Governing finance for people and planet
This blog is a follow-up of the event ‘Governing finance for people and planet’, the third panel of IIPP’s Festival: The Entrepreneurial State 2.0. — Rethinking the State in the 21st Century. The recording of the event can be watched above.
I’m not an economist. And for us, muggles of finance, discussions that might include terms such as heteroskedasticity (that’s a real word, you can look it up) seem entirely out of our reach. That’s why I was so afraid to write this entry about the panel ‘Governing Finance for the People and the Planet’, chaired by Josh Ryan-Collins, Associate Professor in Economics and Finance at the UCL IIPP.
Yet, the problems discussed throughout the evening affect our everyday reality. We live in a highly financialised world, and finance shapes most aspects of our lives (even when we might not be conscious of it). From making sure everyone is included in the development process to transitioning to a greener economy, one question stood out above the rest — can the private sector shape a new financial system? Or should the state step in more actively?
New players: the role of asset managers
The financial sector has changed a lot in the last few decades. In this context, asset managers have been some of the emerging actors. In simple terms, asset managers are financial institutions that invest mainly on behalf of others. Instead of investing only their own money, they manage pension funds, insurance companies, sovereign wealth funds, and private fortunes.
These asset managers already existed 50 years ago. Brett Christophers, Professor at the Institute for Housing and Urban Research at Uppsala University, said that in the 70s, asset managers administered investments of less than US$1 trillion. Today they manage over US$100 trillion.
This market is, as well, deeply concentrated. The ‘Big Three’ asset managers (Vanguard, State Street Global Advisors, and BlackRock) are some of the largest owners of US public companies. Combined, they manage assets that exceed China’s GDP.
Shadow banking
The growth of asset management funds was boosted after the 2008 financial crisis, becoming a core part of the shadow banking system. The term “shadow banking” refers to the credit intermediation system involving entities and activities outside the regular banking system. These entities are not subject to the same regulatory oversight as traditional banks, hence the term “shadow.”
“The shadow banking sector is beyond the reach of regulatory democracy and designed to be such,” said Anne Pettifor, political economist, author and debt campaigner.
Despite some new regulations to the banking system after the financial crisis, the shadow banking sector has contributed to consolidating the global financial structure model and deepened financialisation worldwide.
“Now almost anything that can be financialised,” Anne said, “and so finance is a lighting upon almost anything that is an asset in order to be able to extract rent from it, moving away from the business of investing for productive activities.”
The excessive propensity for rent extraction in the modern economy has already raised concerns by worldwide known economists such as Thomas Piketty, Nobel winner Joseph Stiglitz and Professor Mariana Mazzucato, Founding Director of UCL IIPP.
Excessive rent extraction can inflate economic costs, possibly culminating in diminished wages, drops in investment levels, reduced innovation, and limited productivity. These outcomes pave the way for an increase in inequality, destabilisation of the economy, and, ultimately, economic stagnation.
The issue becomes even more intricate when taking into account the pressing need to shift towards a green economy in light of the climate crisis, which demands a considerable allocation of resources.
The tragedy of the time horizons
Ingrid Holmes, Executive Director of the Green Finance Institute, gave the most optimistic testimony of the panel. In her experience working within the system, she has seen progress in the sustainable finance agenda and increased transparency, accountability, and purpose-led investing.
However, she recognises short-termism as a core challenge: “Most asset managers will be looking at short-term quarterly performance because that’s what your fees are generated off, it’s how you’re benchmarked against other providers.”
Paraphrasing Mark Carney, former governor of the Bank of England, Brett Christophers described this as “the tragedy of the time horizons”. While there’s a long-term horizon associated with the climate crisis, financial institutions pursue short-term profits to have good quarterly results. Ironically, after his role in the Bank of England, Carney joined one of the most prominent private sector asset managers, which is principally a short-term investor.
For Brett, “the private sector is still not going remotely fast enough on a sufficient scale to avert the crisis”.
Anne agreed. She said we are doing “too little and too slow”. For her, the magnitude of the challenge to transition to a green economy is so big, requires so much capital and involves so many risks that can only be led by the state.
Money is political
Anne opened her discourse with a provoking throwback.
“There was just that moment in between August 2007, when interbank lending froze, and the 2008 collapse, when the bankers were convinced they were in real trouble and about to go to jail. What happened next? They were invited into the treasury by Gordon Brown and others to sort out the mess that had been their creation.”
Over the last 80 years, she argues, the vision that finance is objective and apolitical and that central banks should be independent of political power has taken central banks to worry more about the stability of the financial system than of the real economy.
“This is part of a process of depoliticising money as if money were some sort of objective thing which clever people understand,” Anne said.
But money is incredibly political. Finance has the power to give directionality to the economy, and the discussion of who should control those financial levers is as intellectual as it is political. Anne was blunt with her position: if we want to govern finance for the people and the planet, central banks must return to democratic control, overview and accountability.
