what can you do with that? And who's going to decide?"

So said economist Ann Pettifor at our Transforming Finance conference back in May. Her point was this: it may not seem like it to the most-of-us struggling with declining living standards, but at the macro level, the world is swimming in loot. Money sloshes into property, speculation, infrastructure (mainly high-carbon), and buying stuff, or sits in people's accounts. It can be magicked into existence by central banks, as in programmes of 'quantitative easing' (QE) across major economies. It lurks in sovereign wealth funds, and in the banks that effectively decide where most of the money in society goes, through choosing to whom and for what purpose they'll give out loans or finance investment.

But our finance system doesn't send it where it needs to be, and doesn't not send it where it doesn't need to be, if you follow me. The Transforming Finance conference - a major get-together of academics, policy makers, campaigners, entrepreneurs and activists - got its teeth into this dilemma. Here's four things I took away from it:

1. Left to its own devices, the financial markets will continue to misallocate capital on a disastrous scale. Governments need to end 'anything goes' and stamp out the short-termism that riddles financial decision making.
2. Finance needs rehumanising. People need a voice, empowered through better information and duties on companies to know and care what happens with our money, and more active stakeholders, voting with their feet.
3. We need more diversity in finance, like the local savings banks that are underpin so much of the German economy. I'm excited by the potential of crowd-funding and peer-to-peer funding as examples of marshalling investment, and want to see more help for mission-led financing bodies like credit unions and cooperatives...
4. Because most of all, we need more purpose back in finance. The Green Investment Bank is a start, but needs more power - as I argued in a submission to MPs last month. The monetary system needs to be greener: if there is one day to be more 'QE', it should be tilted specifically towards green investment, not just flung willy-nilly at already rich bondholders. And we need to discourage damaging speculation, described by Lord Turner as "socially useless", through instruments like the Robin Hood Tax. Some participants even suggested 'credit controls' - limits or guidance on how much and for what purpose new money can be created by banks.

As a live example, look at energy investment. Renewable investment is increasing, but as a poor sibling to fossil fuels, not instead of it. There's still far, far too much dirty energy investment going on, dwarfing renewables (see this powerful new bit of work from WDM on the scale of RBS's carbon funding). Short-termism prevails, and the climate imperative simply doesn't translate itself into the market. There are signs that coal investment is wibbling a bit at the margins, but in general the picture is stark. Investors don't think Governments really care about climate change.

So transforming energy finance means doing two things. First, increase the attractiveness of clean energy and its ability to attract finance - from traditional and new sources. Second, make fossil fuel investment less attractive, sending unmistakeable signals to would-be fossil fuel investors that this is no longer such a safe bet. The risk/return imbalance - where fossil fuels are seen as safe and lucrative, and renewables aren't - needs shifting from both sides.

There's no one thing that'll fix it, and I've not got the space to go into depth. But as a headline, the Government has to take a cold hard look at the gushing rhetorical and financial support it's giving for fossil fuel extraction. Yes, ministers want renewables, but gas and oil too: an act of supreme cognitive dissonance. It is as if they think there is no opportunity cost in, as the Chancellor did last week, twerking his multi-billion pound tax breaks for oil and gas extraction to industry representatives in Aberdeen. It's as if they didn't think saying things like it is "irresponsible" not to weigh into shale gas in a big way doesn't make it less risky to invest in renewable energy. Because - as Ernst & Young spelled out recently - saying you want both a clean and a dirty energy system is rather bewildering for investors.

As with energy, so with finance. There's only limited value in promoting alternative ways of finance if big banking doesn't change. We need finance and energy to work for people and their communities, not a handful of the mega-rich. Short-termism is so endemic in finance and energy investment that it needs more than just some firm words from the Government to stamp it out.

Our finance system should exist for a purpose: to serve society, not dominate it. So should our energy system, which needs to be decarbonised as quickly as possible, even if it costs a wee bit more in the short term, because it is the right thing to do for the long-term.

You can see our new summary video of the day below, and hop over to the site for a full rundown of what was discussed.