PowerPointPrsentation

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Voice of Future Generations Eliminating Perverse
Incentives How to build Future Finance Stefan
Biskamp, Schifflange, April 23 2009
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Contents

• The World Future Council Future Finance
  Commission
• Future Finance Vision and Obstacles
• Eliminating perverse Incentives
• Bank Bail-Outs as perverse Incentives
• Intermezzo
• Corporate Charter Reform
• Complementary Currencies
• Negative legal enforcement to curb Speculation
• Improving Risk Assessment
• Natural Capital Depletion Tax

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1. The World Future Council Future Finance
Commission

• What is a WFC Expert Commission?
• An Expert Commission is the decision-making body
  for WFC programmes or projects. The group is
  composed of a Chair drawn from the Council, a
  staff coordinator, a Member of the Board of
  Directors and members from the Council, Board of
  Advisors and staff.
• Academics, researchers, civil society, business
  persons and Members of Parliament will also be
  appointed as necessary.
• On the basis of the WFCs mission to be a voice
  of future generations, the Commissions identify
  best policies that will help create a more just,
  sustainable and peaceful world.

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1. The World Future Council Future Finance
Commission

• The Future Finance Commission
• Launch of the Commission March 27th 30th at
  Sekem, Egypt. Host Councillor Ibrahim Abouleish.
• Members include Councillors Maude Barlow, Riane
  Eisler, Olivier Giscard dEstaing, Prabhu
  Guptara, Frances Moore-Lappé and Francisco
  Whitaker, member of the Board of Advisors Margrit
  Kennedy, and WFC founder Jakob von Uexküll.
• Identification of concrete policy proposals
  media coverage in the context of the G20 process.
• Further projects At least three best-policy
  brochures promoting core policies. Preparation of
  parliamentary hearings especially on reform of
  corporate charter legislation.

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2. Future Finance Vision and Obstacles

• Our Vision
• Future Finance
• supports real wealth creating developments,
• ... makes money our servant not master,
• helps to combat poverty and climate change,
• builds trust and fosters accountability,
• brakes growth imperative and short-termism.

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2. Future Finance Vision and Obstacles

• The Obstacles
• Current Finance
• dominates real economy,
• serves to make money out of money,
• increases poverty and climate change,
• creates growth imperative and short-termism,
• deteriorates trust,
• destroys accountability.

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3. Eliminating perverse incentives

• Why is it important to eliminate perverse
  incentives?
• If basic incentives are wrong no government
  control will help. Regulation cannot break the
  innovative power of the financial industry.
  Regulatory loop holes have to be closed, but
  thanks to their innovative power the players will
  always find ways to circumvent regulation.
• It is a myth that the financial industry is not
  regulated. In the current crisis strongly
  regulated banks caused danger not poorly
  regulated hedge funds.
• Therefore the policy proposals focus on
  eliminating perverse incentives instead of
  creating new bureaucracies controlling and
  supervising the financial industry.
• Proposals are designed to have maximum impact and
  transformation lever.

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4. Bank Bail-Outs as Perverse Incentives

• Problem Since Lehmann Brothers went bankrupt all
  major banks in trouble were bailed out a
  serious perverse incentive for bank management to
  try it again later.
• Two basic arguments in favour of bank bail-outs
• Argument 1 Risk of contagion
• But No public disclosure of information on this
  risk
• Argument 2 Risk of a credit crunch. A bankruptcy
  would deteriorate trust.
• But Empirical data show that in many countries
  there is no lack of loans.

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4. Bank Bail-Outs as perverse Incentives

• Example Germany Loans to enterprises are
  increasing

• Public
• Commercial
• Mutual
• Bankenverband, January 2009

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4. Bank Bail-Outs as perverse Incentives

• Example Europe
• Q3 2007
• Lending conditions of European banks (l.) were
  tightened and, at the same time, credit demand
  (r.) went down.
• Q3 2008
• Bankruptcy of Lehmann Brothers has significant
  but minor effect.
• ECB Bank Lending Survey, January 2009

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4. Bank Bail-Outs as perverse Incentives

• Solution 1 Detailed information on troubled
  financial institutions has to be provided to the
  public if a bail out is considered. Public
  hearings to decide whether a bail out is
  justified.
• Solution 2 If bail out is approved the bank
  should be taken into state ownership to minimize
  costs for the taxpayers. Civil society, business
  and parliaments should have majority
  representation in supervising financial sector
  assets taken over by the taxpayers.

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4. Bank Bail-Outs as perverse Incentives

• Solution 3 Banks too big to fail should be split
  up. Having defined the maximum size of a bank (in
  terms of total assets vs. GDP) no bail-out for
  systemic reasons will be necessary anymore.
  Bigger banks should have higher solvency ratios.
• Remark In addition, smaller banks should be
  freed from unnecessary regulatory burden. In turn
  they should disclose information on their lending
  and refinancing business.

