Category Archives: Blogs

POLICY FOR ECONOMIC RE-BALANCING

What if Andrew Adonis and George Osborne are right?  What if the key question for re-balancing the economy (not a phrase Adonis used) was to force through a major new devolution of economic power to the city regions?

What if Michael Heseltine’s was right in his 2012 review into the mix – published with a full-page portrait of the great Liberal reformist Joseph Chamberlain – that Chamberlain’s innovative, entrepreneurial Birmingham in the 1870s is the new model we must aspire to?

It means we will have to learn the lessons of attempts before.  Both the main engines of devolution under the coalition, the Localism Act and City Deals, share the same weakness – they are too often stymied in practice by Whitehall.

In the same way, the Treasury stymied an ambitious plan for tax increment financing (letting cities pay for projects by keeping the tax revenues that result).

In other words, to take these ambitions seriously, politicians need to go further than setting out their ambitions.  They need to say how they will break through the restrictions of Whitehall.

They also need to say, not how this will work in Manchester or Bristol – that much is obvious – but how their plans will transform the economies of Bradford and the other struggling cities.

This isn’t going to work if it is just about how successful cities can capitalise on their success.  The issue then remains about whether the less successful ones are being held back.

I’ve argued before that there is an ultra-micro economics sector emerging – new local banks, new local energy installations, new local enterprise institutions, new ways of procurement, and maybe even new kinds of money.

It is in the earliest stages, and designed to look afresh and what assets any neighbourhood has – wasted land, wasted people, wasted resources – and turning that into a sustainable economy that can provide some measure of economic independence.

Those are questions rather than solutions, though some solutions are beginning to emerge.  This very local economics is potentially a basis for greater self-determination, and it needs to be at the heart of policy.

But what should political parties put in manifestos about it?  The New Weather Institute has published a new report with some proposals, based on work funded by the Joseph Rowntree Reform Trust Ltd.  It is called The Next Devolution and it was published yesterday.

 

The template for a way forward on banking?

The news that Barclays is now investing money and knowhow in credit unions suggests that some of the objectives set out in our Re-banking UK report may be achievable without legislation, as we suggested.

Barclays is to let credit union customers use their Pingit technology and their branches, which is an important breakthrough.

Given that the big banks now control, not just the payments system, but also around 85 per cent of the domestic account market, this may be the only way of achieving the objective. It is hard to see how any government could provide banking services for the unbanked without the major help from the big players.

The problem with this argument is that it doesn’t apply in quite the same way to the small business market.

Project Merlin and other initiatives were designed to funnel money through the big banks and their branch networks to reach small business. The problem was that they no longer ran networks which could reach small businesses. They were no longer part of the capabilities or the business plans of the Big Four.

But the Barclays link-up with credit unions does give us a glimpse of one way forward. The big banks will provide the money and the knowhow for a new partnership between themselves and the new community banking network.

This could be enforced by legislation, as it is via the Community Reinvestment Act in the USA. Or it could be outlined in Parliament and then be acted on voluntarily by the banks, under their own auspices, as they did with the new transparency about where they are lending money, thanks to Lib Dem peers in the House of Lords.

The voluntary approach, if it is possible, would be far more effective and work sooner.

It would unleash the funding and the knowhow we need to build the kind of community banking sector that most other nations in Europe have.  The lack of it here means that we are now the only European nation, apart from Hungary, where small business lending has not recovered to its pre-2008 level. These things matter.

There are of course objections likely from the banks. Why should they? (Because the current situation is corrosive and unsustainable). Why should they create potential competitors? (To avoid the alternative: break up by competition regulators).

But there are reasons why they may want to do this as well. It will mean avoiding legislation that would force them to. It will also mean they can put an end, once and for all, to the accusations that they are not lending enough to small business. It will be a boast they can fling in the faces of their critics who say they are overpaid and corroding the real economy around them.

In short, the Barclays link is important and may prove to be a template for something much bigger.

It only takes one of the Big Four banks to shift their position on this – rather as the secret manoeuvrings and negotiations hosted by Consolidated Goldfields helped bring an end to apartheid in South Africa.

It looks as though Barclays may be the Consolidated Goldfields of banking.

Financial markets are changing again

Financial regulators have to be adept at shutting the stable door after the horse has bolted – and especially so in England, where decades of persuasion are usually required to persuade politicians that the horse has left the stable at all.

