Creating real value in the real economy

April 4, 2023

With another round of bank defaults underway in the United States and Switzerland, the globalized financial system has again veered into “casino capitalism,” with a focus on short-term speculative profits, a disregard for risk management and an overreliance on “synthetic” value in the financial and technology sectors. Increased social and political tensions throughout the world underscore that the current system has proven itself incapable to support meaningful economic development and equitable wealth distribution, leaving us with an even more dangerous prospect of another global financial crisis. How can we make meaningful changes to the system?

The first meaningful change is divesting from the global financial markets in order to reduce exposure to excessive risk and volatility. This means investing in local businesses, regional banks, community development financial institutions, and other types of enterprises that are not linked to the global markets. Shifting to more localized financial solutions can provide a more stable source of capital and greater access to credit for individuals, families, small businesses, and even local governments that are already undercapitalized or underserved.

The next is investing in the real economy. It is the producer, the innovator and the manager that are creating real value for the real economy, not the speculator or the financier. This means investing in food, energy, water, education... the essentials, which help create greater economic stability and reduce social inequalities. If we don’t reverse the trends of speculation, rentification and financialization, we will eventually have nothing left to finance, rent or trade.

Another way to de-risk from the globalized financial markets is by shifting from international investment banking to regional and community banking for more localized investments that address local issues more effectively. This type of banking is better equipped to invest in emerging, frontier and otherwise under-capitalized markets, creating economic opportunities for people and communities all over the world, and not only in major financial centers.

Another way is to localize investments to better align producers and investors. The scale of the institutionalized investment sector today - in which ownership is delocalized, stakeholder engagement is low and proxy voting is plagued by transparency issues - is a recipe for dysfunctional corporate strategy. And so most major listed companies are being run by Western pension funds that seek constant dividend returns at the expense of people and the planet, and which cannot be sustained in the long run.

Furthermore, robust regulation to protect consumers and workers is needed to ensure that the financial system remains stable and secure. On the macro scale, this includes measures like increasing capital requirements for banks and curbing money laundering. On a micro scale, it includes measures such as introducing “living wage” policies to reduce income inequality, providing robust health and benefits to employees and implementing consumer protection laws that provide for recycling, repair and remedies.

Finally, we must create stronger cooperative enterprises to ensure that capital flows back into our local economies instead of being concentrated in the hands of a investors located far from the projects themselves. Creating incentives for cooperative enterprises—of which there are many—can galvanize resources among communities in order to invest responsibly in projects with social impact.

By supporting these types of initiatives, we can create more equitable economic systems that are better able to withstand future financial shocks. By embracing greater accountability, transparency, and responsible risk management practices, it will be possible to avoid another devastating crisis in the future.

CPM