Thursday, 23 February 2012

Don't Just Move Your Money: Spread It, Recycle It.

Great to see the MoveYourMoney campaign up and running - certainly a step up from the calls for futile mass withdrawals in 2010. But there are two significant gaps in the message.

Firstly: why should we move our money?

We don't need to 'save'. That's not really an activitiy in itself. And it's only one side of a much bigger story. Where do our deposits go?

As a society, our financial challenge is to get surplus cash from those who have it to creditworthy people and businesses who need it. Quickly and cheaply. At the rate that's right for both parties.

Our financial institutions don't enable this right now. They pay very little to interest to savers. They keep too much of the interest that borrowers pay. They use this 'margin' to cover losses from their own poor investments. 

So we've had to invent direct finance services that cut the cost of connecting savers and borrowers - meaning higher returns on savings and cheaper borrowing costs. As each borrower repays, you can re-lend your money to others. Think of it as financial recycling. The banks still play a role - the operators of these new services recycle the money through segregated business bank accounts - but they don't get to use your money the same way as if you opened your own personal savings account.

But this brings us to the second gap in the MoveYourMoney campaign. We shouldn't move our money to just one place. We need to put our eggs in lots of baskets -  we need to diversify more. There are many other baskets for your eggs than those listed.

Yet we are incentivised by government not to diversify. Most of us only get basic tax breaks (e.g. ISAs) for putting our small amounts of savings in the bank or building society (or in regulated stocks and shares).  This not only discourages us from using more efficient services, but also protects banks and building societies (and managed investment funds) from competition. Worse, it encourages us to put all our eggs in a few baskets, so our holdings of surplus funds are not diversified. We're told this is 'safe' to do because at least some of our money is protected by the Financial Services Compensation Scheme. But such insurance does not ultimately make these baskets 'safe' for all of us as a society. It makes these baskets expensive - because as consumers we all pay for the compensation scheme in the end. And we pay again as taxpayers when the highly concentrated risks in the financial system bring it grinding to a halt.

MoveYourMoney may not yet explain the need to get your money quickly and cheaply to creditworthy people and businesses who need funding. Nor adequately explain the need to diversify. But the government is now aware that the regulations and incentives are wrong. And organisations like MoveYourMoney should be helping us to keep the pressure on government so that these problems are actually addressed.

No comments:

Related Posts with Thumbnails