Banking and the Social Economy

Last week it was reported that a rogue trader cost UBS $2 billion as a result of “unauthorised trading”.  One wonders why unauthorised trades which yield a profit are never reported.  Putting this aside, it emerged at a bad time for the sector. Earlier last week Sir John Vickers released a report into UK banking, which called for a strict separation between retail banking and capital markets operations. Vickers is attempting to “ring-fence” the government insured retail banking activities which are of systemic importance, and support them with higher mandatory capital requirements, in an attempt to minimise the risk of another banking crisis, caused by capital markets problems. If Vickers proposals are implemented the cost to UK banks is estimated at £6-£7 billion.

Some bankers squeal at the extent of this pain. Warnings about the disastrous impact on the cost of credit for borrowers, the undermining of UK competitiveness or threats to leave the UK in pursuit of a more welcoming regulatory climate have come in a torrent.  On the other hand, politicians and other pundits have piled into the sector, heaping abuse on its leaders, their greedy and overpaid staff and their irresponsible practices.

What relevance does this have to the world of social enterprise and the social economy? Plenty. There is not sufficient money available in government grants or foundation endowments to support social enterprises to the extent necessary. Thus the banking system and the clients they represent are of vital importance to the creation of a social economy.  Yet there is distrust and anger. Some sector colleagues view the financial sector as inherently evil, which ought not to be touched with a barge pole.  But such thinking is short-sighted. Mainstream financial firms have a great deal to offer social enterprises in terms of capital, access and expertise.  On the other hand one cannot deny the damage done by the banks during the recent crisis.  Our sector must have some answers.  Disengagement is a bad answer—what are the good ones?

  • The emergence of social banks. Firms like VanCity (Canada), the Coop (UK) and Triodos (Netherlands) are emerging as competitors.  What are their competitive advantages?  Should social enterprises feel obliged to bank with them?
  • “Crowdfunding” offers an alternative to financial institutions in general. Is this disintermediation healthy?  Should consumer protection rules be waived to facilitate this?

But we also need to have a more articulate critique of the banking sector.  What would we really suggest be done to minimise risks going forward?

  • Is tougher regulation the best answer? I am not sure—Regulators seem forever five years behind the banks.
  • Should we push the banks to lend more? Too much borrowing is what put us in this mess—can more lending really be the answer?
  • Is boosting capital requirements the best answer? Does this not raise the cost of borrowing and reduce the supply of loans?

Our narrative of complaint is not consistent.  We need to develop one.

First published in The Social Edge in September 2009

After the looting, what we require is a social economy

At ClearlySo we talk a lot about the ‘social economy’. We prefer the term for its breadth, incorporating as it does social business, enterprise and investment, as well as the entire commercial chain and how it operates. We exist to accelerate the growth of the social economy as against the predominant mainstream economy. We contend that the lack of a more social economy helps to explain the reasons for the riots in England in August and their underlying nature.

Before proceeding, we need to distinguish between the original outburst of anger after the shooting of Mark Duggan by the police and the other unrest that followed and spread across the country. This article deals only with the latter, where the causes of the looting and destruction seem harder to pin down.

In the days and weeks after these more opportunistic riots, I was struck by what seemed to be almost a conspiracy about the way these were reported and discussed. Rage and condemnation were the order of the day and even in private conversations one was cautioned against being in any way understanding of the rioters’ motivations. “It’s too early for that, Rod,” I was told by a colleague.

Most political leaders, in response to public clamour, called for a crackdown to restore order and have subsequently called for, and the courts have meted out, relatively harsh punishments, with the public’s fervent and overwhelming support.

I understand the fear at work and the need for public order. But if we want to minimise the risk of recurrence, we need to understand what happened, although to understand is neither to excuse nor to apologise for the violence.

In essence, the picture that has emerged is that the riots were acts of economic opportunism. People wanted more stuff and they saw this as a low-risk way to acquire it. Countless interviews suggest a cold calculation of cost and benefit. We can be aghast, if we wish, but before we fix this problem, we must understand it.

Such lawless behaviour has been categorised by the mainstream press as outside the norm. But how much of a departure is it? Have we not created a society, an economy, where the pursuit of personal objectives at all costs is indeed the norm? How different is all this, really, from politicians who fiddle, bankers who misrepresent and media personnel who hack? Rather than a deviation from the mainstream, could one not argue that the looters are the very embodiment of the spirit of the age? Is it so shocking that this has taken place, or have we been rather fortunate that is has not happened before?

Tinkering at the margins will not work as a way to solve this. Radical new ideas are needed. Interventions such as tax rises proposed in the US by Warren Buffett are welcome, but although his intentions are good, the solutions to today’s ills need to go further. And his idea looks highly unlikely in political terms.

In a social economy, the array of goals to which individuals, investors and corporates aspire would be more diverse. The single-minded pursuit of profit at all costs would be replaced by a ‘balanced scorecard’ against which decisions would be made.

Governments would accelerate the trend in this direction by punishing negative externalities and rewarding positive ones.

A pipe dream? Perhaps. But so was the fall of the Berlin Wall and so many other events that we thought could never happen.

First Published in Third Sector in September 2011.