It has become a bit of a mantra, a favourite one of mine if I’m honest, to assert that the banks and the bankers are responsible for the current economic downturn, as it is euphemistically called. But even though it is certainly true, it isn’t the whole truth.
Consider the facts, simply expressed. The banks had accrued too much debt. They had so much debt that lenders stopped lending to them. Under this pressure the banks themselves stopped lending any money. The economy got into trouble and the banks got into even more trouble. So bad was their situation that the government (using our money collected by taxation) had to bail them out. And why did the banks have so much debt? Because they had taken out loans, ie borrowed lots of money, in order that they themselves could lend money to people who wanted to borrow it from them in order that they could buy stuff, particularly property.
So there is a case for saying that the economic crisis wasn’t created by reckless lending but by reckless borrowing. The banks, as any other business dedicated to creating value for shareholders, was simply responding to the marketplace they found themselves in in the late 20th and early 21st centuries. A global economy fueled by conspicuous consumption.
And neither is it good enough to say that the banks were too big to fail in a way that implies that it is a fact that not only cannot be disputed but one that is nothing to do with us. In the 1980’s British banking laws were changed to allow building societies to demutualise if more than 75% of their members voted to do so. In practice the societies transformed into banks not just with the consent of their memberships but with the enthusiastic support of their members. There was a rush to open accounts so that individuals could benefit from demutualisation, so called carpet-bagging. But while this practice did occur, most of the pressure to demutualise came from members looking to cash in on a quick windfall.
So it is partly our own faults that we now have a banking system which, unlike the vast majority of other developed nations, is dominated by a very few banks that were deemed to be too big to fail.
A side-effect of the model of capitalism we have created is the hero entrepreneur, lauded for creating multi-billion dollar businesses, many of which have been shown to be socially irresponsible in their determination to avoid their fair share of taxation.
So this crisis has proved beyond all reasonable doubt, that a world economy fuelled by ever growing consumption is not a viable option, that banks as currently structured and regulated cannot continue and that we need alternative models for entrepreneurs. We need to rethink capitalism to move away from the idea that if we all keep buying stuff everything will work out alright in the end.
So here comes the cavalry.
The era of self-congratulatory entrepreneurs, of businesses focused only on shareholder value, if not quite over completely, is certainly coming to an end. We are on the brink of what Tony Bradley writing in the3rdimagazine, has termed societal entrepreneurship. This is different to social enterprise, I think, as this sector has up to now tended to create social entrepreneurs in the same mould as the hero entrepreneur. Individuals striving to create value for themselves and just a few others. Societal entrepreneurship, or co-operative enterprise as I’d prefer to call it, focuses on creating value for all stakeholders; those within the enterprise, clients, suppliers and the wider community. A co-operative, societal enterprise takes the hero entrepreneur out of the picture, or at least places them amongst a crowd.
Banks are leaving poorer communities which leaves room in the market for pay day lenders. Ironically, reforms to the banking system here in the UK, which mean that banks have to have larger cash reserves to protect themselves against the level of debt that they faced in 2008, will make it more difficult for competitors to enter this market place. So how are we to create the diverse banking systems found in, for example, countries like Germany? Well, ideas are coming from the most unlikely places. The Church of England has committed itself to forcing pay day lender Wonga out of business by encouraging the greater acceptance and utilisation of credit unions. A credit union is a member-owned financial co-operative democratically controlled by it’s members and operating to encourage saving and to provide credit at affordable rates. Many credit unions also support community development. By employing this model of financial institution stakeholder, rather than shareholder value is improved. The role of the credit union goes beyond finance into societal, community enterprise, as with the micro-finance of the Grameen Bank system developed by Muhammad Yunus.
There is a growing desire from investors to have at least some of their capital generate a social as well as a financial return; to have social impact. Social impact is a way of evaluating just how the organization’s actions affect the surrounding community. The creation of tangible, measurable social impact is increasingly important in the development of business models, public policy and finance.
And large corporations can no longer simply pay lip service to their corporate social responsibility (CSR) policy. It was once acceptable for big business to send out their staff once a year to clear some wasteland in the name of team-building and CSR or to sponsor a charity. Corporate businesses must start to consider all of their stakeholders and to make sure that their actions have a positive impact, not solely in terms of job creation, in the communities in which they are based. If they don’t move this way themselves then investors will increasing push for them to do so. Some companies, like Unilever, are starting to take this seriously with a commitment, set out in a sustainable living plan, to double the size of their business while simultaneously reducing their environmental impact.
While capitalism may well outlive the current turbulent economic climate there is at least a movement towards sustainable capitalism. Adoption of co-operative enterprise, encompassing community development and community based finance is a powerful first step.