UK Banking System and Social Issues - Essay Example

UK banking system Global society is facing three very distinct but closely related crises: a financial crisis, an environmental crisis, and an energy crisis. Despite the popularity of threatening books, advocates of sustainability over the past century have not succeeded in developing a sustainable society. A quick look at historical statistics reveals a still growing stock of debt in the UK, and a growing global population, carbon dioxide emissions, and (non-renewable) energy use. Sustainable development implies to equity, fairness, and social coherence in the form of a just distribution of resources and opportunities across space and time. However, in addition to this internal sustainability, the definition also requires external sustainability: we must live within ecological bounds and at the same time build up an efficient and resilient society to be able to remain within these natural limits. It requires a stabilization of the natural and human system , as opposed to an overshoot and collapse. One can characterize such a societal lifestyle as one in which there is ‘human dignity’ (van Egmond and de Vries, 2011). The money system The money system is interpreted as the form that money takes, and the way it is brought in to circulation. The standard approach to this system, as discussed in almost all economic textbooks, is that central banks control the money supply by means of their base money, which banks can expand by means of the money multiplier model (Mishkin, 2009). However, new arguments claim money is based on credit, created by commercial banks, and brought into the economy endogenously at the demand of the market (Wray, 1998). A greater demand for money hereby increases credit, of which debt is the other side. This strand of thought judges the money we utilize on a day-to-day basis, as bank debt, and thus for almost every Pound, Euro, or Dollar in existence someone has to go into debt with a bank. It is clear that money as debt is nothing new, but that in the evolution of this form of money, the banking system has gained an increasingly important role in our payments system as compared to the State. In this process, it has also become more relevant for sustainability because of its role in deciding where New money (purchasing power) enters the current economic system first. A number of different negative effects that our money system may have on society and sustainable development exist. These are considered as transmission mechanisms between the nature of money and (un)sustainable development. The number of transmission mechanisms has not been established beforehand. Understanding what money is today and its effects on society is not straightforward. There are various debates occurring now surrounding this subject: politically, academically, in the media, and in more popular or unorthodox circles. This has historically also been the case, especially in the US where the struggle over who controls the money supply has been an ongoing affair since the nation’s inception. Today, think tanks across the world such as the British New Economics Foundation and Positive Money, the Dutch Economy Transformers, and American Monetary Institute attempt to illustrate how the modern money system is fraught with mechanisms, which prevent sustainable development. Individuals from a broad spectrum of disciplines have similarly presented their conviction that our money system hinders sustainability. The importance of money in our society makes this a natural result, especially during times of crisis. The role of the financial sector in the recent crisis has turned the spotlight on the workings of this industry, and their main medium –money. The lack of agreement and clarity in the academic literature on the various elements of the money system has also enhanced public suspicions. When people started asking questions and bankers, politicians and academic could not answer, protestors took to the streets. The main theory upon which most of the following arguments are based is that the current money supply is created for the largest part by commercial banks, as bank debt. The economy is understood as a credit economy, with a money system based on commercial bank credit creation. The private incentive to expand the money supply, and thus the stock of debt, in the hope of higher current or future income is hereby enabled. This results in asset speculation and ponzi pyramid-like schemes where more money(debt) is needed to service the debt. Bank credit has indeed been found to be a primary promoter of speculative activities (Hasan, 2008), limiting sustainable economic growth by allocating resources unproductively. Keen (2012) claims that the complementary lack of control of the money supply by the central bank and /or government magnifies non-productive investments, which only accelerate debt and asset price bubbles. Bezemer (2012) adds that the result is an extraction of real resources from those in debt, passed on to creditors the banks, in the form of interest payments. He claims that since the early 1980’s, the drain of money from the real economy to the financial sector for servicing loans and other financial obligations has become three to four times as large. Ryan-Collins et al. (2011) argue that by allocating credit, commercial banks affect the money supply and decide on the first distribution of money in society, potentially shaping economic activity. Positive Money also claim that because commercial banks create the money we use by means of loans, they have the power over it, as they decide who has access to it by means of deciding who receives a loan. They argue that this decision is made according to the private returns of a project(a private discount rate), which due to the externalities involved makes investment in long-term social projects less likely. Brunnhubber et al. (2005) propose that short-term investments are promoted in the current money system because interest must be paid over all money that is loaned into circulation, making short-term investments significantly cheaper than long-term ones. There is also an argument that the search for high returns associated with these interest rates results in natural resource extraction as here the true costs are not born by the investor –externalities are Abundant in this industry. Furthermore, the servicing needs (interest) associated with an increasing stock of debt in this credit economy may push the need for growth, a concept known as the growth imperative. Economic growth is claimed to always have been complemented by environmental degradation, thereby preventing sustainable development. As many other popular critics of the money system, Sorrell (2010) claim that, a growth imperative is induced by the money system because society received less money (the principal of a loan) than that they have to pay back (principal+ interest). He argues this forces society to generate an ever-increasing income flow, and results in a need to accumulate “more and more debt to finance economic growth, and we need more future growth to repay the debt” (Daly, 2011). The New Economics Foundation and Positive Money claim that this need for extra money requires the production and sale of extra goods and services, and thus greater use of resources and pollution. The requirement to grow and pay interest, may induce agents to monetize and liquidate the natural capital still available as unused resources, or to grow in productivity. However, total factor productivity in the OECD only grows at an average of 1.006%, including energy. This would result in a pressure to grow by using greater stocks of resources, natural as well as human. Banks generally also lend against collateral and securities, which are collectable and marketable (monetized), so that if there is a default , they do not make a full loss. This would favor loans for items such as houses and already discovered natural resources while investment in future inventions and profits, as needed for the transition to sustainability, are less secure under these criteria. It may also encourage lending to firms of individuals that are already had better off, because their credit worthiness is higher or because they have more collateral. A bank may find it easier, safer, and more profitable to fund one large project than many small ones. This questions whether the current money system encourages preferential attachment in terms of wealth and income. There is an argument that in the current money system, money does not go to those who need it most but to where there is most power and wealth already. Robertson and Huber (2000) add that money concentrates in the banking sector without merit due to the seignior age obtained when creating money. While the seignior age that a central bank earns on securities against notes issued is turned over to the national Treasury. Interest is another way in which this preferential attachment mechanism may occur. The effect of charging interest is reoccurring theme in connecting sustainability and money central to for example Islamic economic research. Historical arguments opposing this mechanism also exist. It is described how in pre-capitalist societies such as those of the Sumerians, Babylonians and Hebrews, a natural concentration of money to a wealthy few induced rulers to impose a debt jubilee. This restored the distribution of wealth to its original state, in an attempt to avoid political unrest. The degree to which the money system alters the allocation of income. It is argued that capital owners and other individuals that hold a portfolio of investments are claimed to receive benefits of this system in the form of interest payments. Bibliography Benes, J. and M. Kumhof (2012). The Chicago Plan Revisited. IMF Working Paper P/12/202. Hayek, F. A. (1997).The Denationalization of Money. London: The Institute of Economic affairs. Keen, S.(2011)."A monetary Minsky model of the Great Moderation and the Great Recession". Journal of Economic Behavior & Organization. Ryan-Collins, J., Greenham, T., Werner, R. and A. Jackson (2011). Where Does Money Come From? London: New Economics Foundation. Read More