Minute examination of its straw continues for some time while everyone else can see the animal rampaging round outside, seeking whom it will devour.

The problem is that the English are a deeply conservative breed when it comes to money.

They also have a blind spot about it – they still believe financial systems are exactly the same as they were in the 1950s, with Captain Mainwaring at his desk dispensing sherry, when he has long since been pensioned off in favour of risk software at regional office.

Take share trading for example. The English still believe, along with other economic fundamentalists in the USA, that markets will always create an accurate price. This is the Efficient Market Hypthesis by Chicago economist Eugene Fama.

Fama and his colleagues came up with the idea in 1970 but recent events have shown that it is almost certainly wrong, and disastrously so. Or so you would have thought.

Even in the policy world, there is little understanding about just how fast financial markets are changing, in their technology, their methods and their fundamental purpose.

It doesn’t help that most of thinking about these markets, which now dominate the world, is done behind closed doors. But there are a few thinktanks which now specialise in it – the Institute for Market Dysfunctionality at the LSE is one. The Capital Institute in New York is another.

Both were founded by people with successful careers in the financial markets. John Fullerton at the Capital Institute had 18 years at J. P. Morgan.

So I take his warnings seriously. When he says that algorithmic trading threatens the stability of the global economy, you have to listen:

“Scientists understand that, in any given system, there is a need to balance system efficiency (resulting in high throughput) with system resilience (resulting in an ability to withstand shocks). Yet in the case of financial markets, the balance has tipped too far in favor of speed and perceived efficiency, leaving markets highly brittle and more susceptible to collapse. High degrees of financial leverage compound this, leaving them vulnerable to events like the 2008 financial crisis and the numerous mini-crashes that have occurred since and are continuing…”

Unfortunately, the regulatory system in the UK tends to be busy fighting the last war and congratulating itself on its success in preventing it, without realising that something very different is on the cards.

But don’t let’s pre-judge the new arrangements which have just come into effect. The coalition has taken financial regulation seriously and have a different approach to it, so there is hope.

But it matters, for example, that nobody is now at the controls of the giant trading machine. It matters that the combination of algorithmic trading on a huge scale, and the trading of obscure derivatives, can plunge us into a darkness on a scale way beyond the banking crash of 2008.

It matters that people like Fullerton can see us accelerating towards the next financial crisis far faster than usual.

This is a key question for whoever forms the next government in the UK. It needs to be very high up in the rival manifestos – both how to prevent the looming crash (a financial transactions tax, as Fullerton suggests) and how to deal with it once it has happened (creating the money to pay off the unrepayable debt hole perhaps).

But will it be? Unfortunately, I’m afraid we may still be in the process of minutely examining the straw in the stable…

Changing the banking argument

I have been wondering whether the banking argument has got a bit stuck because politicians prefer to keep the bankers in the Box of Blame – rather than actually looking at the problem and trying to solve it.

So here are three facts which point to a very specific problem, which is not to do with the inherent evils of banking – or anything remotely like that – but to the market conditions where they find themselves.

Exhibit #1.  Only about ten per cent of bank lending goes on real, productive investments.  The rest tends to go on property speculation or is lent in various ways among themselves.

That is the way the global market works.  Global banks are under market constraints which means they have to go for the most profitable ventures.  It isn’t their fault: it is the rules of the game set for them.

Exhibit #2.  Lending to small and medium-sized businesses is still falling in the UK, despite the recovery.  In every other nation in Europe except Hungary, small business lending has returned to pre-2008 levels. Here the rate of the reduction has slowed down, but it is still going down.

Again, this isn’t the fault of the banks. It is a logical response to the new Basel regulations and the lack of a local banking infrastructure in the UK, capable of accepting local deposits and using them as the basis for supporting local enterprise.

Exhibit #3.  Of the 30 new banks now awaiting approval from the regulator, only one plans to provide current accounts.  Local banks do not appear by magic.

It isn’t the fault of the bankers that they can no longer serve the SME market.  The problem for politicians is not whose fault it is – it is whether or not the UK economy needs SME lending.

If it does, then we need an infrastructure capable of providing it, as other countries have.

The big bankers get very considerable privileges for their role in the economy, personally and professionally. If their banks are no longer able to lend in that market, then they must create an infrastructure that can.

Why has small business lending recovered in other European countries? Because they have a local banking infrastructure, and an infrastructure that takes deposits rather than just lending other people’s money.

There is no way we can rebalance the economy without one in the UK. That is the big shift that is required – but the politicians have to move first.

