If we want to be ready for the next financial crisis, we need to start planning now

Whenever the next recession comes, we must ensure that the opportunity for transformative financial reform isn’t missed.

Fran Boait
27 September 2019, 11.38am
Image: Matt Dunham/PA Wire/PA Images

This article is part of ourEconomy's 'Preparing for the next crisis' series.

There are a lot of murmurings about a coming recession. We know that a crisis presents an opportunity for change, so how do those striving for a finance system that serves society rather than itself make the most of the next crisis? What should our strategy be?

In truth, we need to be developing a number of different but interlinking strategies. Here are seven ideas to kick things off.

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1. An 'inside' strategy

It has been useful for those advocating for radical financial reform to have ‘inside supporters’. An inside strategy is when anyone that appears to be part of the establishment or status quo supports the shift in conversation. For the finance sector these can be people working inside financial institutions including banks, asset managers and pension funds.

Insiders are also politicians, or officials within regulatory bodies including Bank of England and Financial Conduct Authority. Insiders also include journalists in financial press and well known, well respected thinkers or academics. They can play a key role in legitimising a conversation about change or reform.

For example Adair Turner and Martin Wolf were important for Positive Money by talking about how unrestrained money and credit creation by banks played a key role in the 2008 financial crash. A sub strategy for getting to insiders is to influence the influencers. For example, sometimes it’s tricky to go direct to Mark Carney, but by influencing the people that he is influenced by e.g. the financial press or leading economists that he can be indirectly influenced by.

However, it is important to realise that when a crisis hits, if you only have ‘insiders’ leading the conversation it is unlikely that they will change the conversation, because by their nature insiders are more conservative. So their support for change is likely to be too subtle to shift the narrative.

2. Framing the narrative

Frames and narratives are the simple stories that get embedded in people’s heads through repetition in the press. It is amazing how in the UK the narrative that the Conservative-Liberal Democrat coalition put across – that ‘Labour spent too much’ – replaced the narrative that ‘the banks crashed the economy’. This allowed them to undertake serious public sector cuts and austerity, rather than serious structural financial sector reform.

Occupy was successful at pulling the conversation back onto the banks with the ‘we are the 99%’ slogan, and camps set up outside Wall Street and the City of London. However, this was started in September 2011, a full 3 years after the initial crash. As I’ve written about before, whereas in 2008 there was no civil society working on financial sector reform, now there is. Being outsiders, civil society needs a very strong outside strategy to frame the narrative.

3. An 'outside' strategy

This is probably the most important strategy to execute immediately after or during a crisis. Outside strategy is about people power, including protests, strikes, petitions, marches, demos and sit-ins. It can also arise without a perceived crisis if enough momentum is behind it.

In 2019, we have seen a huge shift in the narrative on climate change because of the school strikes and action taken by Extinction Rebellion. Occupy was incredibly important in changing the story in 2011, but the energy didn’t translate into a system change.

To really reform the financial sector, we need a mass movement demanding change. And it matters who is in charge.

4. A political strategy

It matters immensely whether a government is sympathetic or not to financial reform. Ultimately, the degree to which it is will determine what change takes place. Currently the UK is in a political crisis, and there is a stark difference between the Prime Minister’s view of the City of London, and that of the leader of the opposition. During the Conservative Party leadership contest in June 2019, Boris Johnson remarked:

I can’t think of any other politician, even Conservative politician, who from the crash of 2008 onwards actually stuck up for the bankers. Can you think of anybody who stuck up for the bankers as much as I did? I defended them day in, day out”

It is hard to see his government wanting to take forward an agenda to make the financial system actually serve society. In contrast, Jeremy Corbyn has stated:

“When bankers like Morgan Stanley say we’re a threat, they’re right. The next Labour Government is a threat to a damaging and failed system that’s rigged for the few.”

As those who work on financial sector reform know, it's much easier to talk about breaking up big banks and big finance that to implement it. What we saw under David Cameron and Barack Obama were governments that talked about reining in Wall Street and the City of London, but the reforms they implemented were not robust enough. As a result, they are now being undone. Having off the shelf proposals ready to deploy is key to getting a sympathetic government moving on an agenda for reform.

5. An economic strategy

When we look at the big political-economic paradigmatic changes that have happened over the last 100 years, they were to an extent allowed to happen because of a need to boost jobs and employment. This happened after the war in 1945 and during the stagflation crisis in 1979, for example.

It is not easy to shift a political-economic paradigm. But when the economy isn’t working for a lot of people it opens up the opportunity for serious political-economic change. The last big shift in early 1980s resulted in the liberalisation of the financial sector and the ‘big bang’ which essentially caused the 2008 crash. The economy hasn’t shifted significantly since then: we still have an oversized finance sector that pumps the vast majority of new money into property and financial markets (i.e. pre-existing assets).

It’s clear that whilst austerity has compounded the problems, all of this together results in an economy that doesn’t work for most people, opening up the opportunity for significant change – not least in reforming big finance, big banks, and the City of London. However, with the economy in such dire straits it also means that a more moderate economic agenda that doesn’t seek to really reform the structure of finance would also boost jobs and growth, and improve the economy in the short term. So we need a government and a people powered mass movement that is serious about change.

6. A regulatory strategy

One thing that will help us not to miss the opportunity in reforming finance is re-orienting regulation. As a brilliant report from Finance Lab highlights, by too often being ‘purpose-neutral’ regulation actually ends up being oriented around the largest incumbent firms that dominate the market. If regulation can take on more of a social purpose, where it looks at outcomes, this could be a game changer for embedding a shift in the finance sector.

7. A collaboration strategy

I am involved with a project that looks at how to shift the relationship between bank lending and climate change by collaborating with stakeholders across the system. For me the most powerful part of this is understanding that in all sectors, whether civil society or commercial banks, there are some people who are more predisposed to collaboration, and there are others who are more predisposed to dogmatic thinking. Both are important for different responses. But if you bring together people more who can collaborate (i.e. see each other’s view point) and find common ground to work on a change strategy, it can be really powerful. This strategy should not be a response to a crisis, but an ongoing strategy for change.

One glaring gap is an international strategy. Unless we work together across borders, we are unlikely to be able to rein in global finance and stop it crashing our economies and trashing the planet.

Whenever the next recession comes, we must be ready to make sure the opportunity for truly transformative financial reform isn’t missed. It may be the last chance we have for some time.

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