Policy Research in Macroeconomics

Put Fairness at the Heart of Finance

This article appeared in the UK-based Church Times on 26 June, 2020

The coronavirus pandemic is a moment of reckoning for globalisation and our international financial system. The pandemic has shown how unjust the international system is towards low income countries; given us the opportunity to imagine another economy; and served as a warning.  If we do not fix the system to prepare for the coming, graver crisis of earth systems breakdown, the survival of humanity is at risk.

Just as it was hard for the ancient Israelites to imagine an economy apart from the Egyptian military-industrial complex on which they had become dependent, so it is hard for us to imagine another economy. “Would that we had died at the Lord’s hand in the land of Egypt, as we sat by our fleshpots and ate our fill of bread!” the Israelites complained.

We too struggle to imagine an international economic system apart from the “fleshpots and bread” of today’s privatised and financialised globalisation. Before the pandemic we enjoyed the privilege of international travel and tourism. We still enjoy making endless purchases on the internet, paid for with credit cards issued by global banks. We take for granted that goods and food are flown from abroad and delivered to our supermarket or front door within just a day, and at the click of a button.

These luxuries are made possible by capital mobility – the movement of money across borders by those who own capital: investors, creditors and speculators.

COVID19 and poor countries

At the start of the recent pandemic, investors panicked and shifted about $100 billion of capital out of low-income countries (‘emerging markets’). That caused their currencies to crash, and the cost of vital imports like pharmaceuticals, to rise. Because of the exit of capital, some of these countries were downgraded by ‘rating agencies’. Downgrades raised the cost of existing debt and made new, and necessary borrowing very expensive. All this happened at the worst possible time for low-income economies: at the onset of a plague.

Capital mobility is one of the ‘fleshpot’ equivalents of today’s international system, It serves a powerful elite, the 1%. It is both profoundly unjust and unfair, and not sustainable. But we do not have to live under such a system. We can transform it, just as we did after the crises of 1929 and World War II, when governments worked together to build a new system, the Bretton Woods system.

The role of faith communities

Faith, honesty and trust are the foundations of law, and of monetary systems, including the international system. All money originates as credit, or as Schumpeter once explained: as ‘a promise to pay’. Promises, and the trust that promises will be fulfilled, are the foundation of the international system. For it to function well, monetary systems depend on ethical principles– honesty, truth and fair dealing: in short, trust.

The global financial system collapsed in August, 2007 not because financiers ran out of money or capital. Not because of a run on the banks, but because everyone in the sector – everyone – lost trust in the valuation of assets used as collateral against borrowing; particularly the value of sub-prime property mortgages lodged on bank balance sheets. That lack of trust led to the Great Financial Crisis, to unemployment, bankruptcies, heartbreak, divorces, nervous breakdowns and deaths.

Maintaining trust in the financial system is vital to its continued existence.

Faith organisations have traditionally been upholders of society’s ethical principles that underpin the system: principles that stand in opposition to theft, fraud and false witness; adherence to truth, honesty and fair dealing.

Today, actors in the international financial system make “gods of gold”; treat the owners of capital as gods; and routinely disregard the exhortation to “not steal”. By devising fraudulent schemes and flagrantly flouting taxation laws and regulations, individuals in international financial firms eschew honesty and the law, and instead steal, often openly as the FT revealed of this week’s Wirecard scandal.

The consequence of a deregulated and privately managed international financial system is that society’s values are corrupted by private self-interest. Undermining society’s values leads to the erosion of trust. Worse, it will undermine the financial system’s ability to deal with long-lasting economic failure from COVID19, and hinder society’s ability to finance future climate shocks.

If trust is upheld, if credit is regulated by public, not private authority, and aimed at productive, sustainable economic activity, it is a gift, a blessing. Credit-based monetary systems are a great civilizational advance – developed over time to enable societies to undertake transactions and put unique human abilities to work to address crises like war, plagues, poverty, unemployment and climate breakdown.

That power was fully utilised this spring when the public institutions of the monetary system – the  US Federal Reserve, the Bank of England, the ECB – were able to generate more than US$21 trillion in liquidity to help rich country economies survive the COVID19 pandemic. Most of these funds were generated as very low cost loans, and aimed at the private finance sector: Wall St and the City of London. They were of little help to the millions made unemployed and laid low by the coronavirus lockdown.

A sound monetary system, managed in the public interest, ought to make it possible and affordable to serve the whole of society; to create well-paid jobs, especially in the care sector, and to end poverty and inequality. If properly managed it could enable societies to transform economies away from addiction to fossil fuels, and to implement a Green New Deal.

But only if we maintain trust in the system by ensuring public authority over it. Churches and people of faith have a critical role to play in upholding society’s ethical principles to restore trust in the system, and therefore public authority over it.

What can we do?

The first step in re-imagining is understanding. People cannot transform that which they do not know of or understand. The international financial and monetary system is both hard to know of, and understand. While not rocket science, it is deliberately opaque, intangible and detached from regulatory democracy. Nevertheless we must make the effort to understand more. My book, The Production of Money, written in plain English, aims to widen public understanding of the system.

Second, the voices of faith communities must be used to speak truth to the powerful. Voices must be raised against those, the rentiers, who aim to get rich by effortlessly extracting wealth from others and from the ecosystem. Thieves and law-breakers must be confronted and shamed. People of faith, of good faith, must re-engage with political power, and reassert their role, nor just as ‘do-gooders’; but as fierce defenders, promoters and upholders of society’s ethical values; of honesty and truth.  Not just in the local community, but at the national political level, and also internationally.

Third, and as Alice Walker once said, “The most common way people give up their power is by thinking they don’t have any.” As citizens we need to understand we have power. We would not feel so powerless if we understood that the private, globalised financial system depends utterly on our granting permission for governments to use public, taxpayer-backed resources to bail out private creditors, investors and speculators. We could withhold that permission. Or we could agree to permit such use of public power only on terms and conditions that benefit society as a whole. But because we are ignorant of our potential power, we remain silent, and irrelevant.

Understanding the value and power we have as law-abiding, taxpaying citizens must embolden us to demand that honesty and decency be upheld by the public authority of the law, the state. This can be achieved by demanding stronger regulation and public oversight by the Bank of England, HM Treasury and HM Revenue and Customs, ending decades of ‘turning a blind eye’ and of effective ‘self-regulation’ that led to periodic financial crises.

Fourth, we must demand important, game-changing, international policy remedies. First: cross-border capital mobility must be managed by governments, not left to the ‘invisible hand’ of markets and the self-interest of speculators and investors. In a world of capital mobility, tax evaders can simply move profits and capital gains across borders, and into tax havens. We must demand that our government works with other states to manage cross-border capital flows , if billionaires,  oligarchs and global corporations are to pay reasonable rates of taxation on profits, and on the capital gains made in-country.

Finally, credit-creation must be managed by public authority to ensure that it is aimed at sound economic activity purposed to protect human civilisation from the breakdown of the earth systems so vital to our survival.

It will be hard to give up our attachment to the “fleshpots and bread” of today’s globalised financial system. But if we are serious about tackling income inequality and injustice, ending poverty and preparing for the coming shock of climate breakdown, it will be essential to do so.


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