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Realizing Private Capital’s Public Benefits

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.