Banking, Digitalisation and Inequality: Future Perspective

Fourth Industrial Revolution (FIR) is on the door step. Income inequality and global warming is on the top of future challenges. There is a close link between financial system, digitalisation and economic inequality. Before looking in to future, I think, we better start reviewing the past; specially the globalisation era how it went. I picked up some books to see the way of development and thinking behind the development so far. Following books and articles gave me an insight thought.

Globalization and its Discontents, written by Professor Joseph Stiglitz, gives clear idea of why and how Globalization has been discontented to fulfill vested interest although it got liberal and democratic philosophy. Due to the results of globalization so far, Prof Stiglitz summarises that it has been sheer exploitation from fistful ‘West’ minorities to majority throughout the world. However, Stiglitz loves globalization. So he wrote another book Making Globalization Work where he says that another world is possible. The author is so worried about intolerable inequality created during the era of globalization. His book The Price of Inequality is interesting to see the inequality, today.

In Globalization and its Discontents Prof Stiglitz; Nobel laureate, Chairman of President Bill Clinton’s Council of Economic Advisers, says that all developing countries desperately seeking funds must accept the terms and conditions imposed by IMF to get ‘Structural Adjustment Loan’ from the World Bank especially they have to liberalise their financial market, But there were not effective policy measures whether the country is able to do so. (P14)

Stiglitz says that ‘western countries pushed poor countries to eliminate trade barriers by keeping their own barriers as it is. And also developing countries were prevented from exporting their agricultural products.’

He has sharply criticised the IMF and the World Bank- ‘‘A half century of its founding, it is clear that the IMF has failed in its mission to stabilise the economy and betterment of millions poor…The capital account liberalization was the single most important factor leading to the crisis… These organizations could have provided the alternative.’’

While trekking around the Everest base camp, Nepal before some months Lehman Brothers declared itself bankrupt Jim O’Neill (PhD from University of Surrey) found ‘powerful example of how globalization was alive and well’. So he mentioned in his book The Growth Map that ‘‘Globalization need not to be Americanization; there is scope for the rest of the world to create their own definition of the term using their own characteristics’’.

Similarly, Capital of Twenty First Century, written by French Economist Professor Thomas Piketty, has urged to do something new urgently about unequal income and wealth distribution that should be fair, sustainable and equitable. He has analysed a tendency of accumulating capital for 300 years where he found sheer unfair. This came from Piketty’s more than fifteen years research work, which details historical changes in concentration of income and wealth. From the history, the author derives a grand theory of capital and inequality. As a general rule, he claims, wealth grows faster than economic output r > g (where r is the rate of return to wealth and g is the economic growth rate).[**] The main driver of inequality is the tendency of returns on capital, which exceeds the rate of economic growth. That discontent and undermine democratic values. Political action has curbed dangerous inequalities in the past.

From Piketty’s Capital what I understood is there have been systematic acts done by the states to create inequality. Now, I am encouraged to find out how it had been accomplished and how it can be stopped. According to him ‘‘More interestingly, the ill intention of super managers, wolf of wall street, footballers and billionaires who are competing to accelerate their income whereas majority of the people are the loser. The super-rich do not produce the ‘‘wealth’’ but get highest salary from it. This is an absolute form of theft.’’

Let me allow, here, to quote a saying of Adam Smith that links up with ill intention of the invisible hand, from the Wealth of nations (1776) ‘‘our merchants and masters complain much of the bad effects of high wages in raising the price and lessening the sale of goods. They say nothing concerning the bad effects of high profits.’’ There is an ideological similarity on invisible hands between Piketty and Adam Smith although so-called media banked Piketty as left academia whereas Adam Smith is a profounder of laissez faire.

