MUCH BANKING AND FINANCIAL ACTIVITY "LACKS SOCIAL VALUE" -Adair Turner, chair of the Financial Services Agency.

Why it's even worse than this
Why politicians are acting like rabbits in headlights
Why are viable alternatives not being pursued more vigorously?

The chair of the UK Financial Services Agency, himself an ex-banker, recently caused a frisson of horror in the financial markets and vehement objections and denial by the majority of leading politicians.
What did he do? He asserted that a significant proportion of the activities of the investment and banking industries had no useful social purpose. By this he meant that speculating with money to create money and gambling on future events like the rise or fall of share prices (or anything at all, in the case of many financial speculators) really did not create value for the bulk of those in society - only a small group of the wealthy. His exact words, were, "Financial innovation has produced some products of very dubious social value and then there are products that on paper you might have thought would be useful that have not happened.....And if you ask experts why these products don't exist you will be told that there's no liquidity in the market for them, there's no demand for them - but that's because there's no supply! This is an area where a government should create certain financial instruments as strategic aims of policy".

His comments are quite correct and all the more so coming from a prominent banker, but he might have carried his argument much further.
Not only does financial speculation fail to create value for society, it actively damages the interests of the majority. We have no need to go into the causes of the current crisis - they are well known to be the growth of reckless speculation in an industry that owed a duty to no-one but itself and its insatiable greed.
But far worse, the speculative nature of the financial markets has directly or indirectly spurred the following social malaises:

• In the UK, a lack of responsible long-term investment in technology and advanced science-based industries. The financial market has a marked aversion to such long-term risk-taking, preferring their own internal forms of speculative "innovation".
• A direct result of the lack of investment in useful industries that create skilled employment and grow intellectual capital has been the huge growth of the UK balance of trade deficit to a point where Britain has a permanent balance of payments gap. This is because the decline in manufactured and technology products has hugely outstripped a modest gain in the value of financial exports.
• The growth of dominance of the financial sector over all other parts of the economy can be seen with clarity in the performance of the biggest companies quoted on the stock markets in New York and London. There has been a massive growth in dividends paid to investors and even more in rewards to top executives. These increases are in no way based on performance or the creation of "shareholder value" which have been disappointingly modest and are at the cost of investment which in Britain is the lowest in the developed world. Click FTSE 100 and see graph below: for full data.
  These graphs contrast relatively modest 24-year annual percentage increases in sales and pre-tax profit with much larger enhancements in dividends and directors' pay.
  The directors' pay line excludes the growing impact on total pay of Long term Incentive plans and also pension contributions. Thus the amounts by which pay exceeds performance are considerably greater than shown - in recent years by probably 25 - 40%.
• A perversion of the purposes of banking, which in its socially useful form was the process of accepting investors' money and investing it in a range of businesses that needed responsible long term capital support - whilst giving investors a reasonable return. Instead we have seen an industry develop that indulges in speculation for its own benefit and that of a privileged minority and owes responsibility to no-one.
• The creation of a monster in the midst of the "Anglo-Saxon" economies in the form of uncontrollable financial sectors. In Britain, this has become endemic - politicians are either terrified of or "recruited" into the finance sector, which issues dire threats if any government even contemplates curbing their poisonous habits.
• From these "Cuckoos" in the national nest has emanated a vast increase in the wealth of a small minority of powerful people. This enormous wealth is often located offshore in tax havens, as are Hedge Funds and many private equity enterprises. The net result has been a dramatic increase in inequality in Britain and the US, creating a plethora of social ills that are particularly noticeable in the United States and UK, where rates of crime, ill-health, under-education and low skills are now permanent features of those societies and getting worse as the minority suck the wealth and vitality out of society. See Notable facts about UK Society - the state we are in.
• Most disappointing of all has been the muzzling of intelligent debate about what kind of economy benefiting what kind of society would best serve the needs of the majority of the population. Over the last 30 years, a mating of gene theory, strange mathematics and bad economics has produced market fundamentalism, the dogma that has dominated the intellectual and political scenes. Market fundamentalists hate government and believe against all the evidence that totally unfettered activity in markets will somehow be good for all (although they have never convincingly spelt out why or how). This grotesque offspring of bad science has dominated the landscape, seduced Anglo-Saxon politicians and spawned in turn unregulated financial markets.

The growth of an extraordinary international network of "institutes" and "think tanks" aimed at pushing a flood of propaganda supporting market fundamentalism has all but squashed any intelligent exploration of the causes and remedies needed to create a better world - See Spreading the True Faith.
A result of the capture of the media and political systems in the United States and Britain by the prophets of market fundamentalism has been relative silence and an almost total lack of purposeful response to the causes of the current financial crisis by US and UK politicians. The bulk of the population are not informed about what lies behind their travails and therefore have no coherent voice. The banking industry is rapidly returning to its old bad habits of concocting new and risky financial instruments, doling out huge bonuses and exploiting the bail-outs by government to make obscene profits again. (Investment banks are making a fortune on arranging government loans. Government loans are necessary because of raising money to bail out the banks. Thus a truly hellish circle is squared).

Why are positive alternatives not being pursued more vigorously?

There are many healthy alternatives that can supplant or stand alongside the current financial system:

• Re-growing mutually organised banks and financial institutions. There is the strongest possible argument for supporting retail banking and lending organisations that are responsible to their customers. In Britain, the home lenders used to be organised along these lines, and the Co-operative bank is an excellent example of an ethically based enterprise owned by its members. Reversing the trend towards privatisation of mutually organised finance will take some government support. None seems to be forthcoming.
• It is becoming clear that enterprises that are owned by their employees or customers are more durable and in the main better performers than their stock market financed comparators. See Re-inventing the Firm by UK think tank Demos for ideas. Yet there is comparative silence in the media about the benefits of alternative forms of organisation and but little activity to create new ones. Of course, one of the blockages to this is financing through routes that are not in the iron grip of the investment banking industry, which is of course hostile to anything that might undermine its power to control the profitable flow of funds to enterprise.
• Offering strong incentives for long-term responsible investment and penalising the fruits of speculation.
• Outlawing Tax Havens, which are incubators of speculative investment, refuges for those who are not willing to contribute towards healthy communities and hiding places for the proceeds of corruption and crime.

Right now, the most useful forms of innovation, the creation of socially useful forms of banking and finance, are being prevented by the unholy alliance of the finance industries and politicians. Until people manage to get their hands back on the levers of economic power, the undemocratic conspiracy of big finance and politics will continue, to the detriment of the interests of the vast majority of people. For proposals on what can be done, see:

• The Future of the Global Economy, What is to Be Done?, and
• The Future of the Global Economy, Saving capitalism from its own excesses - making the market serve Society