GENEVA – Greece’s youthful left-wing leader, Alexis Tsipras, has a point – certainly polemical and undoubtedly over-simplified – in declaring that the time has come to confront “global capitalists, bankers, profiteers on stock exchanges, the big funds.” With Europe staggering under the blows of investors intent on profiting from a catastrophe largely of their own making, it is time to reflect on the public purpose of global capital markets. As Nobel laureate Joseph Stiglitz has put it: “Finance is a means to an end, not an end in itself. It is supposed to serve the interests of the rest of society, not the other way around.”
Consider, for example, JPMorgan Chase’s recently revealed trading loss of more than $3 billion. The lesson should be obvious: even those considered to be among the best in the business cannot be trusted with our hard-earned savings – capital that is needed to contribute to the creation of an inclusive and sustainable global economy – without a fundamentally different approach to governance.
The reckless decisions underlying such losses are not just a private matter playing out in a domain of willing buyers and sellers. Financial markets’ public purpose is defined by their wider impact – their externalities, which can be negative. For example, the Bank of England’s Andrew Haldane estimates that the global financial crisis cost roughly a year’s worth of global GDP, harming many people who had no say over how financial markets operate. But financial markets can also benefit society by providing positive gains to non-contracting parties, such as jobs, environmental sustainability, and improved security.
Such public costs and benefits are not equal. While the excessive risk-taking that caused the financial crisis has not yet done irreparable harm to the global economy on which we all depend, failure to reap public benefits from private investment – particularly in terms of environmental security – could jeopardize everything.
Positive action is being taken around the world to assert capital’s public purpose. Stock exchanges are placing greater pressure on listed companies to disclose “non-financial” risks, while rules for corporate governance, especially in accounting and reporting, are becoming more demanding. And there are proposals to take into account countries’ natural-resource intensity and domestic depletion rate when assessing their solvency.
The success of specialist fund-management firms, such as Generation Investment Management, shows that disciplined integration of sustainability into investment decisions yields positive results. Yet the forces that drive capital markets’ focus on short-term returns (and discount systemic externalities) continue to dominate.
British economist Nicholas Stern has argued for policy intervention to prevent investors from earning higher short-term profits by pricing carbon at zero (which implies a collective long-term bet on unsustainable increases in global temperatures). Similarly, for Greece (and Europe more widely), it defies logic to allow private investors to profit today from the destruction of the political economies required to generate tomorrow’s wealth.
Financial-market reform has fallen far short of securing the sector’s resilience, let alone driving investment in the technology, energy systems, infrastructure, and business models needed to develop a sustainable world economy.
Opponents of more comprehensive reform rely on three arguments, none of which stands up to scrutiny. First, they claim that it is not regulators’ job to determine where financial institutions invest. But regulators exist to protect the public interest, which must include guiding classes of investments that affect the resilience of the system as a whole.
Second, they argue that financial markets must be stabilized before addressing systemic issues. But the opportunity for reform that the crisis presents may not return. When the global economy is back on its feet, there will be no political appetite for change – until the inevitable disaster that could have been prevented.
Finally, opponents claim that the financial sector’s global mobility would make it difficult to widen the scope of national reforms. But that point merely underscores the need to address the faults in global governance that constitute a major barrier to securing the public purpose of capital markets. The likely failure of attempts to impose a Financial Transactions Tax, for example, should serve to motivate regulators to become more ambitious, not less, in efforts to advance financial-sector reform.
From Latin America and Asia in the 1990’s to Europe today, we have seen the costs of inaction. Shorting entire economies has become an endemic practice, but one that threatens political stability and long-term economic health. Indeed, by failing to channel our savings in ways that create an economy fit to serve a rapidly growing global population within environmental limitations, financial markets are shorting civilization as a whole.
No greater negative externality can be envisaged, and there is thus no more compelling justification for broadening the scope of financial-market reform.