Solving Britain's Economic Crisis Through Micro Business Capital Investments and Credit
Economics / Economic Theory Mar 31, 2010 - 01:50 AMBy: Nadeem_Walayat
Britain had bet its future on the financial sector as the means for delivering economic prosperity and lost. The financial sector over the past 3 decades had mushroomed to an enormous size on terms of over leveraged liabilities extending to more than 5 times UK GDP that has imploded in spectacular style following the start of the Credit Crisis in August 2007 which has now left the country on the brink of bankruptcy under the burden of the liabilities of the banking sector (most denominated in foreign currencies), unsustainable annual budget deficit and the growing public sector debt mountain.
However the future is not all lost as the Government has at it's means the power to diversify the allocation of capital out of the financial sector and into other areas of the economy in an attempt to ignite a more sustainable growth model from large scale projects such as renewable energy to directly investing in new small business start-ups, and financing small and medium sized companies, not on a small scale of a few hundred million scattered around the country, but on a huge scale of between £50 and £100 billion which might sound like a large amount but is tiny when compared against that which is being flushed down the toilet on public sector consumption which contributes towards the annual £170 billion budget deficit. Also not forgetting that the country has committed far more than that in terms of capital injections, Q.E. and bad debt liabilities to the banking sector in an attempt to get the banks to lend to businesses and consumers, much of the money meant for loans is instead being hoarded by the banks in Government bonds or at the Bank of England.
An active government policy to inject capital investments into one million new micro businesses could revolutionize Britains economy by bypassing traditional (frozen) sources of capital. Not only would this ignite a new sustainable boom but Britain would reap the rewards in terms of capital growth and dividend income from new giants of industry that will emerge from this new pool of businesses i.e. both Google and Microsoft were once tiny startups and are now valued in the hundreds of billions employing many thousands, imagine the return if the U.S. government had a 25% stake in these companies from the outset.
Capital Investment of £50bn to £100bn to generate 1 million new micro businesses today would yield continuous returns over the long-run that would not only boost the countries tax revenues and reduce the state benefits bill and unemployment lines but also provide new capital for future investments from return on investments.
Micro business investments and loans (micro credit) is nothing new, as it first emerged as a means of empowering the poor in the third world countries such as India and Bangladesh which has enabled millions of poor to gain access to capital and loans enabling them to lift themselves out of poverty. Micro credit on a small scale has been around in Britain for many years in the form of credit unions and other regional start-up agencies that collectively provide approx £400 million of funding , and it should not be forgotten that Building Societies were originally set up in the credit union traditional, unfortunately over a 100 years of hard work was systematically dismantled by the previous Conservative Government that allowed Britains largest building societies to become banks and gamble on the global derivatives casino and lose everything after bank officers had banked huge bonuses on the basis of fictitious profits.
Unfortunately new start-ups face many additional problems other than access to capital and financing in the form of the huge amount of red tape as well as rules and regulations associated with running a business. However the red tape can be overcome, as a new large scale micro capital investments and credit programme would need to go hand in hand with reform of small business red tape as well as offer new start-up's courses and easily comprehensible information to better understand the plethora the rule regulations that exist.
The alternative to state capital injections and loans is continue to rely on the current FAILED UK Business investment and financing model that has in-built mechanisms that push corporations towards minimising costs to maximise profits by off shoring production abroad to China and India which results in high UK unemployment as the corporations both public listed and private are subject to the short-term interests of the over leveraged private equity funds and city Institutions that are focused on maximising short-term profits regardless of the long-term costs which manifests itself in ever higher leverage deployed regardless of the risk it poses that directly resulted in the bankruptcy of the whole banking sector, as ALL banks were technically bankrupt, which was illustrated by Lehman's bankruptcy where all of the hugely leveraged counter parties were on the verge of a chain reaction spiral of default.
The current banking system is bankrupt, the banks have learned NOTHING from the credit crisis, it is business as usual with most of the politicians firmly in the back pockets of the bankster elite. The banks are still primed to not only gamble on derivatives but increase their exposure and thus set the tax payers up for another financial crisis and subsequent bailout, if anything the banks are BETTING on other banks failing so that they can be bailed out by the tax payers i.e. claiming on the credit default swap insurance. If the government was serious about reforming the banking sector then it would be breaking them up into retail and investment banks and banning them from gambling on derivatives or relying on the interbank market for financing. And also remember this, that given Britains huge debt mountain, we basically do not have the means to survive another financial crisis so it is imperative that the country diversify itself out of the financial sector.
A Government run investment bank would ensure that at the very least new start-ups and small business would no longer fall victim to the banking sector and city of London's misplaced priorities that are NOT in the long-term interests of Britain.
The idea of the State Investment Bank with branches in every town and city that should also be able to make loans on a large scale to new / small businesses at low or even zero interests, after all that is the facility that the bailed out banks are in receipt of, the profits from which they have funneled into the pockets of bankster's in the form of outrageous tax payer funded bonuses.
Off course such an capital injections and loan subsidies from a state run institution would put us at odds with the European Union, which we would need to reject as a failed model as we are witnessing in the deflationary implosion of many of the EU countries that are themselves actively breaking EU competition rules.
Politically, the above change would require a government that is small business centric and not in the back pockets of the bankster elite, unfortunately that would exclude the supposedly business friendly conservative party as they would not be 'allowed' to take bankster's out of the credit and capital investment loop, and the Labour party as we have witnessed over the past decade is useless at business, and has been power for far too long, as its ministers have long since been corrupted by absolute power and therefore remain only focused on piling as much tax payer cash into their back pockets before they get booted out of parliament.
The only party that I can see that could implement such a major shift in financial and economic policy would be the Liberal Democrats, though off course they have zero chance of winning the next election, at best as part of a hung parliament they could bring some influence to bear, which is far from an ideal outcome.
So I am afraid, we may have to wait for many years for a politician to emerge that is able to ignite real grass roots capitalism that would usher in a new era of prosperity that is outside of the tentacles of the bankster elite whose primary purpose is to turn everyone, including individuals, corporations and governments into perpetual debt slaves. Therefore the party I will most likely vote in the forthcoming election is the one that has a policy that could form the genesis of a national state run micro investment and credit bank.
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Source: http://www.marketoracle.co.uk/Article18305.html
By Nadeem Walayat
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Nadeem Walayat has over 20 years experience of trading derivatives, portfolio management and analysing the financial markets, including one of few who both anticipated and Beat the 1987 Crash. Nadeem's forward looking analysis specialises on UK inflation, economy, interest rates and the housing market and he is the author of the NEW Inflation Mega-Trend ebook that can be downloaded for Free. Nadeem is the Editor of The Market Oracle, a FREE Daily Financial Markets Analysis & Forecasting online publication. We present in-depth analysis from over 500 experienced analysts on a range of views of the probable direction of the financial markets. Thus enabling our readers to arrive at an informed opinion on future market direction. http://www.marketoracle.co.uk
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