CREATING A HEALTHY GLOBAL ECONOMIC SYSTEM
WHAT IS TO BE DONE?

The proponents of free-market capitalism have got it absolutely wrong when they accuse those who wish to direct the activities of the global finance industries of ruining capitalism. It is the fundamentalist beliefs of the free-market zealots that have gone a long way towards destroying the viability of the capitalist system. Market Capitalism will only survive if it becomes responsive to the needs of society.

Sometimes it helps to stand back from a complex problem, half close the eyes and see the bare bones uncluttered by detail. From amongst the cacophony of noise and competing theories about the collapse of the contemporary financial system, we will try to create a clear narrative.........

What's happened - the immediate issues

The global free-market financial system has imploded as a result of its own greed and excess. Huge financial behemoths, so large that they outgunned national governments created a secret world of their own in which they could speculate and deal well out of sight of regulators, governments and most seriously, a generally ill-informed and understandably naïve public (the most important stakeholders). Free of regulatory shackles and ethical conscience, they pursued a massive greed-fest on behalf of themselves and a few of the rich and powerful. Such behaviours have been experienced before, but never on this scale. The South Sea Bubble, a worthy 18^th century predecessor, was but a pimple by comparison.

Now governments, having been reviled and excluded by the high priests of market fundamentalism, the creed that underpins the current system (of which more later) are having to dash to save it from total collapse. We have not yet witnessed the sight of neo-liberal economists falling on their swords - mores the pity.

The major sufferers from the system implosion will be the ordinary citizen in their guises as savers, house-owners and employees. The excluded poor in grotesquely unequal Anglo-Saxon economies have already been suffering for decades, as have the peoples of poor countries, whose plight is bound to become even more intolerable.

But there are deeper and more fundamental matters

Behind the current problems lie much deeper issues:

• Governments have lost their way and need to rediscover their proper roles

  The idea that governments and independent regulatory bodies should 'interfere' in the workings of the free market has been under massive assault by market fundamentalists to the extent that politicians in many countries, but crucially the US and UK have become frightened to play their proper role as representatives of the societies that elected them. And of course, many politicians have been 'recruited' and corrupted by the vast wealth of the financial system.
  It is imperative that governments and representative institutions independent of political parties rediscover their proper roles as the guardians of the interests of society.

• All those in the financial system need to understand and accept that it and they are the servants of society - this will require a massive regulatory and cultural change

  The global financial system, spurred by market fundamentalism, has completely lost any sense of responsibility towards society. It needs to be brought back under strict control by global and national bodies representing societal interests.

• We badly need to demolish the remnants of the market fundamentalist philosophies that have dominated (and blighted) the intellectual landscape for the last 30 years.

  The philosophies of neo-liberal free market thinkers have had a full run and have proved to be catastrophically flawed (See Free market economics rules - but does it work? - Ideas that drive our Financial System section)
  If the capitalist system is to survive - and emphatically it should as it is the best system we have so far discovered for creating and distributing wealth - it will have to become responsive to the needs of ordinary people and not just the rich and powerful. The fatal flaw in the neo-liberals' case was that they discounted the fact that people become easily corrupted by wealth and power, so expecting a system based on greed and self-interest to serve the needs of all is totally naïve. The global financial system was predictably hi-jacked by the rich and powerful, who acted solely in their own interests - and silly notions like Game Theory did nothing to rein in their excesses.
  There is enough evidence in the world to indicate that Social Market philosophies work better - they accept that markets are good mechanisms but assert that that they are not omnipotent - and that other mechanisms are also needed to harness the power of markets in the interests of people. (See Social Market Philosophies, Ideas that drive our Financial System section).

• People in the free-market economies need to learn that they can't have it all.

  This applies particularly to the 'Anglo-Saxon' countries such as the US, UK and Australia, where much of the populace has become accustomed to the habits of rampant consumerism and the desire to 'have it all - now'.
  It has suited politicians and producers to push the idea that people are what they consume, that the accumulation of goods and following fashions and 'lifestyles' are amongst the highest attainments. Thus people in free-market economies have been bombarded with propaganda inviting them to participate to the hilt in consumerism. The result has been dreadful - levels of personal debt have rocketed, people have become attuned to life habits that in the end are empty and lacking in substance.
  The most important positive opportunity from the current disaster could be a radical re-shaping of personal values and expectations towards more substantial and modest lifestyles. Incidentally, this is also crucial if the world is to be saved from longer term catastrophe as resources become scarcer. In the rich countries, we have leading unsustainable lives at many levels.

