Will US lead way on co-operation?

Posted on October 2, 2011 · Posted in Co-operative News

Global politics are arguably in their most interesting, and most fluid, situation in the last 60 years. Following the financial crash and recession, it is unclear how politics will bed down. But it is unlikely they will return to ‘normal’. This creates opportunities for the co-operative movement – in terms of shaping both the new political and economic models.

The fluidity of the political situation is reflected in the reactions of voters to the worldwide crisis. In general terms, they have rejected governments that were in power when the crisis hit. They have not voted in simple left or right political shifts, but in anger against the politicians deemed to be responsible. So the UK has voted out Labour; Ireland looks set to eject the right of centre Fianna Fail and elect in its place the right of centre Fine Gael (in likely coalition with Labour); Greece rejected the right (but is unhappy now with the left of centre new government, implementing an austerity programme); and Hungary rejected the left.

Most significant of all was the defeat of the Republicans in the United States, with the election of the most liberal candidate – Barack Obama – since Jimmy Carter in 1976. Subsequently, as Obama attempted to reflate the economy with various pump-priming measures, his popularity declined. The international trend has therefore been against not only governments that were in power when the crash took place, but also against the incoming governments – both those that adopted austerity programmes to balance their budgets and those that increased the size of their fiscal deficits to stave-off mass unemployment and deflation. It might seem a no win situation.

Yet what has tended to be ignored is the basic character of the economy and the financial institutions. Despite this being the most profound economic crisis in modern history, there has been little discussion of how the economy should be reformed. We must hope that this situation is now changing. A recent paper from the United States’ think-tank, the New America Foundation, is making a contribution to this debate and is doing so in ways that is very helpful to the co-operative movement.

In its report ‘Public Purpose Finance’, author Michael Lind makes a very interesting judgement on the financial institutions that failed the US. He argues that the federal government-backed institutions that also had publicly traded stock – such as the bodies that provide liquidity to the mortgage market, Fannie Mae and Freddie Mac – acted not just unwisely, but also corruptly. (The corruption is a matter of public record, so is not in dispute.) By contrast, the banking institutions that are co-operatives owned by member banks – such as the Farm Credit System and the Federal Home Loan Bank System – rode out the storm.

Lind makes the point that there is a parallel in Germany, which operates the much praised KfW (Kreditanstalt fur Wiederaufbau, or Reconstruction Loan Corporation) to finance small and medium sized enterprises. It is jointly owned by Germany’s federal and state governments, with financing for the SME sector continuing during the recession. This may be a factor in Germany having emerged in much stronger economic state than other major countries in the West. This system of SME finance was praised in a recent interview with Co-operative News by the former Treasury select committee chair, and Co-operative Party MP, John McFall. It was also a model that former trade secretary Peter Mandelson sought to copy in the UK.

The lesson, argues Lind, is that we need a structure of public development banking for a modern economy that can ride economic storms, as well as provide sufficient finance into key sectors. Ideally, he says, those public development banks should operate as co-operatives, in which other banks are members. One of those banks should be to promote the renewable and sustainable sector (the UK Government is establishing a ‘Green Bank’, but not structured as proposed by Lind.) As part of a seven-strand financial support system, there would also be new credit institutions for the manufacturing, infrastructure, skills and R&D sectors. The existing farm credit and home loan bank systems would continue.

My own view is that Lind has correctly identified the areas in which the capitalist economy cannot provide the right structure of investment, that can be guaranteed in good and bad times and that is delivered for the benefit of the wider economy and for society’s citizens as a whole. Lind believes that the finance can be provided through the raising of bonds. “It is politically impossible for the federal government to use debt to finance large-scale lending directly on a regular basis on the scale that is required in the areas of infrastructure, manufacturing and energy, among others,” says Lind.

In the US context, the development banks would be established by the federal government and then their shares would be privatised through share disposals to commercial banks, so turning them into co-operative banks. My observation would be that if this is politically unachievable in the UK at the present time – given the character of our right-wing government – it may be worth considering from a European Union-wide perspective. But one of the great opportunities such a structure offers is that it could replace the system of Private Finance Initiative and Public Private Partnerships, which have proved prohibitively expensive and involve unacceptable conflicts of interest.

In itself, the proposals contained in ‘Public Purpose Finance’ are worth considering, both for application in the US and in Europe – the more so, because in part they are modelled on successful experience elsewhere in Europe. The New America Foundation is one of the most respected and influential think-tanks in the US, which has helped shape some key initiatives adopted by the Democrats. It is to be hoped that as Barack Obama reshapes his administration and considers how he will establish permanent economic reforms – rather than just the immediate response to the crisis – he will give the paper the attention it deserves. Perhaps the ideas will even find a resonance here in the UK.