 

How to build alternatives to payday lending

We posted here last week about our new report on whether it might be possible to build an organisation to take on the payday lenders and, as the Archbishop of Canterbury put it so graphically, drive them out of business.

Whatever the solution is, the problem of corrosive high cost/short term lending is increasingly obvious.  And not because there is no market.  It covers a market that was once served by the big banks at one end and the loan sharks at the other.

It is a problem not because clients of payday loan companies are being given loans.  It is a problem because the expansion plans of the companies require those clients to get into difficulties, to roll over their loans, and to continue to leach money in ever greater amounts to the companies.

The implications for the individuals are bad enough.  It is also a disastrous scenario for the local economies of the poorest neighbourhoods.

But it does beg the question of what a reasonable political platform ought to be on payday lenders, especially now that the government has agreed to regulate them and cap their total charges.

It is a difficult question because the credit union movement, important though it is, is only geared up in a few places to compete.  There also needs to be some institutions covering that market or the loan sharks with the baseball bats will be back.  So what should your average political party do, say the Liberal Democrats, for example?

This is what should probably go in their manifesto:.

1.  Real time regulation.  This is the way it is organised in most US states, mainly by a company called Veritec.  Without that real time regulation, clients are able to take out multiple loans with different companies and the loan companies are able to interpret regulations as they like – some already don’t count the first loan rollover.

2. Gear up the credit unions.  The government is already gearing up the credit unions, but this needs to concentrate on the biggest ones like London Mutual, which between them might be able to organise a short-term loan portal that is easy to access and use – and does not destroy lives.

3.  Experiment with crowdfund platforms.  We need to experiment with a range of different social enterprise or crowdfunding models, for different segments of the market, especially with linked debt advice services for those in difficulties – and with the overall objective of getting people out of long-term debt, not digging them further in.

4.  Offer welfare loans through the welfare system. The old social fund loans for furniture were provided through the benefits system.  There is an opportunity here for the welfare system to provide emergency loans, at reasonable cost, and to take payments out of benefits – perhaps in partnership with the biggest credit unions.

5.  Get the big banks to build the infrastructure.  See our other report about how the big banks need to help pay for a new local banking infrastructure that is capable of offering services to those people and places they no longer want to serve.

6. Plug the demographic gaps.  We now have detailed postcode lending data from the big banks and it needs to be used to find the places which are suffering the most from loan sharks or payday lenders – nurses and service personnel for example – and to prioritise alternatives there.

Are payday loans depressing poor neighbourhoods?

There is a central moral conundrum at the heart of the payday loan phenomenon, as our report Can You Imagine an Ethical Wonga? sets out.

It is that payday loan companies are designed to help people through what are intended to be unusual and temporary periods of financial difficulty.  Long-term and repeated use of payday loans is seriously expensive.

Yet the business plans of most payday loan companies envisage growth.  Their business purpose, and the purpose of their investors, is to maximise their profits – and this is bound to be at the expense of some of the poorest families and the most vulnerable places.

So it is time we looked at the issue of what growing payday loan companies means for the local economies in the poorest neighbourhoods.

The profits of the top ten payday loan companies in the UK were about £194 million, according to the Bureau of Investigative Journalism.  It is not clear how much the profits of the other 230 or so payday loan companies are, but the same report suggests that the turnover of the top ten is about 55 per cent of the total, which suggests that about £400 million a year is being extracted from the some of the poorest areas of the nation.

This will be an under-estimate because it excludes the money extracted to cover basic costs.  It is also a suggestion of what the figure might be, which is a reason for more research to pinpoint the amount being extracted more precisely.

If that is so, it is a serious problem, given that the way that money stays circulating in the most impoverished areas, from local business to local business, is a vital element in their economic resilience.  If there is an economic vacuum cleaner on the high street, it means that what enterprises survive locally will be that much less viable, and the neighbourhood that much more dependent on benefits and grants.

The loan companies point to the amount of money they are funnelling into the poorest economies.  But more research is needed about the long-term impact on the poorest local economies when the borrowers are expected to pay back the loan, but find the equivalent of 5,000 per cent annual interest as well.

This matters because the money flowing through a local economy is one of the few assets poorer neighbourhoods possess.  Increasing the length of time that money stays circulating locally can increase people’s wealth.  Finding more ways that it can leak out will make them more dependent.

