Definancialisation: A democratic reformation of finance
This report sets out an ambitious agenda for 'definancialisation', for rolling back the socially useless aspects of modern finance and advancing both its productive potential and the democratic interest over its activities and objectives.
Financialisation – the 'increasing role of financial motives, financial markets, financial actors and financial institutions in the operation of the domestic and international economies' – is arguably the most important structural change in British capitalism in the last 30 years. The rise in the scale, scope and profitability of financial activity relative to the size of the UK's economy in this period is well-known. For example, the balance sheet of the UK banking sector grew from 40 per cent of GDP in 1960 to 450 per cent in 2010. The consequences of financialisation more broadly, both positive and negative, are also well understood.
Critically, the circulation and accumulation of capital in the financial system has become increasingly detached from productive investment, in a process of 'accumulation for accumulation's sake'. This is problematic, because so-called 'rent extraction' is not a neutral process: it occurs at the expense of the wider economy. The banking sector must be reoriented away from short-term, speculative activity and towards its basic, essential functions: managing the payment system, providing appropriate levels of liquidity, and directing credit to the productive and socially useful parts of the economy to create sustainable value.
One of the most worrying long-term consequences of financialisation is the reduction in the capacity of democratic states to meet the demands of their citizens over the demands imposed on them by financial and corporate institutions, institutions which are increasingly free from the responsibilities that were imposed upon them by confident social democracies in the middle of the last century. In this way, financialisation has been central to the creation of what some call an era of 'post-democracy', in which democratic rules exist but are increasingly limited in application.
The financial implosion of 2007–08 should have been used as a 'provocation to rearrange the place of finance in our economic lives'. Instead, six years on from a financial crash that cost British society the equivalent sum of fighting a major war, too little has changed. Financial crisis has ossified into relative political stasis. Contemporary policy debates are either inadequate or focus on treating the consequences of our financial system rather than changing its underlying structures.
In this report we argue for structural reform to address the deeper institutional arrangements that underpin financialisation. By doing so, our recommendations should help to build a financial system that operates without public subsidy (the 'bailouts'), where rent-seeking is limited, and where the relationship between finance and production is substantially tightened.
We set out two principles for this programme of reform:
- First, the financial system is a vital utility and the flow of credit to the real economy an essential public good which should be guided by and made accountable to democratic institutions. However, this does not mean we believe rigid, explicit targets should be set. Rather, an overarching framework should be established to ensure that credit is better directed into expanding the productive capacity of the economy.
- Second, we believe that there are limits to regulation, necessary though it is. This will require building or reforming institutions, both public and private, that are better able to create and sustain equitably shared growth.
These principles lead to three broad objectives:
- Targeting credit at the productive economy – principally by giving the Bank of England the mandate to monitor and guide credit creation and flow
Reassert the public interest in the financial system
- Establish a Monetary Commission to investigate the UK's monetary system
- Strengthen equity ratio requirements to remove the implicit public subsidy to banks
- Create a Financial Product Board to approve new UK-traded financial products
- Establish an EU credit-ratings agency funded by the financial transaction tax
- Invest the gains of financialisation to help fund public expenditure – by establishing a national wealth fund that is able to accumulate some of the gains of financialisation and support the country's long-term service and investment needs