TLE meets…Andrew McNally

By Rob Foster

How has your career in investment informed your belief in equity, and how did you come to write the book?

I started to have these conversations with colleagues a couple of years ago, based on the premise that equity is the only way to access newly created wealth. The price of your house may go up & down, price of a gold bar may go up & down, if you own a bond it might pay interest, but it’s only equity that broadens economic progress. The whole idea came from recognising what’s happened, which is the reliance on debt has facilitated the ownership of the most important form of wealth into the hands of fewer & fewer people. And so if you want more people to share in wealth they’re going to need some business equity, and as we can see in the book, they don’t have it.

This tied in very nicely with the long term performance of equity versus other assets over a hundred years. So the next part of the argument, that equity is the best recycler of newly created wealth in terms of the impact on wealth inequality, follows fairly simply from that basic point.

I hadn’t properly thought about this for years. So I started drawing diagrams trying to get my head around this whole idea, & when I wrote various articles experts from different fields got in contact – an employee share ownership specialist, an expert on equity crowdfunding – all of the components of the argument came together. I had an article published in The Telegraph which was spotted by the publisher, and it moved on from there.

The hardest bit of writing the book wasn’t the book itself, it was the work I had to do to mitigate the risk of being behind the curve academically. Don’t get me wrong, there will always be people who criticise the argument, but I had to study the latest economic theories to understand I wasn’t just being crazy. When I said “ok here’s my argument” – the fear I had was that I would write something that some professor somewhere would say “hang on, we worked that all out ten years ago, this guy doesn’t understand modern financial theory”.

What I discovered was that the whole thing is even more of a mess than you have ever imagined – incumbents of modern financial theory developing ever more complex mathematics & complicating their theories so much to defend their core premise that actually they’re becoming incredibly irrelevant to the real world.

You refer in the book to the creation of a “perfect financial religion” of capitalism: the free market that exists independently as a naturally occurring phenomenon, but your argument is that it can be deconstructed & reconstructed to suit our purposes.

Capitalism was allowed to develop & ultimately thrive because democratic institutions were put into place that allowed it to survive. Economics as a science is in crisis because it doesn’t accept the role of government in allowing the systems it studies to function in the first place.

All of these theories are predicated on the view that you and I are rational, optimising calculating machines that work selfishly & independently of one another, and we know that is simply not true.

Some people may confuse my thesis & my solutions for another version of free market libertarianism – another proponent of Thatcherite share ownership – but what I am saying is that what it requires is government right in the centre ensuring that the system broadens ownership. In a way, yes my theory is free market & capitalistic as a solution but right at the centre you need government at the centre protecting that process. We currently have exactly the opposite, we have central banks that aren’t democratically accountable at all & government egging them on. The outcome is extreme debt & extreme inequality.

Your arguments go against the prevailing trends of economic theory and coming from your position, writing from inside the system…

Most people in government, certainly in Parliament, don’t understand the financial industry. They’ll say “We need to change culture of banking”, but they ignore the elephant in the room that banks are woefully, woefully undercapitalised, having nowhere enough equity on their balance sheets. In a way what I’m calling for is pretty radical.

Readers of Debtonator might be surprised by some of the arguments being put forward by someone with your background. Would you say your views are common in the financial industry?

Early in the book I put forward a very basic summary of the difference between the debt & equity contract, & in a way I was almost slightly embarrassed writing it. After 25 years I have a lot of contacts in the financial industry– my fear was they’d be thinking “God why is he writing this in such as a basic way?”

The truth is that in the last 25 years we’ve all been programmed to think that whether a company finances itself with debt or equity doesn’t really matter, that it won’t affect the value of the firm. Ready availability of credit especially from the central banks has stopped even people in the City of London thinking about what the fundamental difference between the debt contract & the equity contract actually is & so when you ask “Do people share my view?” I don’t think people in industry have thought about it that much, because we’ve been programmed for such a long time not to think about it. Central banks are right at the heart of the problem. Even people in the industry don’t understand the impact of what central banks have done since 1971.

Your solutions differ from those put forward by the likes of Piketty, for increased wealth taxes, which seems to be the one proposal that seems is easily understood.

I refer in the book to When Money Dies by Adam Ferguson, probably the most accomplished account of the German Weimar Republic and the inflation at that time, which points out that right at the peak in 1923 just before it all caved in people still blamed greedy industrialists, foreigners, immigrants, speculators, obviously the Jews at the time – they blamed everyone apart from the printing press. The reason I included that in the book is that people find it very easy to blame all sorts of things & not see the obvious, that central banks are at the heart of the problem.

