The financial services sector as a whole has failed the UK, its economy, its taxpayers and, in particular, those worst-off in society. The bill for rescuing the big banks is likely to fall disproportionately on the poorest.
Even if taxes rise for the highest paid, it is a fair guess that the burden will be even greater on those who can afford it least. While many wealthy people are already escaping to the Channel Islands and Switzerland, plans are being drawn up to potentially cut welfare payments after the next election.
In Conservative local authorities such as Barnet, it looks likely that the Ryanair approach to service standards will take hold. Basic public services will be free, but if you want quality services you will have to pay a surcharge. And we are already seeing evidence of cuts from some governments in their payments of international aid.
Yet the poor were already badly served by most of the major financial institutions. Excessive charges for unauthorised bank overdrafts may have been suffered by those who were inefficient in managing their personal finances, but they were also most likely to have been imposed on those who found it impossible to cope on low incomes.
If further evidence were needed it is demonstrated clearly by the success of micro-lending financial institutions in much of the world. Women (in particular) who were excluded from banking services were given access to affordable loans for the first time – and the effect has transformed many thousands of lives not only in countries in the most dire poverty such as Bangla Desh, but also in capitalist economies of great inequality, such as the post-communist states of Eastern and Central Europe and the United States.
Another important measure for alleviating poverty for those born ‘on the wrong side of the tracks’ in US cities has been community development finance institutions. CDFIs emerged in the US as a result of the Community Reinvestment Act, introduced under Jimmie Carter’s presidency in 1977. The CRA required most deposit-taking institutions to lend and invest throughout their business areas, enabling community development to be properly financed, obligatory and organised on a bottom-up basis.
Part of the rationale for the CRA was that development projects previously were led by the US federal government operating to a narrow minded policy brief based on asset renewal and in doing so ripped the heart out of communities by demolishing functioning assets and replacing them with soul-less shopping malls.
Today “CDFIs and other community-based organizations are working with private partners and with government in multifaceted efforts to spur development, add quality affordable housing, increase commercial activity, and better connect these neighbourhoods to the broader regional economy,” according to one well-placed commentator. “Community-based organizations such as CDFIs can play critical roles in these important undertakings because of their detailed knowledge of neighborhoods’ economic needs and strengths and because of their commitment to their mission of community development.”
According to this same commentator, CDFIs have had a bad time as a result of the severe recession. Assets have been devalued, earnings have fallen and philanthropic donations have dropped. Yet the role of CDFIs is even more important, he said.
“Without strong CDFIs, attracting investments and capital to rebuild and revitalize communities would be even more difficult. Economic recovery, like economic development, is a bottom-up as well as a top-down process. Through their work at the community level, CDFIs, together with other community development organizations, can help build a sustainable recovery for all of us.”
The significance of this eulogy to CDFIs is because of the source of the praise. It is coming not from a left-leaning Democrat, or even from a community development worker – it is from Ben Bernanke, chairman of the US Federal Reserve. It is the equivalent of Melvyn King – Governor of the Bank of England – saying that the UK banking system must invest heavily in community development here, as it is the only means of ensuring sustainable and fair economic growth.
It is a reasonable guess that one reason why Bernanke has stressed his support for CDFIs is the criticism of the CFA from the right wing of the Republican Party. For some Republicans, the CRA is the cause of the collapse of global capitalism. They argue that the CRA forced banks to make loans across society, making them agree sub-prime mortgage loans to low income borrowers who could not afford the repayments.
The argument follows that it was by using these sub-prime loans in packages of mortgage debt that became collatoralised instruments bought and sold by banks globally that the crisis unfolded. (My understanding is, though, that the situation was more complex than this – and that many of the defaulting mortgages were taken out by middle class homeowners who optimistically over-borrowed against their earnings; that many mortgage brokers were involved in lying about client earnings; and that other defaults were in the ‘rust belt’ of the US, where unemployment rose and earnings fell because of the decline in demand for traditional US- produced goods.)
Despite the criticisms of the CRA, there is no sign that the Federal Bank, the federal government or the UK government are put off either the CFA or CDFIs. In a recent speech, the influential Treasury Chief Secretary Liam Byrne indicated that the UK government is interested in introducing similar measures here. “I wouldn’t be looking at CRA if I didn’t think it was possible,” he told a Labour Party fringe meeting, organised by the Social Enterprise Coalition and the Demos think-tank. “I’m extremely interested in the idea, which I’m exploring earnestly with the Treasury.”
Now the Co-operative Party is trying to persuade five Labour Party MPs who have drawn lucky in the private members’ bill ballot to put forward a Financial Inclusion Bill. Michael Stephenson, general secretary of the Co-operative Party, told the News: “Building on the success of our ‘Feeling’s Mutual’ campaign to undo the damage the Tories did to our building societies, we are promoting the idea of a new relationship between banks and the communities they serve. Given the unprecedented support they have received in the last year, it is vital that they recognise the obligation of their responsibility to society – whose taxes, jobs and livelihoods have been put at risk by their failure.
“Co-operative organisations offer a great example of the way to go. For example, the Co-operative Bank is at the forefront of how banks can put people before profit. The whole sector needs to be dragged up to that standard.”
A Financial Inclusion Bill here would not be a simple copy of the CRA, but would reflect both the specific problems of the UK and the experience of the last 18 months of bailing-out what is, broadly, a failed industry. The Bill would, though, aim to ensure that all financial institutions must engage with, design services for, and invest in people from all geographical areas and income levels.
“All people should have equal access to routine financial services and credit within their means,” says the Co-op Party’s briefing note. “Banks should no longer merely be able to cherry pick the most profitable customers, but ensure that their operations serve every part of the community equally.” It adds that “the US experience shows very clearly how government legislation can incentivise and promote social lending and investment that is targeted at the financially excluded”.
Measures that would be included in the Bill would be a ‘universal service obligation’ and a legal requirement to disclose lending and investment activities. Implementation of the Act would become part of the responsibilities of the Financial Services Authority. The Treasury would have the power to levy financial service providers that fail to meet their universal service obligation.
If the Co-op Party’s proposals are to go anywhere, one of the Labour MPs who has been won a place in the private members’ bill ballot will need to run with it. Those MPs are Brian Iddon, David Chaytor, Andrew Gwynne, Albert Owen and Julie Morgan – and the party is asking supporters to write to them urging the MPs to adopt the Bill.
There is clearly a mood both outside and inside the House of Commons that remains angry with the banks – a recent early day motion proposes a ‘citizen’s charge’ on banks’ bonuses and dividends and another the remutualisation of failed banks. Whether there is still time to legislate on financial inclusion before the next General Election is unclear.
But if the Conservative Party means what it says about having changed and being committed to co-operative principles and community development, perhaps it could promise to take this on? I won’t hold my breath.