For April, 2014

The Energy of Nations – an Update

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From Jeremy Leggett: An update on how the dramas described in his book are playing out, April 2014. The Book:    


  The Energy of Nations: Risk Blindness and the Road to Renaissance by Jeremy Leggett 2013

(Reviews of the book, and ways to order, can be found here)      -<>



In April 2013 he finished writing the book during the Easter break a year ago, and made predictions about      three systemic risks being run by the energy incumbency:

the risk of a shale “surprise” (wherein an incumbency narrative-of-plenty in long-term extractable unconventional gas proves wrong),

the risk of an oil crisis (wherein another incumbency narrative-of-plenty, involving growing global supplies of affordable oil far into the future, turns out to be flawed), and

the risk of carbon-fuel asset stranding (wherein policymaking on climate change, or the possibility of it, causes investors to abandon significant amounts of oil, gas and coal assets underground, unburned).

During the year since, he has kept a log of developments relevant to these predictions, as he encountered them, on his website. He also covers the related themes of climate-change risk and the risk of renewed financial crisis. Jeremy invites you us to have a scan of that log<>, if you haven’t already, at the level of headlines only, and check the direction of things. The log would suggest that all three predictions are on course. And if any or all of this is right, the implications for all our lives will be enormous.

Some extracts from the log over the year since the book came out:

– Shale “surprise”: We have learned that the top 15 players in US shale drilling have written off $35 billion since the boom started, and that investors are beginning to pull out. Meanwhile, production has peaked and is now falling in all but one of the major shale-gas drilling regions. The boom is looking like it could turn into a bust before too long.

– Oil crisis: We have learned the extent to which capital expenditure on finding new reserves has soared, and discoveries by major oil companies have dropped. Meanwhile, crude oil production, which meets some three quarters of global demand, peaked in 2005. Who says so? For example, a man BP asked to compile estimates of global oil supply when he worked for the company.

– Carbon-fuel asset stranding: We have seen major financial institutions start pulling out of carbon-fuel investments. Other institutions holding their investments in place for the moment are pressuring carbon-fuel corporations to rein back capital being expended on efforts to turn resources into reserves. This is good news for those of us who worry about the risk of a carbon-fuel asset “bubble”, and wish to deflate it sustainably, abating climate-change risk in the process. It is bad news for an incumbency needing ever more capital to keep its narratives of carbon-fuel-plenty on track.

Over the course of the last year, instead of retreating from the comforting narratives they spin us as you might think the above would warrant, much of the oil and gas incumbency becomes ever more shrill in hyping mantras. They speak of America becoming the new “Saudi America” – a nation self-sufficient in oil and gas that exports to help allies in trouble, like Ukraine. The reality behind the myth is that America imports both gas and oil – and a lot of oil. US oil consumption is 18.5 million barrels a day. Production is 8.9 million barrels a day. What part of that equation are they going to export any time soon to save Ukraine and others from the clutches of Kremlin-controlled pipelines?

The strangeness in the air over this and other aspects of energy “policymaking” encourages him to redouble his efforts in sounding an alarm.


Transforming Finance

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                                       Transforming Finance  

              Fresh thinking on democracy, finance and debt                                                                             

Transforming Finance is a coalition project led by Friends of the Earth,  which draws on the expertise and support of a broad alliance of think tanks, academics, finance professionals and NGOs with an interest in making finance work for people and planet. The coalition includes the New Economics Foundation,, Share Action (formerly Fair Pensions), Civitas,, Respublica,, the World Development Movement,,   Positive Money,,  and Finance Lab, .

The March 2013 conference was generously supported by The Institute of Chartered Accountants,, The Ecology Building Society , Ethex,  and Triodos Bank,

Aims of the Conference  The conference organisers aimed to improve understanding and debate around a range of positive proposals covering banking, investment institutions and alternative financing that were designed to:

  • Avoid another financial crisis; preventing asset price bubbles, debt crises and state bailouts of financial institutions
  • Have Banking work for the real economy
  • Get finance into projects with long-term social and environmental value and financing the transition to a greener economy
  • Explore what democratic financing might look like

Summary  The May 2013 conference, has been summarised and recorded on their website   Click on the Summary tab to download a PDF summary and on the Videos tab to see the speakers’ presentations  and The Guardian’s summary videos. Scroll down to the Themes section below for a quick overview of the 38 short presentations from leading thinkers and innovators from these sectors of the UK and some from other countries.

