Monday, 29 April 2013

Until the banks start lending our economy will continue to flat line and wealth will only be open to the few

When banks stop lending, industry becomes dominated by a complacent patrician elite. In the years after the Wall Street Crash of 1929 in America, banks were heavily regulated. This led to fifty years of declining vigour in America, in which the aspirational were unable to access capital in a conservative banking system. If Britain is to avoid this fate, somehow we must get our banks lending to the aspiring wealth generators of tomorrow.
President Reagan left office at the end of the 1980’s having overseen a period of growth and prosperity unprecedented in the post-war era. It was no coincidence that this occurred as Reagan deregulated the banks and opened up capital to the ordinary aspiring entrepreneurs, previously only accessible to those already wealthy and to the old institutions.
The rigidity of an overly regulated and conservative banking system, resulting in the concentrated access to capital, meant very simply that America could not grow. These old elites failed to provide the growth necessary in the 50 years after the Crash. It wasn't until President Reagan in 1981 deregulated the system, and encouraged a culture of enterprise and lending, that this trend reversed.
Thatcher did the same in Britain. Never before were ordinary people so able to become very rich. Financiers like Michael Milken took on the concentrated access to capital of the established businesses and put it back into the markets, impelling the economic growth in the 1980’s. This was a key to prosperity and meritocracy.
It is with this in mind when I consider the difficult and sensitive subject of banking regulation today our banks.  If many had their way, bankers would be covered in tar and feathers. The EU has recently voted to cap bankers bonuses at no more than the size of their regular salary. Whilst such measures may be popular in the short-term, they do nothing for our flatlining economy and the people desperate to start and grow their businesses.
Regulation cannot come at the cost of encouraging bankers to do what they do best–and that is when they are lending appropriately and generating wealth. Regulation did not lead to a better America in the post war years. Only in a loosened banking sector can markets provide social justice and open access to capital for those who want to and can generate the wealth, indiscriminate of prior wealth and status.
The most important question going forward regarding banks has to be about how the government is to get our banks lending again, so as to continue the vibrant culture of UK industry.
Lending to small and medium sized businesses has fallen dramatically since the start of the recession in 2008
The government has tried to get the banks to lend but to little success. The Funding for Lending Scheme has failed. In the final financial quarter of last year, lending fell by nearly £3 billion. Despite this the government announced last week that it intends to boost funding into the £80 billion scheme. Perhaps it is time to consider more radical measures to get banks lending, to ensure growth, and to see that capital is not confined in access to only a small band of individuals through what is essentially internal protectionism.
One problem banker’s face is fear. Bankers since the Crash in 2008 have been paralysed by a tirade of public abuse. Far from being seen as virtuous wealth generators, the overriding perception of bankers is currently that of feckless, reckless and greedy evil-doers. The banks have withdrawn completely into their shell. In fear of fueling this perception, bankers have become overly cautious and overly prudent. Lending to small and medium sized businesses has rapidly declined since the crash in 2008. So reluctant are our banks today, they are neglecting to lend to the wealth generating small business entrepreneurs of the future.  This festers a culture of internal protectionism, in which those who have already benefited from deregulation face minimalized competition in industry. This leads to complacency. It is the whole country that suffers when banks stop lending. This cannot go on if we are to achieve economic growth and a free and meritocratic marketplace.
Bankers also lack incentive to lend. Interest rates are so low that bankers see no worthwhile return on riskier investments to justify lending. Interest rates have remained at 0.5% for the past 4 years. The death of interest rates alone has done little to kick-start the economy. Banks are at their best when they put their faith in our aspiring entrepreneurs, who simply want to grow successful small businesses and create jobs.
Interest rates have remained unchanged for the past four years, encouraging businesses to borrow
Statistical analysis by Michael Milken in the 1980’s demonstrated that bolder investments are worth making. Banks can demand a high rate in return for these investments, giving them the confidence to lend to individuals determined to grow a business. Milken claimed that although some businesses will inevitably not work out, with wise investment on average banks will make a fortune out of bolder investments. This boosts their profits as well as opening up and providing the opportunity for individuals to start up businesses and pursue their dreams. These are the necessary conditions of a vibrant market economy with open opportunity for those who dare to succeed.
The poor state of bank lending is quite a headache. How Chancellor of the Exchequer George Osborne goes about opening up access to capital in the coming months will be crucial to the prospects of growth in our flatlining economy. The pressure is very much on Osborne and the incoming Governor of the Bank of England, Mark Carney, as they seek the growth necessary to avoid a triple-dip recession.

Monday, 15 April 2013

This overdue benefits cap may just restore credibility and faith in our beloved welfare state

Today the cap on benefit payments kicks in across London. This marks the beginning of a serious approach in tackling the worst cases of welfare dependency in Britain. It is the government which is ensuring, despite a tough economic climate, that it always pays to work, whilst also fostering the conditions which promote work.

