Now that Northern Rock has spawned its evil twin, (Northern Wreck?), can we expect a boost to the economy as its good twin spreads its angelic wings? Is a lack of bank lending really at the root of our relatively sluggish exit from this generation’s “when I were a lad, we were so poor that…” experience?
In theory, the ability of banks to leverage deposit money through their status of institutions which inspire confidence should be wealth creating and efficient as they make a little capital go a long way. However, as has been commented passim, you don’t become a banker out of an altruistic desire, you are in it to make money. We have pumped close to a trillion pounds into the banking system on the basis that this is the best way of allocating capital to where it is needed in the economy. What is less clear is what effect that state subsidy will have on banks and their ability to deliver on that promise of efficiency.
The problem that I can see is a cultural one. By privileging one form of making money (lending through institutionally rigid (rule based) organizations) over others we make that form of production intrinsically less competitive with the universe of wealth creation as a whole. The improved margins created by the subsidy remove the need to compete for every ounce of lending available and for every basis point of advantage. Banks like Northern Rock start to resemble institutions like the Royal Opera House, Museums, Art Galleries etc who cannot exist without funding from the state because not to have them would, it is perceived, leave us less well of culturally or economically speaking.
An example closer to home is the proliferation of incubation and venture agencies (from the lottery sponsored NESTA to the individual university organizations) which are trying to play an increasing role in helping graduates and entrepreneurs (in particular social enterprises, but also technology ideas). On balance the effect these organizations is to place subsidizing forms of capital into the very DNA of these start-up companies which then affects the way in which that company views and uses money from that point on. There is nothing written in stone about a company needing a business plan, working capital, lawyers, accountants, hangers on, advisory boards, quango grants in order to be a success. The art of Bootstrapping is being lost by the rationalization of business through the influence of MBA schools and management consultants (who have an interest in the fees that perspective generates – as such they are the modern sophists so derided by Socrates). John Mullins's book – getting to plan B is a breath of fresh air on that front, reminding entrepreneurs that the best laid plans of mice and men are best treated as a work in progress and too much ‘institutional’ baggage can undermine the effectiveness of the business creation process. Business benefits from uncertainty, competition requires its, removing risk fundamentally undermines the ability of an economy to compete on the global stage – in other words we can’t have it both ways. A Boom requires the potential of a bust to exist in any meaningful sense.
Subsidy occurs in other markets, such as retailers, who charge large amounts of money for brands to inhabit their ‘gondola’ – one referred to their subsidy by leading manufacturers as ‘crack cocaine’ which hampered the efficiency with which that brand could operate as a retailer (as opposed to being merely a department store).
The solution? Well subsidy is inherently culturally and economically conservative because it is money distributed from the top down. What is required is new forms of “non-institutional” (individual?) money creation which can introduce real competition against these subsidized dinosaurs who are currently being insulated from the ice age of “austerity living” and more importantly in the future the effects of sustainable energy strategies on patterns of consumption, production and the wealth of nations.
