The Financialist +: ‘Do we need a state-owned bank?’

4th September 2012

As part of a raft of plans announced in an interview with Andrew Marr on Sunday to kick-start the UK economy, George Osborne, the Chancellor of the Exchequer revealed plans for a state supported bank for small businesses. The new bank, he said, will "bring together all the alphabet soup of existing schemes."

But will it work?

Tony Dolphin, Chief Economist at IPPR, says it will depend on how ambitious Osborne chooses to be  – and the first signs are not encouraging. "The bank is being described as a "one-stop shop": bringing together in one place all the various schemes and initiatives designed by government to help small businesses."

"No doubt this will be helpful for small businesses," he writes, "making it easier for them to find a way through the Whitehall maze. But what small businesses really want is an increase in the amount of credit available to them and a reduction in the cost of that credit."

And, according to Dolphin, it's not immediately apparent that the Chancellor's new bank will deliver on these aims.

Instead, he says, what the UK needs is a fully-fledged British Investment Bank designed to suit the particular state of our economy. "This Bank should be set up to tackle two longstanding problems: a tendency to invest less in infrastructure (as a share of GDP) than comparable economies and a shortage of financing, particularly long-term financing, for small and medium-sized businesses."

A History Lesson

Meanwhile, Charles Orton-Jones,  the editor-at-large of London loves Business, notes that state-run banks such as the British Investment Bank have historically gone wrong mainly because of political meddling – with the Spanish banks being a case in point – "they made politically motivated loans to property deals in politically sensitive locations, and lost tons of money as a result."

Furthermore, he writes, there is the problem of how the firm would be run. "Would the British Investment Bank offer bonuses and competitive salaries? If not, how will it attract high calibre people? If the staff are paid below the market rate then the risk of commercial failure increases."

"The British Investment Bank," he concludes, "is a relic of Cold War thinking, when it was naively believed that rational planners armed with taxpayers' money could allocate resources more efficiently than the market."

"If Osborne is seriously thinking of endorsing a British Investment Bank he must be more desperate than any of us realise."

About Time

Economist and tax expert Richard Murphy, however, says Osborne has at long last realised that we do actually need a state owned investment bank.

"First, why did it take so long?

"Second, will he now realise that supply side reform simply does not work? It has not with the banks.

"Third, will he now admit the state can and must pick winners? The Olympics is clear evidence of that.

"Fourth, let's just hope he does not give control straight back to bankers.

"Fifth, why doesn't he just call it Royal Bank of Scotland and buy out the remaining private shareholders there?

 "Sixth, will he please give it enough cash to make a difference?"


Previously on The Financialist:

The great iron ore crash of 2012

Is a tax on wealth immoral

Currencies in a drought

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