Aforementioned literatures have provided the insight thought and following articles they have shaped my mind that there is something missing on the way of organising economic development. I have taken into consideration following brainstorming thoughtful articles as well-

Globalization is dead: What now an article written by Paul Laudicina for World Economic Forum (WEF) says ‘‘unfortunately, he was less sure that technological change would be positive. The exploitation by violent extremists of social media is a case in point of the double-edge that new technologies can bring … He claimed the Globalization is dead with the emergence of four potential new global economic orders, each with substantially different outcomes for governments and multinational companies alike. They are Globalization 3.0, Polarization, Islandization and Commonization. So as the next global order takes hold, organizational foresight and agility will be critical in determining winners and losers in the new global operating environment.[**]

An article The End of Capitalism has Begun, hugely shared in social medias, written by Paul Mason for The Guardian. In the article he says-  ‘‘The market destroyed the plan; individualism replaced collectivism and solidarity; the hugely expanded workforce of the world looks like a “proletariat”…Post-Capitalism is possible because of three major changes the information technology has brought about in the past 25 years. First, it has reduced the need for work, blurred the edges between work and free time and loosened the relationship between work and wages. Second, information is corroding the market’s ability to form prices correctly meaning markets are based on scarcity while information is abundant. Third, we’re seeing the spontaneous rise of collaborative production: goods, services and organisations are appearing that no longer respond to the dictates of the market and the managerial hierarchy.’’[**]

The end of Banking: Money, Credit, and the Digital Revolution is another mind-blowing book written by Jonathan McMillian. Two author have used pseudonym as Jonathan McMillian to write this book. According to the author the digital revolution turns out to be the game changer that calls for the end of banking. So authors are unhappy about how economists and financial professionals dealt with the financial crisis 2007-2008. And another reason was the impact of digital revolution on existing institutions was also barely an issue. According to them – financial professionals- bankers and regulators are not interested in real solution. They rather keep the deeply dysfunctional system we have today and enjoy the perks as long as possible. There are similarities between Jonathan McMillian and Adam Smith, Professor Thomas Piketty and Professor Joseph Stiglitz regarding the bosses and their attitude on wealth and income as I have briefly mentioned above as well.

Banks are creating inequality and unable to handle financial crises. They must be responsible to handle any kind of financial crisis and inequality too in line with technological advancement and digitalization. 

The banks are sensible to organize the financial system in the industrial age for productive and fair economy, but it got out of control with the rise of information technologies. Banks did almost nothing to avert the financial crisis of 2007–08 as it was an inevitable consequence of banking in the digital age. But, even during an extreme financial crisis banks are in profit.[**]

Let me add another thought from Kemal Dervis who is advocating the  ‘‘helicopter money’’  According him ‘‘Central-bank balance sheets have swelled, and policy rates have reached their “near zero” lower bounds. There is plenty of cheap water, it seems, but the horse refuses to drink…policymakers have one more option: a shift to “purer” fiscal policy, in which they directly finance government spending by printing money – a so-called “helicopter drop…The new money would bypass the financial and corporate sectors and go straight to the thirstiest horses: middle- and lower-income consumers directly, and through investment in job-creating, productivity-increasing infrastructure.’’ We can be agree in somehow on ‘’helicopter money’’ may help to increase the purchasing power of lower income group so that inclusive economy in the real sense is possible. And also, here, Dervis clearly mean that banks and corporate sector are the barrier of resources to go to the bottom.

According to Dervis, Vice President and Director, Global Economy and Development, Banks are rather creating inequality. Let’s see some key findings of the roles of banks how they are creating inequality. Graham Hodgson has researched on Banking, Finance and Income Inequality in 2013. According to him  ‘’The gap between the very richest and the rest of us has increased continuously over the last thirty years. Many factors contribute to this growing gap, but one of the most significant is least understood: the role of money creation by banks and the way money creating need to be changed to tackle inequality’’ he said. Further Hodgson gives some reasons how banks create inequality:

  • The entire money supply is effectively ‘on loan’ from the banks.
  • Money created by banks pushes up house prices and the wealthiest who benefit most from these rising prices.
  • Money created by banks can fuel stock market bubbles.

