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nef: Where did our money go

You can read this reprt on line or download it or buy the book here: http://www.neweconomics.org/publications/where-did-our-money-go
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Where did our money go?
Building a banking system fit for purpose
nef is an independent think-and-do
tank that inspires and demonstrates real
economic well-being.
We aim to improve quality of life by
promoting innovative solutions that
challenge mainstream thinking on
economic, environmental and social issues.
We work in partnership and put people and
the planet first.
nef (the new economics foundation) is a registered charity founded
in 1986 by the leaders of The Other Economic Summit (TOES), which forced issues
such as international debt onto the agenda of the G8 summit meetings.
It has taken a lead in helping establish new coalitions and organisations such
as the Jubilee 2000 debt campaign; the Ethical Trading Initiative;
the UK Social Investment Forum; and new ways to measure social and economic
well-being.
Where did our money go?
Building a banking system fit for purpose
A report of the Great Transition

This report at a glance . . . . . . . . . . . . . . . . . . . . . . . .1
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .3
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .6
The roots of the crisis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Section 1. How did we get here? . . . . . . . . . . . . . . . . . . 11
A licence to print money? . . . . . . . . . . . . . . . . . . . . . . . . . . . . .11
A decade of easy credit – where did the money go? . . . . . . . . . . . . . . . . 13
What is a productive investment? . . . . . . . . . . . . . . . . . . . . . . . . . 14
Re-appraising the role of banks in creating credit . . . . . . . . . . . . . . . .16
Section 2. Transparency – the missing information trail . . . . . . 18
Section 3. The banks and the rescue packages . . . . . . . . . . . 25
Banks, credit and securitisation . . . . . . . . . . . . . . . . . . . . . . . . . . 25
The rescue packages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
Section 4. Did it work? . . . . . . . . . . . . . . . . . . . . . . . 35
Section 5. Into the present . . . . . . . . . . . . . . . . . . . . . 48
A brief fiscal interlude . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
Banks in profit but the ‘funding cliff’ looms . . . . . . . . . . . . . . . . . . . 49
The funding gap . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Section 6. The Government and the banks . . . . . . . . . . . . . 53
A question of influence . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Contents
Section 7. A new financial operating system
and a Green New Deal . . . . . . . . . . . . . . . . . . . . . . . 63
Section 8. What should be done with banking? . . . . . . . . . . 72
Out with the old . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .73
In with the new . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73
Better incentives for better behaviour . . . . . . . . . . . . . . . . . . . . . . . 74
Ensuring fairness, transparency and stability . . . . . . . . . . . . . . . . . . . 74
Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 76
Boxes
Box 1. What the banks are telling us . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Box 2. Capital ratios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .26
Box 3. £25 billion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Box 4. The changing face of the British banking system . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Box 5. Lending commitments and actions . . . . . . . . . . . . . . . . . . . . . . . 36
Box 6. The lending dilemma – how to help small businesses . . . . . . . . . . . . . 42
Box 7. Where have all the branches gone? . . . . . . . . . . . . . . . . . . . . . .46
Box 8. Sir John Vickers and the Independent Commission . . . . . . . . . . . . . .54
Box 9. From The Quiet Coup – Simon Johnson, former Chief Economist
at the International Monetary Fund . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Box 10. The Royal Bank of Scotland (RBS) . . . . . . . . . . . . . . . . . . . . . . 65
Box 11. A manifesto for better banking . . . . . . . . . . . . . . . . . . . . . . . . 68
Box 12. Move your Money: how the backlash against finance opens
opportunities for better banking . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71
Box 13: Public appetite for reform is ahead of government . . . . . . . . . . . . . . 75
1
This report reveals that:
P Public sector support for the banking sector amounts to at least £1.2 trillion committed, equivalent to 85 per cent of GDP – the highest level of any comparable economy.
P Given this enormous sum – in return there is a shocking lack of information in the public domain about where the money has gone, how it has been used, and what has been the ‘quid pro quo’ for the support.
P In spite of the scale of support, new lending to households and firms has stagnated.
P While the Bank of England has cut interest rates, interest rates for households and firms on many mortgages and other borrowing are higher than before the crisis.
P Overall the banking system is borrowing more than it is lending; its net lending to households and firms is negative.
P Public stimulus has been the only effective medicine. Any recovery has been driven by fiscal intervention supported by the central bank’s creation of money, otherwise known as ‘quantitative easing’. However, the nature of these programmes means that the recovery is likely to be limited and temporary, as many are now recognising.
P The return of bank profits has come at a high and counter-productive cost. Banks have returned to profitability, but their actions in doing so are detrimental to employees and customers: raising interest spreads between deposits and borrowing, cutting schemes favourable to borrowers, increasing fees, closing branches, and sacking employees.
P The banks’ reliance on high-risk securitisation processes has scarcely reduced; the Bank of England is critical of their strategies for reducing future reliance on these processes.
This report at a glance
Where did our money go?
2
P Based on Bank of England data, banks now appear to face a funding cliff. In order to maintain existing levels of activity they currently have to borrow £12 billion a month; the projections we reproduce in this report indicate that in 2011 they will have to borrow £25 billion a month. We believe the public sector is likely, once again, to be asked to bail out the banks for the emerging funding gap.
P This amount now appears almost trivial against the scale of interventions to which the public has become accustomed. But it should be remembered that £25 billion is
p one-half of annual current expenditure on education;
p one-quarter of annual current expenditure on health;
p more than the total value added of the electricity, gas and water supply industries; and
p three times the value added of the agriculture, hunting, forestry and fishing industries.
P Further, there is a very real concern that the breadth and depth of the current programme of public spending cuts is being influenced by the likelihood of another wave of bank bail-outs. We believe fiscal consolidation processes are being driven at least in part by the consequent likely need for further public sector support to the financial system.
The economy continues to pay a very heavy price for the failures of the financial system. These matters affect every individual in the UK. At the end of the report we outline a range of reforms that we believe will be necessary to make the banking sector a useful servant of the productive economy and of the new economic, social, and environmental challenges we face. We also call for an open and inclusive public debate and inquiry on the reforms that should, at the very least, be required of the banks in return for current and future support.
3
Chancellor of the Exchequer, George Osborne, unambiguously identified the roots of the UK’s current economic crisis. Yet political action to redress the crisis, and ensure that a similar one does not recur, has been oddly one-sided and imbalanced.
The comedian Ben Elton once joked that nobody really understands economics, it just happens to you, like being mugged.
Today, the general public may justifiably feel like the victims of a mugging, but one in which they are subsequently required to pay for the daily living expenses of the person who attacked them, and who remains free and openly at large.
The previously unimaginable programme of cuts in public spending is the result of the banking crisis and the recession which followed. It is not the fault of the sectors and services now targeted. But, these are now massively out-of-pocket because of someone else’s reckless, antisocial, and self-interested actions. In that sense it is like a mugging.
Yet, the Banks have been left virtually untouched. Little more is required of them in terms of transparency and accountability, and scant new regulation has been implemented to prevent a repeat of the crisis.
The former Chancellor, Alastair Darling, conceded in September this year that the so-called ‘Super Tax’ on bankers’ bonuses had failed to change the behaviour of the industry in giving excessive, unjustified rewards to executives.
Introduction
In putting in order the nation’s finances, we must remember that this was a crisis that started in the banking sector. The failures of the banks imposed a huge cost on the rest of society.
Chancellor of the Exchequer, George Osborne
Presentation of the emergency budget, 22 June 2010
It is certainly a tragically comical situation that the financiers who have landed the British people in this gigantic muddle should decide who should bear the burden, the dictatorship of the capitalist with a vengeance.1
Beatrice Webb (1858–1943)
English sociologist, economist and reformer
Where did our money go?

