Capital Institute | The Future of Finance

A Letter to the Hopeful Inhabitants of the Anthropocene

A hypothetical letter from the future to today’s global citizens. Written by John Fullerton for the House of Futures In100Y Project and released today on their site.

A hopeful vision for the future inspired the founding of the Capital Institute and motivates us to contribute to building and understanding paths to a sustainable and just tomorrow. This letter is an attempt at imagining what may get us there.

“Two mental constructs will direct human thinking in the next Millennium, relativity and holism.”

- Albert Einstein, 1926.

Dear Global Citizens of 2012,

The relative calm we experience in the early 2100s makes it easy to forget just how turbulent and uncertain life was in the first half of the 21st century. We now consider the horrific events of September 11, 2001, to have been the trigger for the Great Emergence. More accurately, it began with the quiet observation in 2000 by Nobel Chemist Paul Crutzen and his colleague Eugene Stoermer that human civilization had shifted into the Anthropocene, the Age of Man. The stable twelve thousand year Holocene had come to a close.

What has become clear a century later is that 9-11 marked the turning point from the expansionist industrial era to the beginning of the interdependent knowledge era. With that shift, gradually over time, a competitive world culture began to give way to the cooperative world culture we experience today. It would take half a century before we would see how much the global community benefited from having women leading the majority of nation states and global institutions. Embedded within the cooperative world culture that characterizes the Great Emergence, of course, lies the exponential and accumulating growth of knowledge that defines human civilization today. This emergence was probably inconceivable by concerned holistic systems thinkers staring over frightening exponential growth curves of atmospheric carbon, soil loss, and biodiversity loss around the beginning of the 21st century. How their concerns could have been ignored remains a mystery to this day.

Today it is obvious that our survival as a species resulted from the shift to holism as the organizing paradigm for the human economy. In the year 2020, when the future looked particularly grim, a young South African PhD student studying holistic finance at the Capital Institute discovered a letter from Albert Einstein to Jan Smuts (the last South African leader to oppose apartheid before Mandela) written soon after the publication of Holism and Evolution in 1926. The letter was a footnote in the landmark “Third Millennium Economy Report” published by the Capital Institute and a group of leading ecological economists and systems thinkers in 2012. That report explained how our ethics, our economy and finance, and our governance systems all need to be grounded in the biophysical reality of the earth as understood by modern science, rather than in failed Cartesian ideologies from what were once called “political parties” competing for power. It was the inspiration for the vital Earth Reserve Cooperative, providing all critical biosphere operating data with which to holistically manage the global economy.

The idea of holism was nearly a century old in 2020 when the Einstein letter to Jan Smuts went viral on CommunityShare, the community owned social network platform that replaced Facebook without warning not long after its historic IPO. Holism was an idea whose time had come. What had been so hard for many early holistic management practitioners like Allan Savory to explain suddenly became obvious. Almost overnight, the financial markets connected the dots and discounted the reality that peak oil didn’t matter after all. Statesmen and corporate executives had no choice but to negotiate how to share the economic pain of leaving all remaining coal and Tar Sands oil safely sequestered in the ground, as well as 80% of conventional oil, and 25% of natural gas in order to mitigate the looming ecological catastrophe that was plain for all to see.

The expansionist industrial era was over for the developed world. Despite the difficult decades that followed, the ground was laid for the cooperative, knowledge driven Great Emergence that exploded seemingly out of nowhere. Nowhere and everywhere: the vast and ever compounding knowledge resource network that defines our post-modern economy, creating the unbounded prosperity we enjoy today.

With gratitude for your courage,

Jack Fullerton, grandson of the Founder, Capital Institute 2112

Listen to the interview with John Fullerton, shown at the second In100Y-seminar in June 2011.
Guest Post: Is Sustainable Capitalism an Oxymoron?

We post here the response of Allen White, Director, Corporation 20/20 and Senior Fellow, Tellus Institute, to John Fullerton's recent blog post reviewing Generation Investments' white paper, Sustainable Capitalism.

We should all feel a sense of indebtedness to Al Gore, David Blood, and the Generation team for raising critical issues regarding “Sustainable Capitalism.” But are they missing the forest for the trees by largely focusing on symptoms of the current system rather than its structural flaws? Aren’t these characteristics of contemporary capitalism creating the volatility and perils that endanger both long-term economic and ecological well-being?   Certainly short-termism, flawed compensation structures and quarterly earnings reports induce behaviors antithetical to long-term building just and sustainable economies. But tinkering around the edges is unlikely to yield the values and behavioral changes that are foundational to systemic change.

