BIG MONEY NEEDS ETHICAL RATINGS AGENCIES TO STOP IT DOING HARM

Anyone who has large amounts of money under their control is in a position to shape the course of change and yet fund managers understand their responsibility to be only that they should maximise returns while staying within the law. Is this amorality immoral? Is it real or is it a convenient lie that hides an extreme right wing agenda?

People who run businesses that make and do things often have a vision that goes far beyond simply maximising profits. Often they want their work to help make the world a better place as they see it. This 'soft' motivation is not something they can ever dare to admit to unless they are either going for an ethical sales pitch or are just extremely successful. If they do they are likely to find they are cut off from finance. The money always wants a clean clear focus on profit and lets the law deal with the moral issues. Never mind that the money also lobbies the law makers not to take away profitable opportunities even if they kill people or endanger life on earth. It is against this background that we have food and drug companies poisoning people, arms and security companies creating the tools for mass murder and torture and mineral extraction companies trampling on both people and planet with near impunity. However, none of these horror enterprises could operate if they did not have access to the finance steered their way by fund managers. Their code of amorality within the law is not neutral. It is biased in favour of people and corporations that will put profit before the common good and yet these fund managers are the people we entrust with our savings.

This has been going on so long that many developed countries and sadly the UK in particular, have economies that would collapse if any meaningful moral standard were applied to investment. Governments are highly aware of this and have become increasingly complicit. Fiscal policy, regulations and enforcement as well as government expenditure are all distorted by the 'keep the cash cows alive' agenda. Tax on corporate profits and the very rich is increasingly voluntary. Big companies may be fined, but are not taken to court. The public purse is for bail-outs and creating corporate investment opportunities to protect immoral sectors that have become bloated in an environment of collusion and complicity with governments. The intellectual deceits to justify all of this have become the banal dogma of the established political parties, university academics, mainstream media and the corporate world itself.

For ordinary people living in this environment there is hardly an opportunity to gain a realistic perspective when this web of constructed meanings forms the language of everyday life. Only the key symptoms tell people that things are not as they should be: they are getting poorer while the rich get richer, the world is increasingly in conflict, freedoms are being taken away, debts are piling up and nothing effective is being done to address climate change or our dependence on the depleting fossil fuels that cause it. The idea that their problems are being fuelled by the money they invest in pensions and ISAs does not often cross people's minds. Nor does it often cross their minds that each time they borrow money, for homes, for student loans or on their credit card that they expand the mountain of private debt that is too big to be ever repaid, but which can be used to enslave them by depriving them of any choice but to always take any job regardless of how badly paid or how mindless or immoral the work is. What good does it do anyone to even think of these things, or to consider the vast funds that are created from the profits on oil and gas that sweep across the globe with the morality of pirates in search of booty? Each of us is dependent on this web of corruption and exploitation to keep us housed, fed and safe from the chaos that would ensue from its collapse. Never mind that in some respects our system is as full of lies and corruption as that of the Soviet Union.

If investment without moral consideration of the consequences of investment is a key component of the problem, is there a realistic way that fund managers could be held responsible for the damage that the companies they invest in do in the course of maximising profits? Just as we have ratings agencies for the credit worthiness of businesses, could we not also have ethical rating agencies?  Could fund managers be obliged to subscribe to a code of practice where their portfolios needed to have a calculated ethical mean score above a certain level. If such a system were in place, we would have seen a collapse in the share price of Barclays once they were found guilty of the Libor fix. GSK's shares would have collapsed after the company was found guilty of miss-selling drugs. Companies, particularly large ones, found guilty of bad practice would not just be able to pay a fine and carry on. They would become subject to a takeover by companies with a better ethical scores. The transition to higher ethical standards could be taken slow enough that the economy is reformed, not destroyed, with the score required rising year on year. Obviously, such a system would require enforced transparency and the ratings agencies would need a high degree of independence and moral authority, but if they were to be able to assure savers, investors and consumers that their transactions were not undermining their wider best interests, it might be a way forward.

BANKS, FALSE PROMISES AND THE ROAD TO TYRANNY

What is a bank but an agent. It will guarantee my promise to pay for goods and services I receive on credit. It will pay you to place your savings with it so that it will not be unable to pay if I default and it makes its money of the difference between what it can charge me and others for its loan guarantee service and the cost of paying for your savings and its other costs. It does not so much lend me your money, as use your money to cover the risk of my and others default. In practice the amount of loans guaranteed can be many times the amount of savings it holds on deposit.

However what I promise to repay for the goods and services I buy with my bank loan are goods and services of equal value. This being true for all borrowers, the amount of debt should relate to the amount of goods and services being produced. If all loans were for one year, the amount of debt that could be honoured would be the value of all goods and services traded in that year, less those that were traded for cash. This would be disastrous, for as the year end approached all loan notes would need to be matched with goods and services delivered and any debts outstanding would be in default. In practice though the process of making promises to pay with real goods and services in the future is constantly rolled forward, so there is no reason to panic that the loans will not be repaid because time has run out.