The Charter that came out of this conference sets out a vision for a financial system that meets the needs of the 21st century rather than trying to fix the old system or protest vested interests – a finance system riddled with short-termism, secrecy, conflicts of interest, intermediaries and unproductive speculation. It reflects the key issues and proposals set out set out by the 38 speakers and represents a voice of growing consensus from inside and outside the financial system on the need for profound systemic change.

These people want to see the system transformed into one that takes a long-term outlook, allows greater competition, thrives on transparency and diversity, and channels more finance into productive investment that delivers for society, the environment and the whole economy.

They believe that the conditions for transforming finance are now in place at European and national level, and that, with sufficient political will, it could start to happen. There are three developments that could together do this:

(1) The combination of banking reform proposals and papers on the need for long term investment in UK and the EU, will provide a great number of political opportunities for change that may not come around again for some years;

(2) A new wave of financial providers, be they ethical banks, new entrants, state sponsored entities, social finance or peer to peer platforms, are being proved in the marketplace; and

(3) A collection of policy ideas that could transform finance is being rapidly developed, in different places, and are ready for mainstream debate.

The Charter is a statement of why, where and how the financial system must be transformed. It sets out a vision of what transformation would look like in three areas: (1) banking, (2) investment in the future and (3) innovation to deliver a truly sustainable finance system.

It has already been signed by the advocacy organisations, academics, finance professionals and public interest groups represented at the conference. Visit the coalition’s website to read and sign their charter as an individual or organization:

The main themes of the conference

The content of the presentations are grouped below to match the three parts of the Charter:

 1. Banking

1.1 Size of Banks:  Centralisation of power in commercial banks in the sector, that are too large to fail – worth over £1 billion, and are therefore implicitly subsidized by the state. There need to be new rules for megabanks. Monopolies in the interbank lending market need to be broken up.

 1.2. Broadening the objectives of commercial banks to make money work for people and planet, not just for private gain. Commercial private sector banks listed in the stock market focus on short term returns on investment.  The two functions of banks, supporting productive activity and financing assets, need to be separated to reduce the risk of bubbles in the economy; and retail and investment banking need to be two separate industries.  Extreme boom and bust cycles can lead to environmental damage in the good times and abandonment of social and environmental regulation in the bad. Society needs the finance sector to allocate a much larger proportion of their credit and their balance sheets to the real economy and productive uses, cost effectively. Policy needs to be used to reduce credit for speculation leading to asset bubbles. The finance sector has been actively creating risk by pursuing short-term profits, and money is not going to the right places, like the green economy and making money work for people and planet.   Parts of the finance sector do damage and are socially useless.

 1.3. Need for a proper role of the state and a well-regulated financial sector to tackle vested interests.  There is a deep misunderstanding of the way the financial system works: the powers that be think that the problems of EU or Japan can be solved by money creation, but that is only part of the issue. The real concern is how the money created by bank credit in the form of loans is spent. Commercial, private sector, banks create 97% of the money supply in the form of credit in deposit accounts. There is no regulation or guidance on who gets the money and for what purpose; the banks decide mainly on the basis of how best to maximize their own profits. Credit creation for GDP transactions into the real economy need to be distinguished from credit for financial transactions that lead to financial asset creation which is not part of GDP. This determines asset prices and so can lead to asset inflation and the cycle of asset boom and then bust when there is not enough credit for GDP transactions. Capital creation through credit for financial transactions is always unsustainable as there is no real generation of income gains to repay the loans. Asset boom and bust cycles are shown in historical data over the last century (e.g. US in 1920’s and Japan in 1980’s), and in the first decade of this one when total credit (and so financial credit) was ahead of GDP.

In addition to this Banks all too often prefer to offer credit for the real economy and GDP transactions when it is to be used for consumption rather than productive activity. This can create more demand while not directly creating the goods and services to meet that demand, and therefore can fuel inflation. Money creation through credit is good if it is lent for the right kind of production. Credit guidance by the central bank can promote lending for productive activity in the real economy and it can reduce speculative lending for financial transactions. While regulation is important, credit guidance is key in preventing instability and crises in banking. Currently the Basel agreements appear to punish banks for lending to SMEs and to reward them for investing in property.  The banks will listen to their central bank’s credit guidance as they are dependent on it for inter-bank market operations. There needs to be a permanent and legitimate role for the state in banking, at a local or national level, either to reduce the cost of risk capital for socially desirable activities and innovation, or to influence the overall allocation of credit to the economy. Fix the financial system and we will become more democratic overnight: all of our institutions have been corrupted by finance, but in particular our democracies and our parliaments.

