ESSAY: Where do we go now?

In one of the most apt middle 8's ever, Axl Rose Decried "where do we go now" as the best riff of his bands career descended into farce. It seems the economy is going the same way!

ECCR article for November newsletter

I spent most of this last September inside my bedroom studying hard for the final round of exams for my post-grad. Page after page of socioeconomic theory digested, analysed and committed to memory, all price signals, market drivers, pro-poor regulation, then finally regurgitated onto a page my conception of how the financial world worked and didn’t work. The final exam was on October the 7th. Rather demob happy, I returned to the office to be greeted by a sombre mood, the largest one day fall in the FTSE 100 in most people’s living memory, and a starkly different world in which to apply my knowledge.

Recent events in the markets have been unprecedented both in terms of the volatility of price movements and in terms of the kind of government action needed to insure society against the meltdown. Sparking with the collapse of Northern Rock, the credit crunch hit the market with full force almost a year later. In the wake of Bear Stearns came Lehman Brothers and AIG. HBOS and Bradford & Bingley became the major UK casualties, as national governments worked to execute rescue plans for ailing banks. Bankers with bonuses were swiftly vilified, and scapegoats from the square mile were easily found. 

But we must look deeper at the roots of this crisis, and ask what was fuelling the demand for cheap credit? As one think tank put it, “a massive bubble of debt inflation has burst”. An era of deregulation surrounding the banks complemented a society driven by debt finance consumerism which was surely unsustainable.

In essence the credit crisis can be characterised as an unsustainable bonanza of credit that manifested itself in a glut of sub-prime mortgages, loans and store cards. Questions are being rightly asked about the role of regulators in allowing such a risky situation to underpin economic growth, but bigger questions must also be asked of political actors and society as a whole. Many saw the crisis coming, but few made moves to call it to a halt. In the words of one fund manager quoted at a recent conference ‘while the music was still playing, I had to get up and dance’. So we must question a system of incentive and risk management which compelled those uneasy with the situation to participate in it against their better judgement.

We cannot underestimate the very real effects on UK society that the current slowdown will have; but we must also search for the positives, however few. In times of crisis, when people’s mental maps of reality have been challenge, voices calling for sustainable change can be better heard. The World Bank, the IMF and what is now the WTO were all birthed in the Bretton Woods conference in the aftermath of WW2. A similar opportunity to shape the institutional future is upon us. We have a significant window of opportunity to engage the mainstream investment community with the kind of long term value creation ideas that have been pushed in more ethical circles for years, and to push for a revamped financial systems that look not only at the sheer scale of growth achieved, but also at the quality and sustainability of that growth.

As many of us know, the credit crisis is not the only challenge facing society, a fact recognised by the panel of thinkers, economists and politicians making up the Green New Deal. Inspired by the Roosevelt New Deal which worked the US out of the Great Depression, this group notes the coincidence of climate change, peak oil and the credit fuelled financial crisis and calls for coordinated action across all three challenges.

The response is a bold programme aimed at pulling society back from the brink, firstly attacking the premise that if public money can be used to shore up the private banks, why do we shy away from using public money for genuinely worthy causes? Traditional economists usually play off the low transaction costs of market led resource allocation against interventionism – but look at the bill the private market has left us with in the form of the US and UK government bail outs! The Green new deal group advocate progressive taxation on high impact sectors, most notably to be used in the creation of an Oil legacy fund, paid for by windfall taxes on the Oil and Gas producers (although the oil price has since fallen dramatically, the long term divergence of supply and demand means these lows will be short lived).  This would be accompanied by a reduction in interest rates for financing renewables and core infrastructure. The approach can be summarised as returning finance to its role as ‘servant rather than master’ of society.

The idea of Keynsian-esque public spending to solve a macroeconomic crisis is anathema to some, and the Green New Deal certainly has its critics. In the wake of the historic US election, the Obama administration has talked big on job creation through spending in the alternative energy and clean technology sectors. A recent Economist article stated that whilst there is a certainly a case for combating climate change and even a case for an economic boost through public spending, subsidising alternative energy would be the wrong solution. Opponents of the Green New Deal argue that subsidy necessarily involves choice by regulators on the kind of technology to deliver the changes, and that this choice of resource allocation is necessarily more inefficient than that achieved by the market.

But if the recent crisis has taught us anything, is that a globally connected market is capable, when left alone to its devices, of creating vast potentially toxic bubbles of ‘wealth’, disconnected to the real world, but whose demise has real world effects. Such absolute faith in markets cannot easily be argued to be the solution to problems cased by blind faith in markets. A reiteration of worn ideas (the ‘shibboleths’ of economic growth as described by H Daly) is not needed – we must find a synthesis of all that is good about the global economics , and apply this within the appropriate limits imposed on us by the finite ecosystem on which life depends.

Faith based investors have crucial roles to play. Historically the church has had strong views on usury, and many ethical investors have shied away from the irresponsible lending at the heart of the crisis. Investment must go back to basics, focussing on real value rather than bubbles of paper wealth, and church based investors should engage with the major banks to encourage more sustainable models for future growth. Crucially, the church must continue to stress the value of the concept of having ‘enough’ – embracing the example of and teaching of Jesus to live simply, of living in communities that are life affirming and provide stability, and pursuing what is valuable rather than chasing after wealth (a large proportion of the toxic financial instruments whose demise sparked the credit crunch were perpetuated by an insatiable consumerist appetite). Many faith based investors will have been involved in micro-finance, and much can be learned from their conservative and ultimately more responsible lending models. We must work now to push for wider acceptance of the UN PRI, promoting long term responsible shareholder ownership. And we must not forget the pressing needs of the Millennium Development Goals which rather hang over us. Aid budgets, small already, must not be cut back. We must find ways of delivering sustainable growth to the developing world, not passing on the shock from our financial excesses.

The church and its investors now also have a key role in promoting the kind of economic growth which contributes to increasing equality in society. Our values must now be worked out in practice – in our lives as workers, investors and community members – with renewed vigour. Across those who campaign for change, whether it be the environmental lobby or those with a social justice agenda, the complaint has often been that those in charge are not listening. Now those in authority are desperately seeking sustainable solutions, faith based investors must speak up for a more just, value lead system of international trade and finance as if people and planet matter.