Labour party leader Jeremy Corbyn this week unveiled his new team of economic advisers. He hopes they will help build a set of policies capable of countering the narrative of belt-tightening austerity which delivered David Cameron and George Osborne into Downing Street back in May.
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Corbyn and shadow chancellor John McDonnell are scheduled to meet four times a year with the seven-strong group which includes people like Thomas Piketty and Mariana Mazzucato. Also on the panel is City University professor Anastasia Nesvetailova, an expert on the international financial sector and its role in the global financial crisis of 2007-09. We asked her to give her thoughts on four policy areas reportedly under consideration by Corbyn and his team:
Q: The new Labour leadership has indicated support for a financial transaction tax, but why does support for this ebb and flow so much?
The idea for the Tobin tax, so called after the economist James Tobin suggested it in the late 1960s to early 1970s, has been long debated. This concept of applying a relatively tiny tax to every financial transaction tends to be evoked in the midst of financial crises and instability, or whenever the costs of finance to society appear to outweigh the benefits of deregulated finance.
It may be comparatively mature as a concept then, but the Tobin tax has been difficult to implement in real policies. During its early life, the idea was eclipsed by the paradigm of monetarism and free markets of the 1970s and 1980s. And throughout there have remained unresolved technical issues about its implementation.
One major divisive issue has been the scope of a possible tax: should it be universal and global (to minimise regulatory arbitrage), or can it be implemented on a different scale by individual nation states? The Tobin tax was originally proposed to target the foreign exchange market – a segment of financial volatility, speculation and bubbles. Today though, we know that the foreign exchange market is only one part of the financial system – albeit a very large part at about a US$5 trillion daily trading volume.
Many other financial transactions today are multi-layered and multi-jurisdictional – very often they involve complex credit contracts. And so a tax designed when the realities of financial markets were quite different and less advanced may not be applicable to all financial transactions today uniformly.
Another issue is how to tailor such a measure to the complexity of today’s financial structures and not harm the needs of businesses and consumers who rely on the foreign exchange market for their daily business needs. Finance is famously prone to speculation and bubbles, but it is an organic and very central sphere of economic activity in advanced, highly financialised capitalism; we need to be cautious about tinkering with the inner workings.
Q: Is there a future for Britain free of the dominance of the financial sector?
This is a tricky question, because it presumes that the financial sector is counterpoised to the rest of economic activity. In reality, we are all part of finance today, and that includes the shadow banking system – a complex set of non-bank financial intermediaries, transactions and entities. Overall, the City of London financial sector plays a crucial role in providing market and funding opportunities for the economy. A better question would be to ask: how can the financial sector today work for society?
It is true that competition and financial innovation can and does spur economic growth and makes our daily lives much easier: it is convenient to rely on credit cards when you travel or to be able to take a mortgage. But financial innovation is also inherently very risky. Hyman Minsky, the theorist of financial fragility who did not live to see many of his predictions come true, said that in advanced capitalism there is always a trade-off between financial innovation and economic stability. Looking back at the unresolved legacy of the 2007-09 crisis, it is clear that the question about who should assume the risks incurred by the financial industry during the “good times”, has not been addressed by policy-makers fully.
Instead, society and the state, were made to work for finance: in 2007-08, the risks from financial innovation were socialised and austerity measures followed. This happened against the big gains from financial innovation that had been privatised by the finance industry. As a result, despite the progress on the financial reforms since 2008, we are ill-prepared for the next financial crisis, which according to Minsky, is certain to come.
Q: What should a new Bank of England mandate look like?
The Bank of England should remain independent, but it should have the power and the tools to continue to act as a stabiliser of the economy and be able to intervene with a diverse and flexible range of tools during a period of financial crisis or instability. It is important to understand that uncertainty about central banks’ mission and mandate today is not a unique problem of the UK.
During the crisis of 2007-09, the central banks on both sides of the Atlantic stepped in and played a role that they were not meant to. We are lucky that they did so. Against many economic dogmas, they were not simply lenders of last resort, they made the markets, as my colleague Perry Mehrling argues in his book New Lombard Street. They made the markets when liquidity vanished and when private participants, buyers and sellers, simply would not pick up the phone.
In the wake of Lehman, along with the governments, central banks saved the payment system from a collapse. And although it was meant as a temporary solution, there was no exit strategy from that role. Up to this day, central banks are de facto in charge of much more than simply price stability.
The problem is that the formal mandate of the Bank of England is too narrow for what is required of the central bank in the advanced financialised context. The risk is that during the next financial crisis they may not have the tools to intervene. Central banks are major actors in financially advanced economies and in any plans for a major recovery they are likely to remain so. They will need new tools to deal with what will be an unavoidably a complex crisis.
Q: Is there a feasible place for public ownership in the banking sector?
Again, an interesting question because somehow it assumes that public ownership is alien to the banking system. In reality, public ownership is already present in finance: as a policy measure when banks are nationalised and a potential measure when a bank is identified as a systemically important institution and its failure threatens the economic stability.
One of the major triggers of the great transformation of banking in late 20th century was the move (in the US) to put investment banks into the hands of markets and the ownership of shareholders. The major consequence of that decision was that the risks that previously were theoretically containable in closed partnerships arrangement, were potentially socialised. Simply put, large bank holding companies trading in the markets have systemic consequences for the economy – and a collapse may trigger systemic risks beyond this particular institution.
This is exactly what happened in 2007-09, when the UK government had to nationalise several banks in order to save them from a collapse. Since banks are crucial systemic institutions in our economy, and since they perform many utility-like functions (payments, clearing) critical for the economic security of the country, it can be argued that public ownership is best suited to guard the public interest in utility banking. And in fact, given our experience in the financial crisis, it can be argued that they were, in effect already nationalised.
I can anticipate a counterpoint from the banking industry: public ownership is wasteful, it stifles innovation and competition. But while the benefits of privately-owned banking groups are difficult to quantify, data suggests that bank executives and managers were rewarded handsomely even as their institutions were making losses and were on a public liquidity drip and, further, that in finance, innovation takes the form of regulatory arbitrage and avoidance, rather than the benign pursuit of the public good.