In a way dealing with inequality by having confiscatory wealth tax or extremely high progressive income tax – some of those things are valid but they still don’t switch of the engine of what’s causing the problem in the first place. What I’m suggesting is not confiscating wealth, it’s making more people wealthy, broadening the ownership of the wealth & you cannot do that unless there is a level playing field of access to credit to build that wealth. There’s the analogy of 186 Homestead Act in the US; Lincoln gave everyone the right to own 160 acres of land but they had to work that land for 5 years before they owned it. So it broadened ownership but you had to earn that right. The suggestion at the end of the book that banks create new pools of equity capital in a way is analogous to the Homestead Act –what I’m are saying is look we will finance you to build pools of ownership of equity in productive assets & you can grow equity from the earnings of those assets.

The Federal Reserve has increased its balance sheet by $3trillion since the crisis. That could have been $3 trillion of new equity capital in the US more broadly owned, & already in 8 years that would have resulted in a profound shift in US society. So all I’m saying is central banks can use their power to allow people to earn capital in the way they earned ownership of land through working the land.

In a way this is a really fresh idea, that’s not really been proposed widely or been thought about much at all, that to me seems to make perfect sense.

What other factors do you think are important in tackling inequality? For example education, the housing market and so on.

Home ownership is a good thing, security creates prosperity & home ownership is part of that. But it can’t go on forever. There’s a big illusion going on here about the one way push to get people to own homes fuelled by debt, especially overly cheap debt through central banks, because if it’s overly cheap all it does is inflate the price of the house anyway.

At the moment there seems to be a new policy every week to get more people to buy overinflated houses at higher & higher prices, & I’m not quite sure in the end that’s in people’s interests. Broadly, ownership of houses is a good thing, but we need to better understand that ownership of productive assets is a good thing.

In terms of education, I’m a working-class lad from North of England – I suspect social mobility was at its greatest at around the time I turned 18 – & I suspect its gone backwards quite substantially ever since for many reasons. One of the things I’m interested in is this separation in society where you have a few who separate themselves & one of the problems is that socially you don’t get the infusion of ways of behaving & not behaving through society. I was fortunate through my education, but there’s something beyond even education that defines social mobility. Your value system, your beliefs, the way you conduct yourself, the way you are motivated – those things really are infused through society & through integration & I would argue it still comes down to extreme credit creation & debt that is behind this ultimately. I’ve written a piece called “Feudal Burden” where I argue debt has almost taken us back to the feudal era where movement up & down the social ladder is no longer normal; that’s not an argument for this book but I will put it on my blog.

There’s an anecdote in the book about being let go after the dotcom bust in 2002. What was that period like to live through?

It was one of the most exciting times of my life. I was in a big American investment bank in one of the most extraordinary times in financial history – it really was quite extraordinary. Actually there was a lot of damage done in the aftermath of the dotcom bust but we faced two of the biggest structural shifts that we’ve seen in a hundred years – the arrival of mobile technology & the World Wide Web. To finance both of those you needed massive shifts in capital. Yes there was a lot of damage – 50% of the companies listed on the NASDAQ were bankrupt by 2004, but out of it we’ve seen the two most productive changes in the world in a hundred years, these two phenomenon. As for the crash itself – the impact economically was nowhere near the impact of the crash of 2008, because the one in 2008 was purely a debt problem. The 2002 problem was an equity bubble & an equity collapse – which makes my broader societal point, that if we use equity to finance ourselves we are more resilient. If we use equity to finance our system we can cope with shocks & changes & shifts. You can’t do that with debt because it’s a fixed contract.

It was a period where there was a lot of pain & a lot of excitement. No one is immune to these problems, but out of it society got something great, & I’m not sure society got anything great out of the bust of 2008.

What’s next for you?

I’m in the process of setting up a new asset management business that will do a number of things, but it will be working to a different concept and doing things in a very different way. A key factor is resilience & I’m interested in the things that really make corporations resilient, & social constructs – how they treat people, how they deal with their customers, do they have an open system of innovation?   We’re building an investment model that’s very different, so it’s at a very early stage.

Obviously we’re at the marketing stage of the book, and I want to get the message out there because I believe in it. And the next plan is to do something a little bit more formal along the lines of a blueprint looking at taxation both on the savings side & the corporate side, there’s culture –this idea of owning a stake in economic progress as a good thing rather than something to be frowned upon or something for the rich, so there’s a big cultural shift to influence that. New technology, crowdfunding, central bank policy right at the heart of the problem – there’s a lot there for a think tank or forum or body, to put together into a really broad programme which would obviously require a range of experts. It’s a lot to pull together under one roof, but a very broad & interesting programme.

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