At the heart of this idea is the theory that maximising the use of the money already flowing through the economy, so that it is passed from local business to local business before it flows away, and can increase the economic impact without necessarily requiring new money.

The Campaign to Protect Rural England (CPRE), for example, suggests that spending £10 in a local food outlet is actually worth another £25 to the local economy, as it gets re-spent locally several times (a local multiplier of 2.5); and they also report that local food shops can employ three times as many people for the same amount of turnover as a large supermarket.

If this is the case, it matters that money is leaking out to payday loan companies.  Unsuccessful places leak out income very quickly.  That is what makes them unsuccessful, because it is not the total amount of money that is important here.  It is the diverse ecosystem of businesses, and maybe even the diversity of people that matters – because they can keep money circulating:

  • The original research by the New Economics Foundation on the local multiplier effect showed that every £10 spent with the organic vegetable box scheme was worth £25 for the local area, compared with just £14 when the same amount was spent in a supermarket.
  • A study in a Chicago neighbourhood showed that a dollar spent at a local restaurant yielded a 25 per cent greater economic multiplier effect than at a chain restaurant.
  • Another study in Maine showed how, for every $100 spent with 28 locally-owned businesses, $58 returned to the Portland economy.
  • Closer to home, a study of the Lincolnshire Co-operative Society found that every pound spent in a co-operative store changes hands five times, at diminishing levels, until the final penny leaves the local economy.

The implications of this for the local economy are profound.  It means that sustainable economic success requires a diverse range of locally-owned businesses which trade with each other. It also means that, if a financial institution sets up which drains the economy of the money circulating, then the economy will suffer.

It won’t just be the person paying back the loan.  Payday loan companies may be depressing the poorest places.

Why bank failures can be a success

Let’s leave aside for a moment the new Barclays bonus bill of £2.4 billion, which is not just evidence that the big banks continue as dysfunctional as ever – it is also money which, in London at least, is being recycled into property prices, imprisoning the next generation in whatever rents the landlords wish to charge.

More on this in my book Broke: How to Survive the Middle Class Crisis.

But, as I say, let’s leave it aside for now, and concentrate on another piece of financial news today: a credit union on the Isle of Thanet has gone under.  Wantsum Credit Union has closed their doors.

This is not good news for the members, who have saved £100,000 there.  But what is fascinating about it is that they will get their money back within seven days.

This is not exactly bailing out Lehman Brothers, but it is brisk by UK standards and it is important that it should be.  Because one of the side effects of a diverse local banking system is that some new banks will fail, and must be allowed to do so – without compromising other institutions and without vast systems which spend years spinning out the process.

Bank failure resolution is therefore one of the most important new elements of the new entrepreneurial local banking culture we so badly need.

For the past three generations, we have been governed in the UK by a regulatory policy that regarded failure as unthinkable, and preferred not to allow any new banks to make failure virtually impossible.  That is what now has to change.

Why aren’t there more building societies?

You only have to look at the results of the government’s Funding for Lending scheme to realise there is a problem.

Despite being able to draw down low-cost finance under the government’s borrowing umbrella, the banks have reduced their lending by £12 billion since the scheme has introduced, according to a new report by Phillip Blond’s think-tank Respublica.

The figures underline the basic difficulty: the big banks no longer want to be in the market for lending to SMEs, however much they are beaten and cajoled by politicians to be there.

They no longer have the infrastructure to lend in that market.  They have no local intelligence and the alogarithms they use, by way of risk software operated at regional level, tend to rule out most loans.

There is the problem in a nutshell.  Despite all the rhetoric, the big banks don’t want to do it.  That is why Project Merlin failed and it is why the results of Funding for Lending have been so unspectacular.

What I hadn’t realised until I read the new Respublica report, Markets for the Many, is that the Funding for Lending figures for building societies are completely different: they increased their lending by £15.7bn during the same period.

The problem is that regulation prevents them lending to SMEs.  It isn’t surprising, in those circumstances, that loan rejection rates to SMEs in the UK are twice as high as they are in Germany and France.

Markets for the Many suggests lifting those restrictions on building societies and to look urgently at remutualisation legislation.

This is sensible, though since the disaster of the building society demutualisation in the 1990s (see my book Broke: How to Survive the Middle Class Crisis for more), the building society market is very strange – one whale (Nationwide) survives alongside many minnows.  It may be that SME lending would only apply to one building society in practice.

Respublica’s other big idea – that building societies should be allowed to buy the new TSB bank, carved out of Lloyds – would certainly apply to them alone.