Numerous observers point out that modern capitalism, and the markets that enable it, have evolved into a machine built on extraction not regeneration, competition not cooperation, and accumulation not well-being. Theoreticians and practitioners alike are prone to tinker with many of the symptoms on Generation’s hit list of needed reforms. But short of confronting its structural attributes, we should not expect market outcomes that respect the Earth’s limits—its “safe operating space”—beyond which irreparable damage is inevitable. Regrettably, this is not what either capitalism or markets as we know them are designed to achieve.

Even the language of Sustainable Capitalism is captive to this misalignment. In Generation’s words, it “…seeks to maximize long-term economic (my emphasis) value creation” through responsible management of financial capital.” But what about natural, social, human and intellectual capital? As long as we denominate all wealth as the handmaiden of economic wealth, the principles of balance, equilibrium and interdependency that define the nature’s intricate anatomy will never be adapted to the economic sphere, which are exactly what true sustainability demands. Generation refers to this multi-dimensionality in its list of “broader ideas that merit attention…Reconsider the appropriate definition for growth beyond GDP...” One wishes stronger language had been used to correct this critical flaw that undermines global sustainability efforts. Time is late to simply “reconsider”—we have been doing that for more than a decade. How about mandatory reconstitution of national accounting systems by the year 2018 under the auspices of a new, muscular and enforceable international accord.

Financial markets, the playground of both Generation and all modern capitalist economies, are vastly over-rated as instruments of creating broad-based well-being.   Of course they serve an essential transactional purpose for buyers and sellers of securities (or insecurities, as the case may be). But the drift toward market fundamentalism – minimally regulated, oblivious to nature’s limits, loaded with information asymmetries and high frequency share trades amounting to tens of billions daily --has wreaked havoc to the lives of millions worldwide. And still the appetite among market makers to further reduce controls on market excesses remains insatiable.

Beyond the largely symptom-based prescriptions of Generation’s Sustainable Capitalism, I suggest a few actions that at least approach the structural deficiencies that underlie market failures that cannot be solved simply by better information or expanded offerings of “sustainable investment products.”

Regulate financial products at the pre-commercialization stage.   Governments worldwide assess (the Food and Drug Administration (FDA) in the US case) the public health and safety of food and drugs before commercialization through sound scientific analysis, public review processes, and government commissions dedicated to protecting the public good.   The financial crisis has laid bare the risks of exotic financial instruments conceived in the absence of such pre-commercial, public oversight.   This needs to change.   We need an FDA equivalent for financial markets—a Financial Instruments Regulatory Authority.

Get real about sustainability context.    The responsible and sustainable investment field over –rewards the appearance of sustainable practices while under-rewarding—or outright ignores—true sustainable practices.   In the long-run, it is not sufficient for a water-intensive factory operating in a water-scarce region to gradually improve its per unit water-intensity performance if the aquifer upon which it depends faces exhaustion within a decade. The same for incremental improvements in carbon emissions and biodiversity protection. Investors, companies, rating agencies, communities and other stakeholders themselves need a new generation of leading indicators that position performance assessment in the broader context of the global, regional and local ecological limits and generally accepted social benchmarks for, say, livable wages and income disparities.

Bring back “boring banking.”    Sustainable capitalism cannot co-exist with unsustainable financial markets. As banks have grown in scale and, since the 1999 repeal of 66 year old Glass-Steagall Act, co-mingled investment and commercial activities, systemic risk has intensified to the detriment of all players except, in large measure, the bankers themselves. Exacerbating this situation is the drift from private partnerships to public traded entities among the large investment banks, spawning all the pressures, self-serving behaviors and short-termism such shifts have occasioned.   The recent, high profile, public departure of Greg Smith, the Goldman Sachs executive, is vivid testimony to these conditions. Amar Bhide of Tufts University puts it simply: “If the average bank examiner can’t understand [a financial instrument], it shouldn’t be allowed.”   Amen. Bring back the investment-commercial firewall and let the risk takers fully absorb the risks they wantonly incur.

These measures are hardly a panacea for all that ails contemporary capitalism. But they at least begin to address the structural conditions that persist and block movement toward a more humane, ecological sustainable economic system.

Is, then, “sustainable capitalism” an oxymoron? It will take far more than incremental improvements to the current system to disprove those who believe so. Without a steep rise in political will reinforced by concerted citizen action, sustainable capitalism will remain a distant and elusive aspiration.
Is There a Case for Public Banking in America?
Last week I participated in the inaugural Public Banking Institute conference in Philadelphia - not a coincidence, freedom from tyranny of the banks underscored the program. When I first learned of this idea of state-owned banks as a solution to our economic challenges, I was a real skeptic. Just what we need, our government running banks – visions of teller windows in the Motor Vehicle Department are not comforting.

