Douglas Goldstein: Geoff Mulgan is the chief executive of NESTA which is a charity that
works to increase innovation in the UK.
After the markets meltdown in 2008, you spoke about the need for change and I kind of figure
out if you feel there’s been any substantial change in the systems that might protect people
from such a meltdown in the future?
Geoff Mulgan: My interest over many years has been on how governments that have democracies
can be better at handling the long term dealing with the big issues that really matter rather
than getting caught up just in day to day problems and spin and hype and so on.
And I guess when the massive crash happened in 2007-2008 and it was clear that the whole
set of models were no longer working off, financial system was in meltdown, I hoped
that that moment would be used to fix some of the deeper imbalances, the problems particularly
in countries like the UK and the US.
I think what’s clear now looking back seven or eight years from 2016 is that governments
in many ways did very well on the tactics.
They did respond very radically to the scale of the crisis pumping huge sums of money into
the system, bailing out the banks and the US bailing out in the car companies but very
little was done to actually address the deeper long-term problems and that’s why many people
now worry the system maybe almost is fragile now as it was 10 years ago.
We’ve got a very serious risk of yet another major crash.
Douglas Goldstein: So is that risk because of things like a housing bubble or might there
just be some other issue that we just don’t see that could be causing that crash?
Geoff Mulgan: A lot of the problems in the 2000s came from a financial system which was
creating enormous leverage, enormous levels of risk which were down the efficiently by
real savings or activity in the real economy and throughout history whenever that happens
too much, you get too much of a gap between the monetary economy and the real economy
it’s meant to represent, at some point you get a crash and although there have been some
minor changes, we still have huge ratios in banks between their underlying assets and
how much the lending despite the warnings of many experts to try and fix that, we have
certainly signs of housing bubbles in countries like my own.
We still have big overhangs of public debt in many countries around the world and the
really striking thing in Wall Street and to degree in Europe is most of the people in
institutions which were most involved in creating the problems in the 2000s are still there,
still actually doing [audio glitch] for themselves, almost no one would punish, remarkably few
people lost their jobs and it’s almost as if the systems fail to learn.
It had an amazing opportunity to really rethink how money was organized and that opportunity
was flanked.
Douglas Goldstein: It seems the takeaway from this is that if everyone knows the government
is going to backstop the mistakes that people are going to make, why wouldn’t the banks
take risks again going forward and so organizations like the FDIC in America which we all say
“You have to have the government there to protect the banking system” because people
have to know they can always get their money out, maybe just a concept of having that is
the real problem and we have to just allow people to know what the risks are and say
“I’m either going to put the money in the bank or I’ll use the treasury or a different
bank from the UK that might be safer.”
Are those the type of systemic changes you’re talking about?
Geoff Mulgan: Yes and I think many people at the time of the crash said that we had
a system where the gains were privatized, they went to the people working within the
system and the losses and the risks were socialized, were spread around everyone else who had to
bail the system out when it crashed.
That is still largely the case and I think either you have to move to a system where
you much more tightly regulate the banks so that they are not so exposed or leveraged
or you have to have true risks so that as you say you allow some of them to go under
or you use other methods.
One of the things we’ve been interested in here is building up alternative kinds of
finance, peer to peer funding and new entrance to the banking market, much more digitally
based funding tools which often don’t require the same levels of risk and exposure as we’ve
got in our banks.
I think the bigger risk here though is always what went wrong in the UK and in the US in
the 2000s.
We became so obsessed with the financial sector and allowed it to take such enormous profits.
In the US, it was about 40% of all corporate profits were going to finance by the middle
of the last decade, that was actually sucking value out of the real economy and if you’re
concerned about the long term in any country, you’ve got to be concerned about investment
and the underlying springs in wealth which are things like knowledge, technology, innovation,
infrastructure, things which take quite a long time to materialize but actually are
the only ultimate sources of wealth and if you allow too much to be siphoned off by what’s
meant to be a service, finance is meant to serve to real economy not dominate it, you
shouldn’t be surprised if the rest of your economy risks than stagnating and you might
get the productivity problems which we’re seeing very, very acute right across Europe
and North America at the moment.