There is an another article in Bloomberg Business written by Luke Kawa. he has  underlined that ‘’The rich are getting richer and Central Banks Have Made Wealth Inequality Worse.’’ The study was accomplished by Dietrich Domanski, Michela Scatigna, and Anna Zabai for the Bank for International Settlements. The study focused on evolution of wealth inequality in France, Germany, Italy, Spain, the U.K. and the U.S. and how it was influenced by monetary policy.’’[**]

A report from the Organisation for Economic Co-operation and Development (OECD) on healthy financial sector that supports long-lasting, inclusive growth concludes that ”over the past 50 years, credit by banks and other institutions to households and businesses has grown three times as fast as economic activity. At these levels, further expansion is likely to slow long-term growth and raise inequality” According to OECD reportfinancial expansion fuels greater income inequality, mainly because: People with higher income benefit more than poorer ones from credit-financed investment opportunities and the sector pays high wages, which are above what employees with similar profiles earn in the rest of the economy. This premium is particularly large for top-income earners”. Hence, by analysing the report Heather Stewart for the Guardian says ”large banking sectors widen inequality and slow growth”.[**]

Indeed, inequality has been largely ignored in discussions of monetary policy. Of course, central banks are not charged with the task of addressing inequalities in the distribution of wealth, income or consumption – nor are they dealing with the broader challenge of promoting economic justice for society as a whole.

The researchers find that contractionary monetary policy shocks have significant long-run effects on inequality. Hence ‘‘Central bankers are running down their arsenal, but other options exist to stimulate the economy’’[**]

It is irrational to underestimate the role of banking in the modern business. But if we focus on inequality definitely there are some important issues have been  ignored by the banking system. So far, central bankers have a technical, non-judgemental interest in the distribution of income and wealth in a society.

So what do we know about the impact of monetary policy on the distribution of wealth, income and consumption? A comprehensive study published recently by the National Bureau of Economic Research that (NBER) outlines five potential channels by which more accommodative measures might affect inequality.

Recently a scandal of Panama Papers has raised serious questions of banker’s responsibility  why those ‘dirty money’ are being handled by the banks!

Finally, let’s consider a saying of Jimmy Carter, Former US President, ‘‘Globalization, as defined by rich people like us, is a very nice thing…you are talking about the Internet, you are talking about cell phones, you are talking about computers. This doesn’t affect two-thirds of the people of the world.”[**]

Conclusion

So, as said by many, Banks are creating inequality and unable to handle financial crises of 2007-08. All ‘profit’ we create or money we earn ultimately goes to the bankers. They are mediating more than producing capital. Hence the theme is current banking system seems unable to cope with digitisation itself neither able to short out the financial crisis.  Specially uncontrolled investment on hire purchase and housing is considered as a sources of inequality. They are less productive for the economy but less risky for the banks.

Those problems are created knowingly or unknowingly with direct involvement of the state. Because state has provided the laws and regulations to do so. By using the state law BoDs, CEOs and business houses are free to take decisions how to allocate income among the factors of production.

Banks also  handle dirty money in any way that is unfair and bad practice. The question is  their dirty

Fourth Industrial Revolution, cryptocurrency and Bitcoin are on their way to new financing system. So financial system must be ready to handle the Digitalisation sooner the changes introduced.

Bankers must be responsible to handle any kind of financial crisis and inequality too in line with technological advancement and digitalization.

The policies allow to create inequality must be checked and overview by an independent body and bring change accordingly.

Feature Image: The Guardian/Ben Stansall/AFP/Getty Images


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6 Comments

  1. Fantastic post, Check this one as well

    The way we do banking, King thinks, needs to change. As it turns out, he has a powerful idea for how to change it. “The End of Alchemy” is about more than this one idea — which doesn’t actually appear until roughly 250 pages into the book. To the idea itself he devotes 40 seriously interesting pages, and I have here only a few hundred words. But this idea is the heart of his book and worth telling people about. So here goes:
    http://www.bloomberg.com/view/articles/2016-05-05/the-book-that-will-save-banking-from-itself

    Liked by 1 person

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