1.4. Banking systems with greater diversity of institutions, in forms of ownership and constitution, is another way of governing how money as credit is used:  as in Germany where regional savings banks and co-operatives, which make up 70% of the banking sector, are mandated to provide credit for productive use, the common good and for financial inclusion, and local savings are used for local loans and small businesses, with profits staying within the region. It is in the interest of local banks, constituted in this way, to invest in or lend to local businesses with good prospects. While such banks confine operations within a region they also collaborate across regions by sharing IT centres and funds to cover liabilities. The Government should provide central infrastructure for local banks to overcome cost barriers. Locally head-quartered and mutually-owned banks have a better track record of supporting small business & local economies. There should be increased competition and diversity within retail banking allowing for frequent new entrants, and exits: multiple ownership models including mutuals, co-operatives, credit unions, local savings banks and sector banks. Diversity and more prudential balance sheets and local knowledge leading to a more healthy loan book, create greater resilience in times of crisis. Governments and policy makers can structure the economy to have these different forms of banking institutions, and civil society and progressive finance can be aligned to this to secure big systemic change.  Government can encourage more financial education both for citizens and for professionals in different roles in the finance system so they can participate to mutual advantage.

1.5 Fresh Thinking on Debt and Recoveryfor now and the future.  Since the credit crunch debate has been around austerity versus public and private borrowing. How do we manage debt-cancellation now that there are complicated chains of debt between different players? Could some debts, those seen, through information available to the public, as legitimate, be written off or paid back later after recovery, as part of a transition to a new monetary system? Since the crisis banks have been cautious with loans and people are paying off their debts where they can, so that there is less money in the economy for productive activity. The central bank put money into the bond market through quantitative easing to address this but this has fuelled financial markets and led to loans for speculative, rather than productive, activity.  Should the central bank create money through putting it into the government’s bank account to be spent in the real economy, to tackle climate change and the transition from a carbon economy, creating jobs and enabling people to pay off their debts? This in turn could reduce private bank credit and the bank’s assets (as loans are assets and deposits liabilities), and so the size of the banks.  Or should there be an independent commission to oversee long term investment by the government in the low carbon infrastructure needed for sustainable living in the 21st century? This  would be a loan and the commission would also advise/decide how it is to be paid back:  through general tax, specific taxes, and the expected returns on investment for the economy as a whole that would in turn generate more state income from taxes and reduce state costs in the form of benefits or subsidies. The specific taxes might be on cars & vehicles with carbon emissions or a small carbon tax for the economy as a whole which increases as our international competitiveness moves over to carbon free technology  and energy?

2. Savings and Investment

2.1  Where do our savings go? How to ensure that our pensions and insurance savings serve people and planet rather than fuelling speculative bubbles and climate disaster? Pensions fund destructive activity but there is very little in the system to check this. Moving our money is relatively easy with banks, but much harder when it comes to pensions and insurance savings – though more people want to with their savings.   Does government need to fundamentally change the rules by which pension providers compete? Or should we cut out the mainstream middle men altogether and seek radically new ways of investing our money? Increases in transparency would give savers the information they need to know (and act) if their savings are being invested in environmentally or socially damaging projects.  Financial literacy and bringing economic activity into marginalised communities is vital too.

2.2 Fiduciary duties are the strict legal obligations that apply when one person is entrusted to act on behalf of another. In an investment context, fiduciaries include the trustees of pension funds and charitable trusts. Other examples of fiduciaries are lawyers and the legal guardians of children. Fiduciary duties are interpreted very narrowly as a straightforward duty to maximise profits in the short term, and the law needs clarification  to ensure that ‘beneficiary interest’ is interpreted more broadly to address the issues of today – such as climate change, resource and energy limits, poverty and income equality across the world, security in the face of extreme ideologies linked to terrorism, and the need for strong and resilient economies. The behaviour of institutional investors will have an enormous impact on addressing these, and it is vital that our money contributes to good corporate governance rather than fuelling bubbles and irresponsible practices. Analysis by Carbon Tracker ( shows that the valuation on the stock market of major fossil fuel companies is largely based on reserves which cannot be burned if we are to keep the rise in global temperature below 2 or 3 degrees. This “carbon bubble” threatens investors and pension funds. Pension funds should be engaged owners of the shares they hold with an active role challenging companies, and ensuring much more engagement with issues such as funding the green economy. But it is hard for an individual fund to take a lead; we need to “re-humanise” investment collectively and regulation is needed together with radical new investment mechanisms that shift the mainstream. Fiduciary standards should be applied consistently to those managing other people’s money: this means addressing the conflicts of interest between financial intermediaries and the millions of ordinary savers whose money they invest. Without tackling the role of financial intermediaries and the principle (who has the money)/agent (to whom the investment is delegated) problem through a code of practice, asset mispricing and rent extraction result; the G30 proposals may be a step in the right direction.  Perverse incentives must be taken out of the system. New rules are needed for megabanks, and a change of culture so that they see themselves as fiduciaries. For example: highly damaging food speculation through the increase in trading of derivatives based on the price of food, that leads to massive price spikes with particular impact on the global south. Deregulation is the cause.  The war is cultural, not economic: we need to reclaim money and power from the banks. This can empower governments to bring in the regulation needed. Savers must make the case that social and environmental considerations are the bedrock of financial success, and demonstrate that we value something other than the highest short term financial return.