What is strange is that even the most fervent advocates of building societies seem to have given upon the idea of starting new ones.  The Building Societies Association website is not encouraging.

What is encouraging is that Respublica is closely involved in this debate, which goes to the heart of the key to rebalancing the UK economy – providing an effective local lending infrastructure that can use local deposits as local investment.

Why middle-sized is beautiful

The news emerged yesterday that the successful publisher Quercus is now up for sale because, according to co-founder Mark Smith, “the publishing industry seems to be polarising around very big and very small companies. It’s difficult for companies of our size.”

The immediate cause of all this is the anti-competitive thumbs up to mega-mergers, like Penguin Random House. And of course to the disappearance of most of the middle-sized bookshops.

I don’t think, when I helped launch the Clone Town Britain campaign ten years ago, that we expected the great clear out of middle-sized retail chains. Nobody really predicted the euthanasia of the clones.

You can see why now. The semi-monopolies like Amazon are riding high. The small, local bookshops have a kind of quirky personality and authenticity of their own – but why go to Waterstone’s?

So much for the middle-sized retailers, and the middle-sized banks were snapped up more than a century ago, in the UK. In fact, the middle sections of the economy are everywhere being hollowed out. The banks don’t like them and they lack the clout of the big or the personality of the small.  It makes the UK economy vulnerable.

I was thinking about this because of a fascinating item on the PM programme on Wednesday (here, 36 mins in), about a conference hosted in Staffordshire by JCB about the German Mittelstand sector – the family-owned middle-sized companies, which underpin the success and stability of the German economy.

Judging by the item on PM, they also underpin the stability of German society. They have few shareholders, since they remain in family hands, but the employ four out of five of all German apprentices.

But the real clincher is that the Mittelstand sector is completely dependent on the German co-operative banking sector. Only 20 per cent of them bank with private banks. The rest rely on co-operative banks or the locally run Sparkassen.

So if you want to see why the German economy is more stable than ours, you need look no further than this. We have no Sparkassen. We have no co-operative banks – in fact, co-operative banks are not legal in the UK (the Co-op Bank was owned by a co-op, but wasn’t a co-op itself).

It is the existence of this banking sector that explains why they have a Mittelstand and we don’t.

How might we develop this crucial sector in the UK, without waiting decades in the usual British way?  Well, we have a plan and you can read it here.

How to start building a new lending infrastructure

The diversity of the banking system is back on the political agenda.  The government has tended to focus its attentions on the systemic risk to the financial system to banks operating under the safe umbrella of the government guarantee.

Some measures have been taken to increase competition, seven-day account switching, and making it easier to enter the market, but there has been little done to actively increase the diversity of the market, and to make sure the SME market is served as well as it is in other countries.

The closest to a proposed solution at the last general election in 2010 was in the Lib Dem manifesto, which promised to: “Break up the banks and get them lending again to protect real businesses”.  This was translated in the coalition agreement along these lines:

“We want the banking system to serve business, not the other way round.  We will bring forward detailed proposals to foster diversity in financial services, promote mutuals and create a more competitive banking industry.  We will develop effective proposals to ensure the flow of credit to viable SMEs.”

Our new report Re-banking the UK sets out a way to achieve that – the replanting of a local banking infrastructure in the UK, aware that it is the crucial missing element that rebalances the economies of continental Europe which is currently missing from our own economy. 

It argues that the lending problem is not simply an issue about the information used by existing banks to decide loans, and that there is a more fundamental problem that needs to be addressed – the serious lack of diversity in the UK system compared with its competitors. 

It argues that only a diverse local banking system will be able to provide for the diverse needs of local SMEs, micro-enterprises and social enterprises, and that the shift is required on three levels:

  •  Short-term, by carving a new network of local and regional banks out of the existing RBS network.
  • Medium-term, using the resources of existing banks in partnership with the new local infrastructure, aware that – to lend in this sector – the existing banks need to work hand in hand with a new lending infrastructure that covers those parts of the economy they are no longer set up to reach.
  • Long-term, by encouraging new entrants to the local banking market.

The big banks clearly have a vital role to play in the re-banking of the UK.  But the four biggest are currently receiving subsidies from the taxpayer worth £37.7 billion a year (New Economics Foundation estimate), in the form of the too-big-to-fail guarantee.  They need to rise to the challenge to play a constructive role in return, and this report suggests ways in which they can