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5. Intermezzo

• If the credit crunch argument is questionable
  why did the financial crisis infect real economy
  at all?
• Answer Major parts of global economy were
  brittle already before the crisis. Growth
  imperative and short-termism stretched the
  balance sheets and caused increasing volatility
  leading to a
• resonance catastrophe
• On November 7th 1940 the Tacoma Narrows Bridge
  collapsed. The bridge was built too slim and
  unstable. Wind hit the resonance frequency of the
  bridge. Since vibrations were not controlled
  (properly regulated), the center span of the
  bridge collapsed.

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5. Intermezzo
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5. Intermezzo
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5. Intermezzo
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5. Intermezzo
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5. Intermezzo
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6. Corporate Charter Reform

• Problem Shareholders are not accountable for
  social and environmental damages caused by their
  corporation.
• Solution 1 Corporate charter legislation should
  mandate responsibilities, in return for limited
  liability privileges. Corporations should be
  forced to account for the environmental damage
  they cause gt new accounting standards defining
  the responsibilities of corporations.

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6. Corporate Charter Reform

• Example Operational boundary of Nike will
  include not only 30,000 employees but 800,000
  workers in contracted factories. The fraction of
  workers employed under ILO standards can be
  measured.
• Solution 2 There is a simple way to create
  positive incentives for shareholders
• If a bank provides credit or equity to firms with
  high ecological and social ratings
• gt Shareholders of the bank pay less capital
  gains tax.
• gt huge transformation lever.

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6. Corporate Charter Reform

• Remark Defining the true operational boundaries
  and their responsibilities is difficult but can
  be done. Rating corporations according to their
  newly defined duties is difficult too but is
  possible gt total social and ecological footprint
  of a corporation.
• Solution 3 Banks and firms with high ecological
  and social ratings provide a major fraction of
  their return on equity in non financial terms as
  common good. They should be compensated. Possible
  measures
• Tax relief
• State guarantees for good banks

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6. Corporate Charter Reform

• Solution 4 Salary increases for CEOs should be
  reflected across the whole workforce. The gap
  between highest- and lowest-paid employees should
  be reduced to earlier ratios (e.g. 251) but
  including all employees, also those
  outsourced. gt eliminates incentives for
  short-termism.
• Remark The global market for board members is a
  myth. There is no free market price fixing
  mechanism for CEOs.
• Remark In addition, the liability of board
  members and directors should be enhanced.

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6. Corporate Charter Reform

• Evolution of executive pay versus average
  employee wages
• in the United States, 2003-2007

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6. Corporate Charter Reform

• Average Executive Pay, 2007

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7. Complementary currencies

• Problem 1 Monopoly currencies are very
  efficient, but not resilient.
• Problem 2 Interest rates provide perverse
  incentive to make money out of money.
• Solution Complementary currencies can revive the
  economy gt Implement a variety of low interest
  rate complementary currencies
• Business-to-Business currencies
• Regional currencies
• Special purpose currencies (designed e.g. for
  health care, or to support green industries)

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8. Negative legal enforcement to curb speculation

• Problem of regulating financial speculation Bans
  are likely to stimulate attempts to circumvent
  them by inventing slightly different instruments.
• Solution Negative legal enforcement. Contractual
  obligations based on speculative financial
  products not approved by the regulatory
  authorities are not legally enforceable.
• Example gambling Unpaid gambling debts seen as
  immoral are not legally enforceable.

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9. Improving Risk Assessment

• Problem Incentives to sell complex risky
  financial products.
• Solution 1 Banks should be forced to provide
  guarantees for proper risk assessment of their
  products, as is well known in many other
  industries. If risk accounting proves to be
  wrong, they must take back their products.
• Solution 2 Financial products should be
  classified according to their risk (green,
  yellow, red as in food industry). Very risky
  products should have mandatory warnings gt buying
  risky financial products becomes taboo over time.

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9. Improving Risk Assessment
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10. Natural Capital Depletion Tax

• Problem High taxes on labor and goods barely
  any taxes on bads gt bias against ecologically
  responsible action.
• Solution A Natural Capital Depletion Tax would
  compensate for the damage caused during a
  products production process and redirect money
  flows quickly.

A Green New Deal. Joined-up policies to solve
the triple crunch of the credit crisis, climate
change and high oil prices, Green New Deal Group
2008
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Thank you for your Attention!
Stefan Biskamp Commission Co-ordinator Future
Finance Manager World Future Council Bei den
Mühren 70 D-20457 Hamburg Germany Phone 49
(0)40 3070 914-26 Fax [phone]
914-14 Mobil 49 (0)173 928 6116 Email stefan.bi
skamp_at_worldfuturecouncil.org

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Thank You!
www.worldfuturecouncil.org