Posts Tagged ‘Will Hutton’

Money in hand

Vince Cable has a cunning plan to kick life into the UK economy. It is called a British Business Bank. “We need bold action to fix what has always been a weakness of the UK economy,” he said last week, but there is a question mark. Is Vince’s plan bold enough?

David Petrie, head of corporate finance for the Institute of Chartered Accountants in England and Wales, has doubts. “It is shaping up to be a missed opportunity to make a real difference, especially to micro and smaller businesses,” he has said. So what’s wrong?

First of all, he reckons small businesses are being side lined. Secondly, he is worried that the business bank will not work directly with businesses, but will be one step removed.

Thirdly, he says the money being talked about is nowhere near enough. He reckons the bank will need a minimum of £10 billion of capital.

And fourthly, he says the plans unveiled by Vince Cable amount to little more than a respray of the old Capital for Enterprise scheme.

Mr Petrie’s observations are worrying, but – sadly – probably about right. It is a sort of puzzle. The UK government throws billions at mortgages, the Bank of England prints £375 billion to buy government bonds under its quantitative easing programme, and Vince’s new business bank will have £1 billion of new money.

He says the UK needs bold action, but what we get is timid packaging and the re-jigging of old initiatives that didn’t do much the first time around. Banks have not been failing business for the last few years; they have been failing UK businesses for a decade or longer. For way too long it has much easier to get a mortgage, or even a loan to pay for a holiday than to get funding for a business.

Back in November 2008, Edmund Phelps, a former winner of the Nobel Memorial Prize in Economics, said in an interview with ‘Spiegel Online’: “A fundamental issue that regulatory discussions must confront… is what function society needs the banking industry to perform. Increasingly over the past two decades, the banks have tried to make money with mortgages, residential and commercial. As this has proved difficult, the banks will either have to shrink their supply of credit to the economy as a whole or else redirect some [of] their credit to the business sector.”

But the problem runs deeper than banks. It lies deep within the British and indeed European psyche.
In his book ‘Them and Us’, Will Hutton says: “The European Flash Barometer found that around 43 per cent of people in the UK (compared with 19 per cent in the US) believe that a new business should not be created if there is a risk it may fail.”

The more potentially innovative a business is, the more the chances are it will fail. Bank lending to innovative business does not make sense, because the probability that the business may fail is too high. It only makes sense to back an innovative business if the provider of capital has shares in the upside if things go well – that is to say a share in profits. That way, the successful funding deals can make up for the ones that don’t work. This is the issue a business bank needs to grasp.

© Investment & Business News 2013