Well that is nearly true, but nearly true is a dangerous thing in banking. Suppose that the amount of loans made each year, together with loans from previous years still outstanding was 1% greater than the economy as a whole could produce real goods and services for (over and above those paid in cash or immediate barter) and that this was always the case, year after year. What would happen. Well to start with it wouldn't matter, but over time the amount of loans outstanding would get bigger and bigger relative to real goods and services. In fact this gap would grow exponentially. After about 20 years it would result in debt being the same as a whole years goods and services. Unchecked, after a few more decades the gap between debts and real goods and services  would be three times what could be produced in a year. In reality this would mean that the whole society was awash with promises that could never be honoured. This is what has happened.

To some extent this is inevitable. To give an example. The government decides to borrow to build a new road between two cities. It calculates that because of the new road people in both cities will produce enough extra goods and services that the increased tax will more than pay for the road. Meanwhile shrewd investors realise that the small towns along the road will also benefit and so borrow money to buy property in the small towns. Sure enough, the property in the small towns becomes a more profitable location for business and the speculators pay off their loans as they sell on the property at a good profit. The banks soon realise that provided the economy is growing that they make more money from this sort of speculation on future growth than on actually financing growth in the production and consumption of real goods and services. However, speculation does not itself increase real production. So the increase in debt relative to real production is driven by speculation.

Bankers are not stupid. They can see when this problem is growing. However they do tend to look at the position of their own organisation, not the economy as a whole. As the risk of default grew, they did not stop lending, but rather looked at how they could shift the risk away from themselves using insurance and other vehicles. When it became obvious that some banks had defaults they couldn't cover, there was panic that threatened the whole system and governments had to commit future tax revenues to guarantee the banks' ability to deliver the future goods and services that their borrowers were unlikely to deliver.

Stupidly, some governments, such as the UK, took this to mean that government now had less ability to buy goods and services. As a result the value of goods and services being produced decreased. As a result the demand for loans increased as both households and businesses wanted to borrow when they experienced what they hoped would be a short term difficulty obtaining the goods and services they needed. Banks were is a bind though. They didn't want to take on risky lending. This meant they could not pay savers much. From the governments perspective this was good and bad. If there was a decrease in borrowing then they could have very low interest rates. In theory this would support people producing real goods and services, but with the banks avoiding risk this made little difference. Low interests did make it cheaper for the government to borrow. On the down side returns on savings declined and the government had to start creating money to put into banks to replace savers' money. That is to say the government was replacing savers as the source of liquidity to underwrite the bank's promise that its debtors would deliver goods and services. While this helped the banks to appear viable it was of course a complete nonsense. The system is only working when sufficient goods and services are being produced that the people who sell them become savers interested in investing in the future production of more goods and services. If the amount of goods and services is in decline and the banks are not rewarding savers, apart from keeping banks alive for the sake of it, governments giving money to banks to keep going is like wanking - it might feel like sex, but its not going to be productive.

In the meantime the real underlying problem persists. There are more promises to deliver goods and services out there than there is any real prospect of being honoured. For a short while there is a justification for governments to stand as guarantors to stop a system collapse, but if they start believing that if they just keep rescuing the banks then the problem will gradually go away then they are badly deluded. There is a need for real action to rectify the problem.

The problem is too much debt. It doesn't matter whose debts might be better than others. It is the sheer quantity of accumulated promises that physically can not all be honoured. There is only one solution and that is to tear up the promises. It is to say to people that they don't owe money on credit cards and mortgages and overdrafts and bank loans and student loans. It is to say to them that they can go and use the money they were paying to get their lives working again. To get new clothes, to repair the car, to insulate their homes, to buy decent food, to learn new skills or what ever it is they need.

Of course in practice this can't be done quite like that. Firstly if it were done all at once it would flood the economy with a demand for goods and services that could not be met, sending prices through the roof and secondly not all debt needs to be wiped out to get the system working again. Further there is the difficult issue of savers. If the debts were wiped out so would their money be. The suggestion of the Australian radical economist Steve Keen would make a good starting point: he suggests that a sum of money be given to everyone. If they have debts they have to use the money to pay it off. If not its a bonus. For some it would be a crude (and no doubt unfair) compensation for the loss of value in their savings, for others with no debt and no savings it would be a bonus.

There are many details to sort out, but if nothing is done we are going to endure a slow misery of decline, with young adults in particular having their hopes lost as they try to survive in a land that is willing to sacrifice itself so that the holders of empty promises can accumulate the rights to everything. While the process of unrealistic debt accumulation has been going on, there has been another change taking place. Increasingly the ultimate owners of wealth have placed their assets in tax havens. This advantage has allowed them to become the winners in what is becoming increasingly like the the last stage in a game of monopoly. Awed by their wealth and power governments do their bidding. Government services are contracted out to them. Their taxes are reduced, Bank regulation is watered down. Laws are put in place to control the restless masses. With no change in policy, these owners of great wealth will gradually accumulate more and more, acquiring property and access to tax revenues. This tyranny has affected much of the developing world, it is now coming to haunt us.