Douglas Goldstein: You said that the gains were given to private individuals but the
losses were socialized.
Isn’t it true that AIG paid back an extra $20 billion, in other words the US government
actually profited even though for a long time people thought they weren’t going to?
Geoff Mulgan: In a few cases, the deals ended up quite good but I think if you look at most
of the deals, the tax payer hasn’t done well out of them and of course the overall
effect of the crash which was a crash almost entirely driven by the behavior of financial
institution’s GDP is still well below what it would’ve been without the crash.
So essentially many other people are paying the process for mistakes made by really a
very small number, most of them didn’t in fact pay much the price for any stakes at
all.
Douglas Goldstein: It seems to me that ultimately in the crash in 2008, there were a very few
people, even in the government it was mostly Ben Bernanke who would convince the other
people at the fed about one decision or the secretary of the treasury and so literally,
there were a couple of guys sitting in Washington making decisions that had multi-trillion dollar
impacts.
So I’m actually very interested in hearing more about your other proposal which I guess
for example peer to peer financing which does imply that there is risk but people are willing
to take that risk.
Is that how it works?
Geoff Mulgan: One of the problems with banking systems is that they often get effective monopolies
over the creation of money and creation of credit given that essentially by government.
So not surprising they can become very rich.
So one of the is to try and open up competition so it’s much easier for new comers to come
along with different ways of lending, different ways of raising money, different ways of intermediating.
We work a lot with the government in the UK to open up those markets.
There are things like peer to peer lending, crowd funding of equity, there’s a whole
series of non-bank lending models and of course, there’s a very big now social investment
sector which hardly existed 10 or 15 years ago which is trying to raise capital to achieve
both the financial return and a social return.
We’ve had new financial innovations in government like social impact bonds, development impact
bonds, trying to use clever financial ideas but to generate real value and in a way to
answer the complaint made many years ago by Paul Volcker who was the head of the Federal
Reserve who said he couldn’t think of any good financial innovations over the last 20
years except for the ATM, that’s a slightly extreme point, but it clearly was the case
of many of the innovations in the 2000s were good for the sellers but really not very good
for the buyers at all and quite disastrous for the system.
And so the really clever people in finance to use that brain power to solve real problems
to create real value for the customers in societies to improve the environment, solve
social problems seems to be a much better approach than just pumping more money into
the old system.
Douglas Goldstein: It seems that these new ideas either they can be directed by the government
or by organizations like yours or just by allowing an open competition without so much
regulation but with an insistence upon transparency would allow new ideas and new people to come
in.
Is that the way to go or do you feel this has to be a top down solution?
Geoff Mulgan: I think the ideal thing is that you allow an open market so people can generate
ideas.
In London where I am at the moment, we have a phenomenally innovative financial technology
sector constantly devicing new digital tools for lending money, handling identity etcetera.
You make it easier for them to answer and you make it easy for them then to talk to
the regulators about what is an appropriate level of regulation.
Usually, that’s going to be something, otherwise, it’s too much of an imbalance between the
buyer and the seller and fully laissez-faire financial markets tend to be a bit disastrous
if you have too much regulation then the new comers have no place, no way of getting in.
So what we’re saying in cities like London, New York but also others like Berlin, I’m
thinking isn’t it tend to have a much more dynamic conversation between the regulators
and the new comers, the insurgents rather than them having them dominated by the incumbents
and kind of cozy relationships, they used to be between central banks dominant regulators
and the big players which were usually designed to keep everyone else out.
Douglas Goldstein: How can people follow you and follow the new innovations that you and
your team are working on?
Geoff Mulgan: The organization I work for is called NESTA (National Endowment for Science
Technology and the Arts) in the UK.
Our website is www.nesta.org.uk.
We are both an investor, a researcher, a runner of programs.
We also do big events in the future.
We have several thousand people coming to our festival of the future in September if
anyone wants to visit London then and lots on our website on new ways of solving social
problems and new ways of making money achieve more.