Over the last couple of weeks there’s been an unfolding food scandal in Britain and Europe after various ‘beef’ microwave meals and burgers were found to contain horse meat. It’s prompted a whole lot of debate about supply chains, the ethics of cheap meat, and the cultural taboos of eating (or not eating) horse. But it’s made me think about something else entirely – the banking crisis. The horse meat scandal and the financial crisis may look very different, but they share the same roots.
1. Corporations – publicly traded corporations are duty bound to maximise ‘shareholder value’, ie deliver the biggest possible return for investors. As a supermarket, you can increase profits by expanding, but also by paring costs and using your buying power to secure low prices from suppliers. The suppliers are all bidding for a slice of the supermarket action by also offering the cheapest prices they possibly can. It’s a race to the bottom – who can supply the absolute cheapest hamburger patty or microwave lasagna? If companies are incentivised to push their prices as low as possible, it’s hardly surprising that some start cutting corners.
In the banking crisis, we’re just talking about loans rather than meat. One bank offers a mortgage with no deposit, another trumps them with the 125% mortgage. Borrowing over the phone or the internet? Sure. Loans with no credit check? Okay then. The race to the bottom applies here too, a gush of easy credit to consumers and home owners, all growing the banks in the name of the shareholders. Like the supermarkets pushing one step too far in the search for cheap meat, so the banks pushed their lending beyond what could be repaid – because in the short term at least, it was profitable to do so.
2. Inadequate regulation – the second factor that the two scandals have in common is a regulator not being able to keep up with the market. Britain’s Trading Standards Agency and the Food Standards Agency have both got their investigations underway, but as the BBC’s Now Show put it, this is ‘closing the stable door after the horse has been bolted’. Policing every product on every shelf in the country is a mammoth task, as food networks are global and products are often ‘of more than one country’ as the labels put it. To make matters worse, these are times of austerity and budgets have been cut at organisations such as the Food Standards Agency. They are dismissed as quangos and red tape until the scandal happens, and then everyone wishes they were bigger and more powerful.
In banking, the regulator had similarly failed to keep pace with changes in how banking was done, how derivatives were constructed, and how banks were doing their accounting. When they did find irregularities, they often lacked the power to do anything. If they were given more power, it would have been seen as meddling, and making Britain uncompetitive.
3. Complexity – The third factor is the sheer complexity of our food systems in a global culture. When the horse meat was first detected, the race was on to track it back through the chain. Which factory produced the ready meals, who processed the meat, which abbatoir supplied it? Somewhere down the line a crime has occurred, but it’s very hard to know where. That raises the uncomfortable fact that much of the time, we just don’t know where our food comes from. We have to be content to say ‘it came from Tesco’ and hope for the best.
There was a similar phenomenon at work in the financial crisis, through mortgage backed securities. Mortgages were bundled up, sold on in tranches according to risk, and used to underpin a variety of derivatives. The credit rating agencies kept giving them triple A status, but as we now know, there was a great big slice of subprime lending in the mix that nobody knew was there. Bad lending practice in one country’s property boom could infect pensions and public accounts in another, tipping whole economies into uncertainty.
Food adulteration and banking crises aren’t the only symptoms of this combination of corporate rent-seeking, sleeping watchdogs and global complexity. You could probably make the same comments about the use of sweatshop labour in the fashion and electronics industry.
What can be done about it? There are different answers for each of those three aspects of the problem. There are other ways to set up companies that would neuter the corporate drive for profits above all else. Structures include employee ownership, cooperatives, B-Corps, and non-profits – here’s a list of ten alternative businesses.
On the regulation side, there’s a balance to strike. The last decade or so has seen a preference for ‘light touch’ supervision of corporate behaviour, and that hasn’t really worked very well. Better oversight doesn’t have to mean big government though. Some industries in Britain are self-regulated, using codes of conduct, shared standards, kitemarks and so on. Others are co-regulated, using industry bodies in partnership with a government organisation. Sometimes this works fine, like the Advertising Standards Agency. Sometimes it fails, like the Press Complaints Commission and the phone hacking scandal. Other sectors, particularly important ones like energy or education, have entirely government backed regulators. There is no one-size fits all solution.
However, the supermarkets have been a problem for a some time. Successive governments have looked into their behaviour and then failed to act, or have opted for voluntary codes of conduct that haven’t been respected. The government did appoint a long-expected ‘supermarket ombudsman‘ this year though, which is one hopeful sign.
As for complexity, you don’t have to go far to find arguments in favour of a more localised food network. Likewise with banks, there are distinct advantages to regional or local banks and some countries (like Germany or the US) still have them. There is a trade-off though. The reason companies source internationally is to secure low prices, and many things would be more expensive sourced locally.
Ultimately, that brings us into the equation too. If we didn’t buy cheap meat and take out easy loans, the companies wouldn’t be there to supply them. We can’t separate ourselves from the issue and blame the big corporations. Once again, we’re challenged to ask more questions about what we really need, and what makes life worthwhile. There is no simple fix for these sorts of things, it’s a matter of culture.