8: Finding the way out

I’ve been trying to follow a nagging thought through to its conclusion. We know to expect that flooding risk will extend to an ever increasing proportion of the UK housing stock. But in the context of financialisation, mortgages underpin bank lending, and by extension the wider financial system. And a majority of households depend on their house as a savings vehicle. So what happens when physical climate impacts destroy the real assets that households and the financial system are relying upon?

This is part 8. Finding the way out.

---

Finance has a purpose. We depend on finance for making payments, allocating capital, managing personal finances and handling risk. But finance should support, not overshadow, the real economy.

The preceding sections have laid bare the fundamental weakness of our current financial system: an over-reliance on debt-fuelled growth that has transformed banking from a service industry into an extractive one. This transformation has created a fragile economic structure where financial stability depends on ever-increasing levels of household debt, rising asset prices, and the financialisation of basic necessities like housing.

Reimagining finance

To move beyond this unsustainable model, we need to reimagine finance with its proper social purpose restored. This requires several fundamental shifts:

1. Addressing climate-housing risks: The convergence of climate risks and property markets represents the most immediate threat to financial stability. We need a comprehensive approach that includes:
   • Reforming mortgage regulations to reduce systemic risk, including reconsideration of the UK’s full-recourse mortgage system
   • Climate-resilient housing policies and investments
   • A just transition program for homeowners facing climate-related devaluation
   • Public investment in climate adaptation for existing housing stock
2. Separating utility banking from speculation: The core payment and deposit functions of banking should be ring-fenced from speculative trading activities. Following John Kay’s recommendation, we should separate the deposit channel completely from banks’ trading activities. Utility banking that provides essential services should be treated as critical infrastructure and regulated accordingly, while investment banking should bear its own risks without implicit government guarantees.
3. Breaking the debt-growth dependency: Economic growth should be driven by productivity improvements and wage growth, not by ever-increasing debt. This requires macroeconomic policies that focus on sustainable value creation in the real economy rather than asset price inflation. Research by economist Atif Mian shows that economies can grow without relying on the debt super-cycle – but it requires deliberate policy choices to support labour income over asset wealth.
4. Democratising financial stability: Financial security should not depend on asset ownership. We need to build pathways to economic security that don’t require households to take on ever-larger debts. This means strengthening social safety nets, supporting retirement systems that don’t depend entirely on asset markets, and ensuring direct investment in social infrastructure rather than relying on private debt to fund public needs.
5. Reorienting central banking: Central banks have become trapped in a cycle of artificially low interest rates to prevent debt deflation. We need central bank policies that consider not just inflation and growth but financial stability, inequality, and long-term sustainability. This means rethinking the tools, targets, and governance of our monetary authorities.

The finance-led growth model has reached its mathematical and ecological limits. The convergence of climate crisis and financialisation now threatens not just economic stability but the basic financial security of millions of households. Yet this moment of crisis also creates an opportunity to fundamentally reimagine our financial system.

By restoring finance to its proper role – serving rather than dominating the real economy – we can build an economic system that delivers genuine prosperity and security rather than illusory wealth built on unsustainable debt. The path forward requires both technical reforms and political courage, but the alternative – continuing down our current path until it all comes tumbling down – is far more costly in human and economic terms.