The dynamics of the current problems

At one level, it's quite simple. The distribution systems for investment, savings and money have been hi-jacked by institutions that have corrupted and distorted them for the benefit of the distributors themselves and a few wealthy clients. In doing this, they complicated the system to such a degree that no-one really understands it. The basic purposes of banks should (and used to be) to keep customers money safely, giving a secure return - and channelling money from owners (mainly you and me) into economically and socially useful investments. That's it really - and that is not a naïve view, it's simply a description of the fundamental purposes of the banking system.

If operators of retail logistics chains decided to make money by swindling and holding retail companies to ransom, they would receive short shrift. The owners of oil pipelines may try to exploit their power, but not very many commentators would condone holding countries to ransom - so why so soft on the financial distribution system?

The reasons are fairly easy to understand - a lot of rich people have ripped huge amounts of wealth out of the financial system - and a lot of politicians are either in the pay of, or wish to benefit from the financial markets. In the UK, this applies to senior politicians in both major parties - just consider the lucrative positions with banking organisations that Tony Blair fell into directly from stepping down as prime minister. Equally, Conservative shadow ministers have been liberally supported by bankers, hedge funds and property developers for years. (See Bad News - Tony Blair cashes in and Politicians and the finance industry in the Government, politicians and the economy section.)

Secondly, a lot of powerful and influential people have hooked up to the star of free-market fundamentalism both intellectually and emotionally, backed up by a myriad of free market institutes and media journals. It is now almost impossible for this vast array of free-market cheer leaders to eat humble pie and confess that they were disastrously wrong - we see little sign of Gordon Brown dropping his free market beliefs for the vastly more successful social market variety of capitalism practiced in the Nordic countries and elsewhere.

When the dust dies down, selfish interests could re-assert themselves

When the dust settles a little, expect to hear a growing volume of advocacy for the fundamentalist free-market position. The strategies employed by its promoters will be multi-fold. We will hear that whilst the collapsed system had its flaws, it created huge amounts of wealth for the global economy, and we will be exhorted to avoid throwing the baby out with the bathwater. We will hear ludicrous reasons advanced as to why the system failed. A great example of this was to be found in the Financial Times and Wall Street Journal, both of which asserted, apparently in unison, that the reason US mortgage lenders Freddie Mac and Fannie Mae collapsed was that they were protected by government and therefore had no sense of responsibility for their actions. This assertion is quite staggering. The two mortgage lenders were part of and surrounded by, a banking system that quite simply went mad in an orgy of greed and speculation. Governments may have been to blame, but for spineless neglect of the excesses going on in the financial markets, not for corrupting lenders.

But, more fundamentally, we will witness a tactical retreat by the powerful interests behind market fundamentalism, apparently making concessions, but in reality only making minor adjustments, waiting to resume their old habits.

What should happen?

The Fundamentals

The remedies are not so difficult to spell out at a broad strategic level.

Restore the connections between Finance and Society

First and foremost, the global and national banking systems need to be made accountable to the societies that are supposed to serve. Over the last quarter century, we have seen a progressive shift in the free-market economies from the healthy notion that economies are a part - and the servants of - the societies in which they are embedded to a corrupted position where they are separated from Society. This separation is a basic tenet of market fundamentalism, and as well as being profoundly anti-democratic, has been at the root of the recent financial market mayhem.