...

report continues: http://www.neweconomics.org/publications/where-did-our-money-go

The ecology of finance

The UK’s financial sector has made itself rich at the expense of an increasingly fragile economy. In the aftermath of the recession and in the face of challenges like climate change, the UK is facing a great transition to a new kind of economy. Only radical reform of the UK banking and financial sector can deliver institutions capable of economically and socially productive investment and lending. The Ecology of Finance shows how radically recasting the banking and financial sector could meet the proper function of finance. Freed from short-term and profit-driven models of lending and from risky, volatile speculative investment, the banking sector would, instead, form a highly diverse ‘ecology’ of institutions that range in structure, market sector and scale; fit for the complexity and shared long-term goals of the economy.
21 Hours: Why a shorter working week can help us all flourish in the 21st century.
21 Hours shows how reducing the amount of time devoted to paid work opens up a huge range of possibilities for richer and more fulfilling ways of organizing our lives. It documents the forces pushing us towards a shorter working week: economic failure revealed by the banking crisis, an increasingly divided society where over-work is matched by unemployment, and an urgent need for deep cuts in environmentally damaging over-consumption. And, there is a growing interest in people spending more time producing and delivering a share of their own goods and services – from co-produced care and neighbourhood-based activities, to food, clothing and other necessities.

The Great Transition
new charity number 1055254© June 2010 nef (the new economics foundation)ISBN 978 1 904882 63 3Written Simms, Eva Neitzert and Josh Ryan-CollinsWith from: Stewart Wallis, Sam Thompson, Eilis Lawlor, Anna Coote, Potts, Joe Smith and Daiana BeitlerThanks to the processImage figure in the world of photography, Joel Sternfeld was born in New York numerous awards, including two Guggenheim fellowships, a Prix de Award. Sternfeld is the author of twelve books including American When it Changed (2007) and Oxbow Archive (2008).www.tabd.co.ukThe how it turned out rightThe midst of a triple crunch – a coming together of credit-fuelled financial highly volatile energy prices underpinned by the approaching peak longer abstract, distant issues of financial and environmental policy. The Great Transition shows why we need to get behind solutions that change, the economic crisis and are also socially progressive. These are both progressive and poisonous political trains of thought may emerge. transition to a new economy is not only necessary, it is both possible GREAT TRANSITION through financial and climate crises and the peak and decline of global visit: www.neweconomics.orgThe Great TransitionGT_110/06/2010 11:3021 hoursWhy a shorter working week can help us all to flourish in the 21st centuryBy Anna Coote, Jane Franklin and Andrew Simms
new economics foundation
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Telephone: +44 (0)20 7820 6300
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Website: www.neweconomics.org
Registered charity number 1055254
© October 2010 nef (the new economics foundation)
ISBN 978 1 904882 82 7
Written by: Andrew Simms and Tony Greenham
Additional material was provided by: Deborah Hargreaves, Ruth Potts, Richard Murphy, Lindsay Mackie, and friends of the Great Transition.
With thanks to: The Network for Social Change, PLATFORM and the convenors of the Policy and Research Institute for Macroeconomics (PRIME) network for their help with the development and preparation of this document.
Edited by: Mary Murphy – www.irjjol.com
Design by: the Argument by Design – www.tabd.co.uk
Cover image by: R Jay GaBany in collaboration with David Martinez-Delgado www.cosmotography.com
Finding ways to survive and thrive through financial and climate crises and the peak and decline of global oil production.
To find out more and become part of it visit: www.neweconomics.org