|
Job #1:
|
|
Separate everyday, simple, secure "utility banking" from investment fund "casino banking", then add a vital Third Element, Regional Development Banking, to create jobs now, and set Britain's industry on a secure, longterm, productive basis.
CREDIT MANAGEMENT The most important element in any economy is finance, money or credit. Without what may broadly be called a monetary system, an economy is reduced to barter. It is vital to ensure, first and foremost, that the operation of the monetary system is honest and effective. In order to exchange goods and services without the tedium of direct barter, society needs an exchange medium. If there is no exchange medium trade becomes almost impossible. If there is a shortage of exchange medium trade is slow. It is therefore important that whatever medium is used, there should be sufficient available to satisfy the needs of trade and investment. The exchange medium used in earlier times was a real commodity such as seashells, gold or coffee. In today's near-cashless society the exchange medium is the credit facility. Simply stated, the Commercial, or Main Street banks themselves create credit by making loans to their customers; the loans are eventually repaid, and more loans are made. It is a continuous-flow process, as credit flows out and back, and is then recycled out again. It is this revolving flow of credit which finances the entire economy, buying and selling, earnings and savings, longterm investments and retirement pensions. The Commercial Banks are private corporations, whose sole objective in present circumstances is to make a profit for their shareholders. The Nation's Central Bank attempts to regulate the total quantity of credit in circulation so that it satisfies the needs of the economy in its current or potential level of activity. If there is insufficient credit available to finance the economy's needs, the Central Bank lowers interest rates, thus encouraging business investment and personal credit-spending. Excessive liquidity can cause overheating and inflation, and to slow down the level of economic activity the Central Bank raises interest rates, thus slowing the pace of business investment and personal credit-spending. The Central Bank, in conjunction with government economic policy, regulates the quantity of credit flowing through the economy. But the actual translation of a potential credit facility into real industrial and consumer loans is left wholly to the discretion of the private Commercial Banks, whose motives are solely shareholder-profit oriented. Government regulatory involvement in the Monetary System, the revolving flow of credit which empowers investment and lubricates the entire industrial and commercial machinery of the nation, is concerned solely with the quantitive issue of how much credit is available in the system at any given time, and exhibits no interest in, nor exercises much influence over, the selective or qualitive issue of how the available credit is used.
CREDIT MANAGEMENT Just as governments still carry a residual aura of absolute monarchs ruling by divine right, bankers too like to maintain a residual mystique harking back to the days when their vaults were filled with gold, and major banking groups even printed their own banknotes. The reality today however is quite different. Today's Commercial Banks are creating credit within the overall framework of, and under the ultimate control of, the national monetary system. They are simply acting as agents handling a national resource. It is a resource of extensive proportions and of vital import to the economy both nationally and at local community level. And yet this resource of the nation, this System-generated Credit is created and channeled by the commercial banking sector with little reference to the overall needs of the economy and frequently with insufficient financial responsibility. Bankers are, in reality, wholesalers and retailers, providing credit to consumers by drawing from a national infrastructural asset deriving its origin, authority and credibility from government. This national infrastructural asset of available credit is limited in quantity and carries enormous potential for employment, production and productivity and thus prosperity. Overall quantity is regulated by government and central banks. But there is no regulation over quality of use. How do banks handle this limited and valuable resource? Responsibly, realizing its maximum prosperity-creating potential? Absolutely not. Consider just a few examples of banking irresponsibility. Banks encourage home-owners to indulge in shopping sprees by taking out second and third mortgages "secured" by clearly inflated market values. Yes, advertisements on American radio have promoted just such offers. Credit Card departments of banking institutions advertise actively for business "no credit checks, instant acceptance guaranteed". Why such rash promises? Surely there will be defaults. Yes of course there will be. But there will also be the "poor but honest" who maximize their card debt then have to pay interest at an annual 19%. In the pursuance of profits, major banks take substantial risks in financial speculation on a huge scale, or at local level, in unproductive ventures operated by relatives or thinly disguised associated companies. The history of banking provides numerous references to major banking scandals where banks have made substantial loans to dubious real estate companies, or, more recently, where banks have played the foreign currency markets using complex high-risk gearing techniques. The situation remains unchanged, and a new major banking scandal can break at any time. The complete collapse in 2008 of major banking, investment and insurance institutions can leave no doubt in anyone's mind: Clearly there is insufficient control over the commercial banks' investment activities. Traditional banking practice is founded on "reserves", with loans based on and securitized by those reserves. The philosophy is that once you've got reserves, you can gamble, speculate, make dubious property loans whatever you like. But experiences in 2008 have proved conclusively that banks' "assets" as security are a fantasy, a foundation of sand on which they construct a house of cards. Reserves are in effect insurance, insurance against bad loans. But as any insurance assessor knows only too well, insurance must be weighed against risk, and bankers' gambles and their investment "devices" have become so complex that risk is almost impossible to estimate. In the autumn 