In practice, this means establishing a co-ordinated system of global and national institutions independent of party politicians to oversee and control the activities of the financial markets. The powers vested in these institutions will need to include the ability to act decisively against malpractice, but also to take punitive action against maverick players outside the mainstream financial system.
Then, the network of Tax Havens that have sheltered a poisonous mixture of speculators and tax evaders, together with the proceeds of political corruption and organised crime must be excised once and for all. They need to be forced to be totally transparent about all investors and financial operators involved within their jurisdictions - not just "On request", but as a matter of course.
Fine words from politicians will not be enough - these poisonous boils on the financial system must be lanced

Second, re-assert the proper place of democratic institutions

Free-marketeers have been driven by a visceral hatred of government and democratic institutions. But what other agencies have proper democratic and legal legitimacy? Elected parliaments, not banks, Hedge Funds, Private Equity investors and the whole panoply of financial players are supposed to be the representatives of most of the finance system's customers. So they should be responsible for ensuring that the financial system is responsive to the needs of all its customers and not just a few privileged players.

In the case of the UK, this must mean Parliament as a whole and not the political party that happens to be in government, for many senior politicians have been 'recruited' by the financial system. Representative bodies should be made responsible for establishing and controlling those institutions that manage pensions and savings - so that society has a major financial stake in all companies that manage other peoples' money. Such institutions should enjoy substantial tax advantages over more speculative players in the financial markets. We would be disinclined to outlaw irresponsible speculators, just make life very difficult for them - and the tax system is a potent weapon.

Third - a British imperative - direct investment into strategic technologies

The dominance of the finance industries and supposedly 'entrepreneurial' activities like private equity has starved UK technology of the vital investment lifeblood needed to establish and grow successful industries at the forefront of technology. It's not as though the UK lacks the brains or the academic know-how - it's simply that the funding needed to convert ideas and research into tangible ventures has been denied by an investment culture that abhors the unknown and seeks certainties. The result is that the UK has fallen dramatically behind most developed countries in technology, still the lifeblood of a modern economy. Premier Brown has become well-known for making stirring speeches about Britain as a hotbed of modern technology and then doing .......nothing of any tangible use. The reason? Brown is unwilling to interfere with the free market.

The solutions must lie with incubation of key technologies plus massive directed investment into converting invention into industrial enterprise.

Free-marketeers will howl furiously about by-passing the financial markets, but they have failed disastrously to invest in Britain's industrial future.

However, the answer does not lie with old-fashioned state intervention either. Politicians and civil servants have shown themselves to be totally incompetent in selecting and consistently supporting technological investments.

The UK needs to study and learn from the very successful approach to technological investment developed by the Koreans which fosters partnerships between R&D institutes, industry and government - only in Britain, the national interest needs to be taken care of by independent institutions with access to very substantial capital resources, as the political system is capable of poisoning any form of long-term initiative.

Beyond this, there is a raft of specific actions that need to be taken - for example:

• Very strongly discouraging the 'lending' of shares by pension funds to speculators for 'shorting', as this toxic practice undermines the viability of many of the companies employing the pension holders
• International action against tax shelters - including a duty to disclose companies and individuals whose investments are held offshore to an international commission
• A duty on companies to report the onshore and offshore pay of all company employees, directors and consultants with total remuneration and benefits to a value of (say) over £1m to a parliamentary commission and in the case of public companies to employees.
• Significant tax breaks for investors that are willing to take a responsible and long-term approach to their investments
• Institute an international licensing system for all professionals in the financial markets. Ensure that licences are withdrawn from all found to have violated a strict ethical code of practice. Apply heavy tax penalties to financial practitioners who do not have licences.

Will change be effective?

In our view, the current system is hugely resilient and will resist effective change fiercely. So, the risk is that there may be some immediate changes at the fringes of the financial system and more regulation, but it is highly likely that over time old bad habits will reassert themselves - too many rich and powerful people stand to gain from things as they are.

The final remedy

Effective change will only come when there is sufficient popular understanding of how the system works and how the average person is being swindled to cause widespread anger and revulsion amounting to a popular revolution. Politicians need to understand that if they do not act decisively to promote the interests of their citizens against the current financial system, they will pay fulsomely by losing their heads. There are some encouraging signs in social market countries such as Germany and Sweden and amongst poorer countries with popularly elected governments, such as in some South American nations, but this does not amount to a real head of steam for fundamental change.

We need more pain before change becomes inevitable - and rapidly evolving events may indicate that we are about to get it. If the whole system is not reformed root and branch we will continue to suffer from periodic disasters.