Where did all our money go and why isn’t it being spent on something useful?

Date: 15 October 2010

This morning I read the new economics foundation’s new report Where did our money go? – building a banking system fit for purpose. The report looks at the causes of the financial crisis, what the results have been and – more importantly – what can be done to reform the banking sector.

A few worrying things immediately stand out. The first is that nef, looking at Bank of England data, find that the banks appear to face a ‘funding cliff’:

“In order to maintain existing levels of activity they currently have to borrow £12 billion a month; the projections we reproduce in this report indicate that in 2011 they will have to borrow £25 billion a month. We believe the public sector is likely, once again, to be asked to bail out the banks for the emerging funding gap.”

Another bail out?

The second is that, despite the crisis, the banks have not reduced their reliance on high-risk securitisation processes and they don’t seem to have any strategies to reduce it in the future. This has massive implications as these processes include complex derivatives and credit default swaps which caused the crisis in the first place.

‘What is securitisation?’ I hear you ask. Don’t worry, most people don’t know what it is either. But this Bremner, Bird and Fortune sketch explains it pretty well (starting about 3.00 in, but it’s well worth to watch the whole clip)

So what does nef propose that we do about these problems which still feature heavily in our banking sector? Among the solutions is one that WDM has been campaigning on for some time now – turning the publicly owned Royal Bank of Scotland into a Royal Bank of Sustainability.

Since RBS was bailed out by the taxpayer in 2008, it has provided nearly £13 billion worth of funding to the oil and gas industries. The companies it has backed includes BP, Shell, Tullow Oil, Trafigura and Cairn Energy.

Turning RBS into a green bank would make a massive difference. According to nef, a sample of £10 billion invested in the energy efficiency sector would create:

60,000 new jobs while reducing emissions by a further 3.96 megatons of CO2 each year

Public savings of £4.5 billion over five years in reduced benefits and increased tax intake

If the £10 billion was invested in onshore wind and directly replaced energy from conventional sources it could decarbonise the UK economy by 2.4 per cent – a £19 billion reduction in environmental damage.

Sounds like a no-brainer to me. You can take action here.