2008 global financial storm, UBS, Switzerland's biggest bank, got itself into serious trouble. Not only was the bank gambling wildly, it also grossly underestimated the risks it was taking. Before the beginning of the crisis, UBS calculated its credit risk at SFr 800 million. In the event it had to write down SFr 40 billion that's 50 times more. The government had to step in and save the bank by putting in $5.3 billion to take a 9.3 percent ownership in the bank. The "reserve of last resort", it turns out, is the unfortunate taxpayer. It goes without saying that the current banking practice of gambling its reserves for profit has to stop. Reserves which they consider their own are ultimately guaranteed by government and central bank, and should not be viewed as casino chips. But to promote employment and growth we need to go much farther, and completely revise indeed reverse our banking philosophy, moving from asset-backed securitization to project-based securitization. In other words, the security of a loan must be based on the validity and on-going monitoring of the investment project itself. Banking philosophy needs to look forward to the investment project as security, not backwards to its reserves. Reserves are only as good as the project they are supposed to guarantee. Our entire financial system is based on System-generated Credit, a national resource and not the private property of the banks a fact totally unacceptable to the banking community, yet brought home with devastating clarity in the autumn of 2008, when the worldwide financial crisis prompted first, guarantees of government and central bank support in Ireland then in the USA, followed by what amounted to partial nationalization of several major banks in Britain as the government took shares in the banks' equity and imposed stricter standards and controls an example subsequently copied by the USA and some European administrations. The fact is now clearly and transparently established: a nation's credit flow is a national resource, and government is the banker of last resort. Once this is recognized and accepted it becomes a matter of importance to consider how this vital and limited resource can be used safely, and to the greatest benefit of the overall economy.
CREDIT MANAGEMENT The basic requirement of a nation's financial infrastructure caters for day-to-day banking matters such as current accounts, locally financed mortgages, and loans for big-ticket consumer purchases, all of which are necessary functions. This is Utility Banking. Clearly, appropriate controls and guidelines must be established to ensure that the resources of Utility Banking are not misused for speculative purposes in property, stock markets, foreign currency transactions, and the complex web of margin deals and derivatives with which banks' whiz kids currently gamble depositors' and shareholders' hard-won resources. The needs of investors who want adventure with appropriate risk are already catered for through the many Investment Funds which clearly grade the risk of their various investment vehicles. These Funds are subject to strict regulation, but regulation which simply ensures honesty and transparency in their specified dealings. This may, perhaps ungenerously be called Casino Banking. Investors enter with their eyes open, providing that funds are properly described, as indeed regulation should require. Gains and losses are confined to that sector alone, and do not spill over to affect banking and finance outside specific funds. So we can conduct our day-to-day banking operations, and we can invest our savings in a Fund or mix of Funds which reflects individual appetite for risk. The third type of banking, the least developed and yet the most important, is Development Banking, established regionally maximize employment and productivity throughout the economy as a whole. There is an ongoing need for investment in major infrastructure projects and environmental protection measures, as well as industrial development in backwater areas or areas experiencing major unemployment. However, there is no current mechanism for directing the flow of credit into economically depressed areas or regional infrastructure requirements. These investment demands are presently funded, either not at all, or by government as non-returnable grants out of taxes. This is an improper accounting practice which only serves to distort government accounts and increase government debt. In addition, when companies and projects in economically depressed areas receive outright grants rather than repayable loans, this distorts their own costings and may cause unfair competition. Grants lack the financial discipline which applies to loans which must produce a repayment, and the use of taxpayers' funds for what should properly be investment only succeeds in further enlarging and obscuring government accounts. Regional Development Banks, centrally coordinated and having access to a proportion of overall credit availability, making open decisions based on nationally and locally debated priorities, would deploy their credit allocation to make repayable loans for infrastructure and local development on a more businesslike footing, with the object of maximizing the overall nation's and each region's productive and employment potential. The flow of credit created by the banking system is a national resource, not a resource of any specific bank or investment institution or individual saver. It is a resource having a substantial potential for the enhancement of prosperity, and it is moreover a scarce and finite resource. It is therefore entirely appropriate that this resource should be directed purposefully and publicly into projects which will improve employment, productivity and thus prosperity. Full employment is one of the basic essentials of a civilized society, but it will not come about by chance. There is a tremendous potential for creativity in the world; most people want to do a useful job of work, and to do it well. Unemployment is not for most people a natural or preferred condition. Regional Development Banking can be used to expand employment on a powerful scale, but only if it is guided by overall priorities. Without selective criteria, the nation's credit resource will not be used productively, and may well serve only to inflate property and stock market balloons which will eventually burst with the disastrous effects only too familiar in historical, recent, and indeed current banking experience. Utility, Investment and Development: the Three Faces of Banking.
