The failure of the banks is an example not just of economic disaster but also of a void in public values. We need to create a system that goes beyond greed and materialism and offers answers to the collective challenges that we face
It seems the Libor rate scandal is spreading. Seven banks are now required to give evidence in the US following allegations that inter-bank lending rates were fixed. Meanwhile, Standard Chartered has agreed to pay $340m to New York regulators to settle claims that it hid large transactions with Iran.
The banks have become large and powerful commercial organisations that have, in recent years, shown little respect for ethical and professional behaviour. But their monopoly powers have effectively been sanctioned by the state and central banks. The implications for market economies and modern capitalist societies are stark, with the very foundations of monetary systems being questioned.
Much of the developed west has been in economic crisis since 2007. But at the core of this crisis is not so much a crisis of economic ideas but of public values. Economics cannot save us, but public values articulated through political debate and policy formulation can.
The Libor scandal is a prime example of a crisis of values. Politicians and regulators once again have been shown to be subservient to market values – the belief that the accumulation of wealth via competition and a loyalty to other financial elites will automatically take society to some higher place.
This story line isn’t new. We’ve already lived through Enron, WorldCom, and Goldman Sachs versus the Securities and Exchanges Commission, plus the bankruptcy of Northern Rock and RBS after aggressive market activities. All were examples of the defeat of public values. Greed and the manipulation of unregulated markets benefited a few dishonest people, at the expense of the public majority.
Markets will remain part of modern social organisation but they need to be subservient to goals of collective good and fairness and find a proportionate place alongside the numerous other ways that human beings organise. Public policy should be an output of political mission and articulated through debating the values that will create the kind of society we aspire to live in.
We urgently need a value system that gets beyond the greed and materialism that is destroying our civilisation and rises to the collective challenges of the 21st century: growing inequality, resource constraints and global warming. We need values from which to derive policy goals. Then our institutions and economies can be subservient to what we really believe to be important.
The late Donella Meadows was one of the first to challenge the primacy of economic growth and instead propose policy built on sustainability. Her ability to see society and economies as highly interdependent systems still offers us an important method for policy formulation and management that is better than the limited understanding offered by much conventional theory.
Meadows saw the natural potential of small forms of organisation and the dangers of getting locked into big forms of organisation that trapped the global system into harmful feedback loops. Values tend to be more in focus in small organisations where action and responsibility is transparent. Micro credit and peer-to-peer lending are modern financial examples.
She saw the importance of system stability where long-term investments were preferable to short-term speculation. We need opportunities to invest in public projects rather than those based on market greed. Decisions to invest and save should be partly informed by the public contribution our money will make rather than a casino betting mentality. Risks are then contained and real value is at the forefront.
Savings could be committed to bonds that support specific investments with a fixed rate of return ideally guaranteed to beat inflation. The buyer choses the investment of choice: renewable power, broadband infrastructure or private manufacturing innovation.
This prevents the financial repression in Quantitative Easing that advantages the indebted large corporations with low interest rates while the smaller players are undermined by inflation and low returns. Similarly the Libor scandal helped those in massive debt with lower rates while savers and investors lost out.
Most important of all, Meadows saw the importance of what she described as a ‘Paradigm Shift’. This she concluded was the fundamental way to change a system: by amending its core values and beliefs. Systems might be partly stabilised by creating reservoirs of energy resources or increasingly good assets in banks, but real change could only be generated by installing a more progressive system of values.
This illustrates the systems intervention needed in banks: not financial interventions like Quantitative Easing, but a change in values. Many rich societies are not just financially bankrupt but also morally bankrupt. This needs a rebirth of collective values and a strong celebration of people who do well for others through service or paying their taxes.
Recent research examining OECD nations in the period before and after the crisis suggests that raising sufficient tax revenue as in Scandinavian countries contributes to high employment, economic stability and wellbeing and that failing to raise sufficient tax revenues has the opposite effect, while leading to high and unsustainable borrowing.
The value here is the belief that all should contribute in an equitable and proportionate manner and the policy issue is raising sufficient taxation rather than cutting public services and seeking to borrow to stand still.
Philip Haynes is professor of public policy at the University of Brighton and the author of Public Policy beyond the Financial Crisis: An International Comparative Study