2.3 Investing as if the future matters Long term savings capital should be deployed in the market primarily as investments in economic activity for the long and medium term, rather than a pool of money to fund short term, speculative trading in equities which has little bearing on the true value of the assets being bought and sold. Investment institutions should understand and take into account the social, environmental and other systemic consequences of their investments. The legal framework must support and encourage this. Investors will be more responsive when the government shows by their policies that climate change will be tackled. The structure of the investment sector must maximise transparency and accountability to savers, and minimise opportunities for rent-seeking. The policy framework and tax system should unambiguously reward equity investments held for long periods over ones sold more frequently.

3. Innovation in raising Finance: 

Alternative and bottom-up solutions aimed at democratising finance and getting it into the right place have increased independently across the globe since the recent banking crisis using the same technology that allowed social networks to grow.  Much of the regulatory and policy recommendations have focused on reforming the financial institutions that caused the crisis, but elected governments need to ensure that the markets for new systems such as these are adequately protected from fraud or poor judgement derived from mass appeal. On the other hand experimentation on a small scale means less damage from failure or the breakdown of user trust. The resurgence of co-operative models of economic and financial collaboration, and peer-to-peer models, which connect people to each other rather than via financial intermediaries who think of their job in terms of transactions rather than as a commitment to the welfare of clients and the society of which they are a part. Finance based around localities is coming back, and finance that aligns with specific values. Timebanks and community exchanges allow people to trade freely and unleash underused resources, to engage differently with society locally and to question the relationship between money and value. Community shares and bonds, crowd-funding and social investment platforms provide new ways of raising finance for popular projects. Crowdfunding creates engaged supporters and democratises finance, and there are many ways to do it – from quasi-equity to loans and even donations. People support crowdfunding not just because of returns but also because of relationships. Could these innovative models ‘disrupt’ the system so that there is a tipping point where consumers demand greater transparency, autonomy and demonstrable social return?
 Allstreet (  ), for example,  has created a map of the alternative finance system, illustrating where new entrants and startups can disrupt or partly take over from mainstream financial services in all the main areas: lending (e.g. through ‘peer-to-peer’ networks),  nvesting, current accounts and savings, payments (e.g. mobile money),  alternative currencies, alternative stock and foreign currency exchanges, advice and guidance, open data etc. Through ‘disintermediation’ everyone could effectively become their own bank. There is a challenge for small  players offering alternative finance to get to a useful scale.

The intellectual power of the finance sector needs to be wholly focused on creating innovations that are socially useful. Regulation and the tax system should reward simplicity, transparency and diversity for the customer, and penalise complexity, secrecy and rent-seeking by the finance sector. Proportionate regulation should be introduced speedily for new finance products and innovative business models aimed at making financial services more inclusive and accessible, or accelerating funding to the real economy, for example peer-to-peer lending or equity crowd-funding. Policymakers and regulators should have to ensure they have the skills and resources to support innovation and competition with the existing system, as well as within it.

Those at the conference signing the Charter:

Organisations in support
 The Finance Innovation Lab,
New Economics Foundation,
Share Action,
Positive Money,
Move Your Money,
Friends of the Earth,
Ecology Building Society,
PRIME Economics,
All Street,
Blue & Green Tomorrow,
Centre for Banking Finance and Sustainable Development – University of Southampton,
Beacon Strategic Communications,
Trillion Fund
Manchester, Energy Generation Association,
Triodos Bank,
Community Forge,
Institute of Social Banking,

Individuals in support
 Paul Woolley, Founder of the Paul Woolley Centre for the Study of Capital Market Dysfunctionality LSE,
Professor Mariana Mazzucato Economist and Professor of Science and Technology Policy, University of Sussex,
Professor Gary Dymski Chair in Applied Economics Leeds University Business School,
Professor Costas Lapavitsas Professor of Economics at SOAS,
Professor Richard Werner Director Centre for Banking, Finance and Sustainable Development University of Southampton.

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