I met Ellen Brown about a year ago, author of Web of Debt and founder of the Public Banking Institute. She provided a well-researched history of banking in the United States that didn’t exactly match up with what they taught us in the Morgan training program. Most interesting, she told me about the Bank of North Dakota the nation’s only state bank. Established in 1919 during a period of economic depression in its farm economy, and under immense political attack from the private banks in the state, the bank now appears to be the pride and joy of the state, Republicans and Democrats alike.

The bank’s deposits are comprised of state liquidity that would otherwise likely be sitting in branches of what are now money center banks, funding their activities largely outside the state. It has no branches and does not compete with local banks for customers, but instead acts as a “partnership bank” with private banks for the small business credit needs inside the state. The bank is professionally managed, and is reported to have a thoughtful and independent governance structure which has steered it through the economic cycles quite well, including the recent financial crisis. It has been profitable at least back to 1971 based on available data, returning approximately $500mm of profits back to the state coffers since 1945, the majority of that in the past twenty years as the bank has grown.

North Dakota, population under one million, is different that other states. But the $4 billion Bank of North Dakota, like the state-owned grain elevator and flour mill, was born out of economic hardship not dissimilar to what most states in the nation are now experiencing. Public banking of course is a part of the economic fabric in many countries ranging from China and Russia, to Japan and Brazil, but also in Germany where the Sparkassen system of local savings banks accounts for nearly half of the bank assets in Germany. I met a German gentleman now living in Canada at the conference and asked him what he thought of the Sparkassen system. His response was typically crisp: “Like everything in Germany, it just works.”

I’m not ready to embrace a call for state-owned banks quite yet, and there was a connected and far more challenging question under discussion at the conference of whether government or the private banking system should control the credit creation function. This latter question is very complex with implications I can’t pretend to fully understand. But I know it has new relevance in a world of finite physical limits, which are in apparent conflict with a debt based monetary system that by definition expands exponentially. But this is a discussion for another day.

Apart from the predictable “free market” vs. “socialism” shout fest that the question of public banking will encounter, here’s what the case for public banking in America might look like:
- Whatever we might say, banking is already a hybrid private/public sector function. And when push comes to shove, it’s only the lender of last resort (and now dealer of last resort) function of the world’s Central Banks that keeps the system afloat. So the question is not if the State should be involved in the banking function, but how it should be involved. Public banks are one obvious possibility to complement, not replace private banks.
- It appears to work - at least it can work when properly executed. Outside the US, there are many successful and less successful case studies to examine. We should start by studying the German Sparkassen system of local savings banks.
- If structured along the model of the Bank of North Dakota, a system of state banks would complement, not compete with, local place centered private banks, in a cohesive local ecosystem leveraging the “edge effect¹” of value creating boundaries between the private, public and philanthropic sectors within a given region. This appears to be happening in North Dakota.
- A system of state-owned banks in the US adds to system diversity, and is by definition decentralized, adding much needed resiliency to our present highly centralized and concentrated banking system. Furthermore, state-owned banks would never be rolled up into money center banks, so this resiliency is not temporal.
- Public banks would provide a vehicle for taxpayer funds to be recycled productively in support of the local economies, leveraging these deposits by working collaboratively with the local private banks in support of local credit needs, and helping local banks compete with the unfair funding advantage of TBTF mega banks whose real interest is securing cheap deposits to fund whatever is most profitable - lending to hedge funds, lending for leveraged buyouts, or speculating in European bonds for the bank’s house account.
The profession of banking has been overwhelmed by the short-term-focused, transaction-driven business of banking. In our search for solutions, we should be open to exploring deeper direct engagement by the public sector, with all proper caveats regarding governance and political influence. Currently, we allow the TBTF banks to hijack the public sector involvement and subsidy, benefiting management and their chosen transaction-driven brand of finance that is often not aligned with the interests of society. Banking is too important for this state of affairs.

I’d like to thank the Public Banking Institute for putting on a thought-provoking first conference and boldly proposing solutions to some of the problems in our financial system that most need addressing. A careful state-by-state examination of public banking is an important part of the broad financial system transformation the Capital Institute seeks.

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1. In natural systems, an ecotone is the area between two biomes such as where a river flows out into the ocean through wetlands where life is abundant, creating what is known as the “edge effect”. Ecotone literally means the place where ecologies are in tension. Similarly, we see numerous examples of value creating tension at the edges where the private and public sectors intersect.

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