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Getting rid of predatory finance is an essential solution

Hector McNeill1

In working on the PACM analyses of the main four economic crises it becomes startlingly evident that the causal factors in the run up to each crisis and the final tipping point was the behaviour of the financial intermediation sector including banks and central banks. This system has become predatory with society and the economy the prey.

The solution to each crisis, including Covid-19 crisis, has been for governments to give more business to this system. We need to tame it and preferably get rid of this destructive element.

Why has finance become predatory?

I have almost completed a Production, Accessibility and Consumption Model (PACM) analysis of the last 4 financial crises but feel it is worth posting this note concerning findings so far.

Two crises 1929 and 2008 were caused by the behaviour of financial intermediaries and banks while 1970-1980s slumpflation was a classical supply side pricing issue. Unfortunately the "solutions" in the hands of monetarist policies and the financial sector were a calamity, preparing the ground for the 2008 crisis. This recent Covid-19 crisis started out as a supply side crisis but governments are making the same mistake by placing the solution in the hands of banks.

Because of this circular policy process, the finance sector has become richer and more powerful. It has gained a dominant influence over government policy to its own advantage. As a result policy has created a predatory system that has become increasingly prejudicial to society and the economy.

Towards a rational solution

It makes no sense to place the prospects of a country and its citizens in the hands of a few private companies whose behaviour has demonstrated their ability to act in an unethical, economically and socially destructive manner (evidence coming up in Part 2 of the PACM article) which has made the shareholders and executives of these organizations richer as a result.

Elsewhere on this site, I have explained that mutual organizations are the best structured to participate in a real incomes policy framework, they can also become far more competitive under this framework than shareholder-based private plcs. So the formation of large mutual banks where the profits remain within the organization and dividends are paid to the mutual communities, means the benefits of any crisis solution are returned to the communities and not to the pockets of a few private bankers. This concept is somewhat like the notion of a national development bank for investment.

This is not an appeal for nationalization of the banks; they can continue to exist. It is an appeal for this country to accept the values and benefits of constitutional economics by providing society with more public choice to increase their power to benefit directly from the mutual efforts of all to recover from economic crises. Under such a re-organization it is unlikely that we would see the calamitous predatory and unethical practices that created the 1929 and 2008 crises. Any future crises that do occur should not place the "solution" in the hands of private banks but rather in the hands of the community where it belongs and structured in a way that enhances incomes and reduces income disparities.

It is revealing that the attempt to destroy financial mutuals was brought forward by legislation enacted under a prime minister who declared that there was no such thing as society. It should also be noted that the prime minister revealed his own perspectives on this matter by declaring greed to be an important motivator for economic advancement.

Covid-19 has helped to expose such absurd values as being fundamentally alien to the human spirit and how we, as a society, need to behave according to normal expectations and the community conscience. So why does government insist in upholding these sterile and destructive economic policies and "solutions" in favour of a specific self-serving faction?

1 Hector McNeill is the Director of SEEL-Systems Engineering Economics Lab.