CREDIT MANAGEMENT The commercial banks must deal with day-to-day matters such as current accounts, mortgages and loans for big-ticket consumer purchases, all of which are necessary functions. To take care of more specialized needs, Regional Development Banks should be established with the specific purpose of investing in regional business and industry on an ongoing partnership basis, their decisions based on a rigorous assessment of project viability and guided by an overall regional investment strategy. The cost of finance as charged by the Regional Development Banks would be limited to the Bank's administrative costs and the cost of loan insurance. There is of course an element of risk in any investment. The more useful approach however, is to minimize risk through proper pre-investment research and positive on-going monitoring of physical production, sales, and accounting precisely the measures which a banking-industry partnership system is able to undertake. A Standard Audit Format for accounting and quality/productivity performance would facilitate a follow-up monitoring process through which the investing banks are provided continuously with performance data from recipient companies, thus ensuring the safety both of the investment loan, and of the recipient company. In the case of larger businesses, the investing bank may well appoint a Director to the Board, as already practiced in Germany. Careful monitoring will be to the advantage both of the investing bank and the recipient business, as well as to the regional economy: bankruptcy is not contributive to economic stability and prosperity. The banking-industry partnership would therefore be in a position to offer investment at a relatively low cost, possibly 2-3%, backed by the on-going monitoring of the recipient business ensuring safeguards for the investing bank, the recipient business and all those involved with and dependent on it. The highly successful Mondragon cooperative group in Basque Spain illustrates this ongoing relationship between investment banking and recipient business. The Workers' Bank serves three mutually inter-dependent functions: it provides investment as a local development bank, offers technical and financial advice for business startup, then monitors production, quality, and financial performance in a process of ongoing cooperation and partnership. To fulfill these objectives, the Bank's operation is formally divided into two sectors. One deals with finance. The other comprises specialist departments, providing skilled commercial, architectural and technical advice either to assist existing enterprises or to promote new ones. Once launched, the new enterprise manages itself but the Bank guarantees continuing support in return for a flow of data from which the new enterprise's progress can be monitored production, sales, profits and so on. If anything begins to go wrong, the Bank can give timely help, with advice or further finance if appropriate. A similar and highly successful banking enterprise, the Grameen Bank, operates on a similar basis, directed more towards the needs of poorer developing countries. The major distinguishing feature of this system is a relatively new concept of forward-securitization, in which the total project, from design through production and management to sales, becomes the loan collateral, rather than the assets of the bank, or the personal assets of individuals. This is important. Comedian Bob Hope once remarked that "banks are institutions which lend money to people who can prove they don't need it." The availability of investment credit has enormous potential for growth, and the Development Banks should actively be seeking to maximize the productive use of this resource. The partnership concept also assumes longterm commitment, resulting in the encouragement of secure long-range planning and productivity investment, as well as research and development into new-generation products and services in conjunction, perhaps, with more specialized venture capital funds. The RDB could also provide investment finance for regional infrastructure, such loans to be repaid in the normal way by the relevant local or regional government departments from their own revenues. Once proper disciplines and regulatory institutions are in place, creative use of the national credit base through System-generated Credit can act as a major source of economic motive power. The Regional Development Banks would, like all areas of the banking sector, be strictly regulated to ensure the responsible use of created credit and investment funds, and would in addition be confined in their activities to their own specific region. Within these qualifications they would be endowed with a substantial degree of autonomy in tailoring to regional needs both the quantity and the recipients of investment. They would also be able to set their own charges based on administrative costs and loan insurance. Thus the RDB would prove a powerful catalyst at local level, providing finance and subsequent ongoing supervision for business and industrial development, together with investment capital for regional infrastructure. On a historical note, before 1890 Germany did not exist. The geographical are now Germany consisted of totally independent princely states. On unification, these States became Provinces of the German federation. Today, over a century later, these Provinces, or Länder, are still fiercely independent. In the years immediately following WW2, the Provincial Banks, or Landesbanken, considered it their duty to promote their local industries. This was in large part responsible for the famous Wirtschaftswunder, or postwar German Economic Miracle. We can do the same with Regional Development Banking, the regions defined by and based on already established "Core Cities". In fact a report commissioned by Britain's Core Cities Group demonstrates that investment in local infrastructure repaid through an uplift in business taxes can create increases of between 50% and 80% in housing, jobs and economic output.
See Job #2:
A 36pp book
|
|
|