Two posts ago, we reviewed what is problematic with the current way the financial system works. Now, let’s put a more positive spin on things – what can we do about it to change it? There are a number of different propositions on the table, both in terms of regulation and policy (which I will talk about first) and in terms of your own behavior. Let’s take each one in turn!
1. Creating a sovereign money system
The organizers of the Positive Money campaign think that the best way to change the system is to lobby politicians to do three things:
a) Take the power to create money away from the banks, and return it to a democratic transparent and accountable process
This could be a committee or the central bank, but it should ensure that there is sufficient money in the economy – not too much and not too little – because the people involved in this process would have a much more long-term vision and no immediate profit goals the way bankers do right now.
b) Create money free of debt
This point follows on the next – if commercial banks cannot inflate the money supply by giving out loans, money creation won’t be hinging on debt creation. Rather, money would enter the economy through governmental spending on goods and services.
c) Put new money into the real economy rather than financial markets and property bubbles
Again, following on the last point – when governmental spending is the way money enters the economy, it prevents much of the new money to be caught up in short-term, high-risk investments such as in the housing market or in exotic derivative products. Consider this (from this report):
According to Bank of England figures, between 1997-2007, of the additional money created by bank lending, 31% went towards mortgage lending, 20% towards commercial property, 32% to the financial sector (including mergers and acquisitions, trading and financial markets). Just 8% went to businesses outside the financial sector, whilst a further 8% financed credit cards and personal loans. Yet it is only ultimately the last two – lending to businesses and consumer credit – that have a real impact on GDP and economic growth. In short, we have a system where very little of the money created by banks is used in a way that leads to economic growth or value creation.
Check out their video for a quick run-through of their proposals:
The end goal is a money system that transfers the ability to create money exclusively to the state – a truly sovereign money system. Their report (pdf) explains it in 56 pages – a pretty enlightening read actually, in very understandable language and with arguments that make a lot of sense to me! Positive Money is running a campaign right now to lobby British PMs to consider their proposal, so if you are from the UK consider heading over and signing the petition!
2. ISEE proposals going even further
The sovereign – or 100% money, or full reserve banking – system is what most ecological economists agree is necessary, but there are interesting proposals on how to bring that idea in balance with our ecological goals, or even with degrowth ideas. Some of these proposals I heard personally, some I took from the ISEE Abstracts book because I was unable to attend one of the two sessions on money – the abstracts are freely available for all, though!
a) How to align a sovereign money system with environmental and social sustainability
Josh Farley from the University of Vermont suggested that
to promote sustainability, governments can create money through expenditures on ecological restoration and open-source green technologies, and destroy money with taxes on pollution and resource depletion; to promote well-being and equity, governments can spend on job creation and poverty alleviation, and tax rent and excessive wealth.
Basically, the idea is simple – if money is injected into the economy by spending it or giving tax breaks, you can still decide where to spend it and who to give tax breaks, right? And those should be in the public interest.
b) How to get investments into low-carbon sectors going
Emanuele Campiglio talked about a proposal, also summarized in this Working Paper, how financial instruments can be used to move the economy toward a lower-carbon direction. He argued, for instance, that you could create different reserve requirements (which, as we saw last time, would limit banks’ lending capacities) depending on whether banks invest in ‘green’ products or not. Though, he rightly notes, this only works in countries where central banks actually have clout over the reserve requirements – he says that
this ‘green’ macro prudential regulation has a better chance to be effective in emerging economies, where central banks usually exhibit a higher degree of control on the dynamics of credit, thanks to the employment of a wide range of quantitative’ monetary policy tools.
c) Additional proposals to transform the financial system
Inge Roepke additionally summarized some key issues that are in debate currently and are a bit more accessible than a full-blown reform of our monetary system. For instance:
- the regulation of international capital flows
- restrictions on some kinds of financial products
- the introduction of a financial transactions tax to reduce high frequency trading, and
- limitations on tax havens.
3. And finally… what you can do.
So there are definitely a lot of good ideas out there edging closer and closer to practical policy recommendations. Yet, these types of reforms can take a lot of time, and it’s not always obvious how you as a citizen can influence them beyond adding your name to petition lists. But how about voting with your dollars about what kind of system your money is supporting?
There are more and more ethical banks out there that commit to the principles of transparency, solidarity and high ethical standards in their lending practices.
For example, in Germany one of the largest ethical banks is GLS – the abbreviation stands for Gemeinschaftsbank für Leihen und Schenken (community bank for loans and gifts) which is celebrating its 40th anniversary this year. It’s a cooperative and only gives out loans to projects that are socially or environmentally sustainable, in the areas of sustainable housing, food, energy, and education and social initiatives. For example, loans are offered to projects like independent schools and kindergartens, organic farms, institutions using therapeutic pedagogy, nursing homes, projects for the unemployed, health-food stores and communal living projects, as well as sustainable businesses. What I find really cool is that you can choose upon opening an account whether you have a preference where your money is being invested. I just opened an account with them (it’s free for people under 28!) and chose that my money will support organic agriculture projects, of which some are even featured on its website. How neat to know that your money is actually supporting things you believe in as long as it is in your account!
The graph below shows where they gave out loans – clockwise projects related to energy, food, housing, education and social projects. Just seeing this makes me all warm and fuzzy inside. Compare that to the numbers quoted above (8% to businesses outside the financial sector??) and think about the positive change we could make if everybody started banking ethically tomorrow.
I would highly recommend doing some internet research on whether there are ethical banks in your countries as well. Many might be smaller and have mainly an internet presence, but our generation is so used to online banking that that shouldn’t be an issue, and normally they partner with other banks’ ATMs to allow you to use the services you are used to. Switching accounts takes a bit of time and effort, but it’s just one of those things you can rant about or be the change, you know?
P.S. I did actually think about ethical banking before and wrote it up here in the Swedish context, so fun to return to the topic again!
Have you heard of ethical banks before? How do you feel about your banks’ ethical background?