The Coalition arrived in 2010 needing serious policies to address serious problems and injustices which developed in our welfare system. Whilst Labour buried their heads in the sand during their 13 years of government and escalated the problem of growing dependency and worklessness, Cameron and Iain Duncan-Smith are paving the way for a culture shift which gets to the very root of the causes of benefits and unemployment culture. They are promoting sustainable employment and opportunity by cutting government dependency and supporting the private sector to provide jobs. Over a million jobs have been created, and numbers of people in employment are highest ever since records began.

The rewards from working diminished under Labour. Labour hiked welfare spending by a massive 60%, whilst at the same time neglecting to link the minimum wage with inflation. This meant that the benefits of being in work reduced throughout Labour's 13 years, and the gap between those working and those out of work eroded. It became increasingly the case that people out of work were better off than those in work, trapped by wage depression. This injustice was confounded by Labour’s increased taxes on working people. This essentially meant that those on more modest income in work were subsidising the benefit rises of those out of work. This is hardly the legacy of a self-titled ‘One-Nation’ Labour Party. They left a nation divided between those who work hard and pay their taxes and those trapped into costly welfare dependency, with little incentive to seek work.

What this government has done is cut taxes for the least well off in work. The threshold by the time of the next election for those exempt from income tax will be £10,000. No longer will those on the lowest income but doing the right thing, subsidise those out of work-40,000 of whom claim more than double in benefits than what those on the lowest income bracket earn.  This is an admirable way of reducing the burden on people doing the right thing whist also addressing this bitterly-felt injustice.

The cap is not going to save significant money in the wider scheme of things- One hundred million pounds out of a cut to the welfare budget of eighteen billion pounds, but it does send out a strong and necessary message that the government is serious about ensuring that it always pays to work, rather than to stay on benefits. This has been too major a disincentive for far too long for many to go out and find work when they know they will be worse off in work than being on benefits. It is this emphasis that will reconnect the working man with the Tory party.

The cap of £500 per week for single parents and of £350 for single people without dependents makes common sense. The government estimates that 40,000 households will be affected when it comes into nation-wide implementation in July. The average loss to these 40,000 is estimated to be £93 per week.  This will be a difficult loss for these households but the reality is they should never have been trapped in such costly dependency in the first place. It is this dependency which is more costly to such people, who are limited in their aspirations, dreams and social capital which welfare dependency consumes. A £93 loss per week can be offset by increased conditions conducive to promoting work. It already seems like this is working.

The government claim that 8,000 people in households who receive in benefits more than the average pay have been moved into work. This is quite an achievement during economic hardship and one which surely increases the life chances of children in such environment, where worklessness is too easily normalised.

The strategy of making work pay is given further credibility by the fact the benefits cap will not affect those who are in work most struggling to make ends meet, but determined to do the right thing, like single parents desperate to ensure they bring their children up in a working household. For all of Labour's talk of concern for children being brought up by long-term unemployed parents, almost 2 million children were living in workless households during Labour's 13 years. The Coalition are promoting the rewards of work, a necessary influence to ensure that less children grow up in workless households, which increases their chances of being similarly dependent in adulthood, trapping them in welfare and cultural poverty .

This shift into work can only increase the respectability and life chances of children in such households longer term, beyond the challenging but necessary short-term cost of benefits cuts. Clearly this government is reversing Labour's legacy, but what about measures to ensure future generations are not lost and wasted in welfare dependency and worklessness?

Youth unemployment is one of the biggest crises in social policy we face in Britain. The young people most vulnerable to this are people brought up in workless households. A big obstacle to finding employment is lack of work experience. Employers prefer older candidates who have a proven record in the work place. Young people need work experience to improve their employability. Iian Duncan-Smith has introduced the Work Experience Programme. The Work Experience Programme is a scheme which gives young people the opportunity to work under an employer for 2 months. Employers are incentivised to take part in this or provide apprenticeships in the form of a Youth Contract subsidy. As of last year, half of the young people who took part were off benefits within 5 months of starting the programme.  This has so far proven to be a massive success.

The Conservatives are quietly tackling dependency and the causes of dependency with a serious programme of welfare and employment reform. They are addressing the inherent unfairness of an excessive and counter-productive welfare state which causes working people so much resentment, whilst at the same time has damaged the lives and capital of those trapped on benefits. I do not wish to celebrate the benefits cap for the sake of punishing the most vulnerable, but I cannot help but feel a great sense of optimism that this government is finally addressing a problem that for so long has just been talked about yet never acted upon. This could just save the welfare state from itself.