Britain needs a new banking model

Nov 6 2008 by Andrew Lydon, Birmingham Post

Digbeth think-tank Localise West Midlands is urging a change in the way the Bank of England works. Andrew Lydon outlines the results of his feasibility study.

Over the last year or so, we in Localise West Midlands, have been doing feasibility work on reforming of the way central banking works in the UK.

In what we have come to refer to as our ‘Bank of Britain’ project, we have been assembling material for arguing that the UK central bank should be more representative of the various economies that make up the UK. 

We saw the need for a bank that was less a creature of Downing Street and Westminster.

In this recent crisis, what none of our supposedly national media have noticed is that the further a bank has been based from London the more likely it is to have ended up in a mess.

We hoped that through more responsive and proportionate control over inflation and credit, we could allow the UK economies to find their way towards a more successful model.

We were active in seeking to foster the discussion but, increasingly, decision-makers and commentators’ attention was focused on the mechanical responses to bank failure and bail-out rather than the path to future success and sustainability.

Until only days before the banks asked for the government to take a stake in their ownership, no-one was publicly talking about this as a way forward.

Now, faced with what has happened, we have been revising our project road map. While there were many who have in the past sought the nationalisation or partial nationalisation of the banks, none would have really wanted to see them fall into the public’s hands as basket cases.

None would have wanted to see government sinking billions into the process in the middle of an existing economic crisis. However, what is needed is a basic idea of what to do with these banks.

What we taxpayers have ended up with is a decisive stake in a broken but increasingly centralised, leaderless but monopolised industry.

Remember competition considerations were already dispensed with to save HBOS. Once the crisis subsides, some might be tempted to seek the rapid recouping of money for the taxpayers by getting them ready for sale – for which the monopolised hulks would be allowed to continue their tradition of poor returns to savers to fatten their balance sheets.

We would be re-privatising these hulks again rather as Boris Yeltsin would have done it (or maybe as we privatised our water industry).

One should not be surprised to find money from Russia seeking to get involved in any such potential rip-off.

But a better solution would be for us to bring in the Competition Commission and ensure that the banking system from which the taxpayer withdraws is a more competitive and diverse one than it would otherwise be, with better structures of governance installed. When the UK power industry was privatised, some might have thought something like that had happened with the flotation of the regional electricity companies.

But that only serves to show how appearances can be deceptive, because the hope of profits for the millions of new shareholders was based upon it being known that there were investors wanting to come along quite quickly and buy up their shares to create amalgamated energy companies: firms that would end up becoming what we now call the ‘Big Six’ who rip us off daily.

Most of the cars running on the roads of Europe today are compact with shortened engine compartments, have front-wheel drive with an engine running across the car from right to left.

That format was pioneered here in Birmingham with the Mini at Longbridge. But the company that owned it hardly made any profit on it – ever.

That sort of poor industrial leadership led our banks away from investing in production and towards the sort of system we have since had. If our banks had sunk ‘their’ money into that sort of manufacturing, as many in politics wanted them to do, the banks may well have gone bust in the 1970s or 1980s.

What survived was a financial sector that was more interested in gambling on international markets and property bubbles than investing in production in the UK.

Our political class basked in the bubbles of an over-valued pound that screwed products like the Mini, and the bankers learned to play this over-valued pound. And they had a good innings, but this is the industry that now follows Longbridge into the hands of the state.

What we need is a finance sector that is able to foster production in the UK rather than consumption and speculation. But that will require a monetary regime that prevents inflationary bubbles developing in either property or the pound exchange-rate, not one that tries to revive bubbles that have popped, as Gordon Brown seems to have suggested.

The supposedly independent Bank of England and the current institutional magic circle has failed to do this. We might be able to get banks upright again without doing something about all this but we will not be able to get under way without a better and more responsive central banking structure.

As far as our feasibility study on the ‘Bank of Britain’ is concerned, one can see that we have to conclude that reform is needed and if radical change has ever been possible it will be in the coming period.

Parliamentary time for this will have to be ‘blocked in’ in 2010, by whoever has the majority then.

We will need to put more representative and responsive central banking in place before we can get a more responsive commercial banking in place on our high streets.

That new central bank will need inflation indices, like those in most other major economies, that measure inflation as it impacts on different layers of society.

The UK Statistics Authority tell us it will be looking at these issues, which have been raised with them, before the end of the current financial year.

The countries that are managing inflation better than us (most of the G7) don’t just rely on penalising those with mortgages and debt to do this.

The last year has seen the twilight of too many business models right around the world. Besides banking, in the UK we see our agriculture failing to revive despite an unprecedented rise in peacetime food prices.

UK manufacturing set the trend. This downturn will end up having to become the most dramatic reassessment of business models seen since the 1930s. Public policy towards the economy is already evolving at lightning speed but with little forethought. 

How this plays out in the regional economy of the West Midlands remains to be seen. But the existing business model for government’s involvement in the regional economy is Advantage West Midlands.

This was a business model that was already waning and with the decline of Labour hegemony is probably now living on borrowed time. The new council of economic advisors for our new regional minister seems to displace it even further.

Tomorrow AWM is having its annual conference. We have written suggesting that this event should be re-formulated to become the start of a rolling discussion on the big questions of our region and of this moment.

Otherwise it is in danger of just being a showcasing event for Liam Byrne which, at first sight, its agenda would suggest it is intended to be.