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.

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