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This missing financial infrastructure - and it's not the banks!
Categories: Justin Urquhart's Comment
Oh please stop wringing your hands, politicians, and apparently blaming everyone else except yourselves. From "banker and business bashing" to Euro carping, they cannot just pass off the responsibility to others. Please can we have some effective leadership not only to encourage change, but above all inspire that key word for all our economies, whether personal, corporate or national - confidence.
There are some very exciting businesses waiting to develop and others desperate to invest and innovate - but our financing system is falling far short of what is needed. This is not a recent development but rather a structural flaw within the UK economy which has held it back for many years. The banking crisis had just exacerbated this but I have listed the fundamental issues below.
Our financing system and structure has proven itself inadequate, although this is not actually the fault of the banks. "Surely they are the cause of all our ills?" preach the politicians - and that just highlights their ignorance in my view.
Commercial banks, as opposed to investment banks, are very different beasts in both business and culture and, as I have bored many before, should never have been allowed to mix together. One services clients (although I accept often not very well these days) and the other effectively is there to service itself. One is a service bank; the other, as the name implies, is an investment bank.
Our structural problem has been a lack of corporate funding for smaller and medium sized businesses - and we can easily trace this back to the end of the last World War. Some have pointed at the commercial banks for their failing here, but fundamentally it has not been the role of banks to provide capital for businesses, but rather to provide cash flow and trading services - they provide oil and fuel for the engines, not the engines themselves.
Some have tried to do so and failed miserably - as was so perfectly demonstrated most recently by the failed HBOS (and especially the BoS bit of it) who seemed to have tried to develop themselves into a form of banking private equity business. This may be fine if you are a private equity business with their skills and "sharpness", but not when you are a domestic corporate service bank.
As for investment banks, they too have never really focused on the SME area and seem to have regarded it as either not being of enough scale or with enough margin. This leaves the stock markets, which in theory should be a key area for fund raising for companies - in fact this was their original purpose. The problem is that since 1945 the stock markets in the UK have declined in number and relevance to smaller companies. In 1945 we had in fact 45 stock exchanges liberally sprinkled throughout the United Kingdom, there to service local companies with often local capital. However, slowly but surely what was to become the London Stock Exchange absorbed them all until the final local exchange in Glasgow's Nelson Mandela Place sadly closed some 20 years ago.
As a result we ended up with the most international stock market in the world, servicing companies and investors throughout the globe, but effectively one that was almost ignoring our domestic structural need for finance. Oh yes, we did have the USM (unlisted securities market) and for the geeks amongst us, Section 4.3 trading, but neither really made much difference. Eventually we had AIM (Alternative Investment Market) which grew out of the exciting initiatives in Glasgow, and the diminutive Plus (OFEX) markets and, although they have made some impact, they have not been able to fulfil the local demand for smaller financing.
After WW2 the initiative that eventually became 3i was designed for this purpose as a more direct form of private equity which was in its infancy in those days. The current government has more recently tried to establish something similar, but as yet I have barely seen it break the surface of the news over the past couple of years.
What is needed then is something more dynamic in both scale and size. Perhaps this is the time to tie together the need for more Quantitative Easing with a direct means of getting finances through to industry and commerce. The last two rounds may have had an impact although no one seems to be totally sure, but now we need one that is not only creatively effective but is seen to be.
In theory you could use the newly created finance to establish regional bonds for local direct investment backed by these funds and probably directed through not just the banks but by the corporate advisors who would usually be the accountancy firms, and not just the big four, but rather those often more connected to local businesses like Mazars, RPG and Scott Cooper to name but three.
If the economy is in a funk - do something and do it effectively in some scale.
I am saddened when I look back at our national missed opportunities, such as the boon and boom of North Sea oil and gas, the cash windfalls of privatisations and the financial boom most recently bust. All of these created huge waves of cash which, if used correctly, could have been used to create a national Investment fund as we see in Norway, Singapore and others, or at least in building us a world class infrastructure - as opposed to the vague promise of building a Japanese style bullet train 60 years late, to get us to Birmingham 20 minutes faster.
We seem to have ignored our skills and competences and wasted our assets, and then go and lecture the Germans on how to run their currency! We then seem to have the self satisfied grin of thinking that we are going to be ok because we can devalue our currency? So debauching your currency and economy is seen as a key strength....? I am sorry but this is the economic theory of the Simpsons. Is it the politicians or the Treasury? Sadly I can't see Sir Humphrey Appleby (Yes Minister) any longer with his depth of knowledge expertise and experience.
Perhaps a little more wholesome humility would be in order as I don't think the strength of our economy gives us solid footing to order others about.
So let's treasure and value our strengths, in financial services, high tech engineering and creativity and not fritter our assets away just to fulfil our short term greed and favours.
And finally... perhaps we should never complain about schools testing again when you hear that China has banned kindergartens in a northern province from offering palm-reading tests. Apparently these schools had claimed that they could predict toddlers' intelligence level and potential, state news agency Xinhua reported.
Although many parents in Taiyuan, capital of Shanxi province, eagerly brought their children to be tested, some later complained about the high cost and raised questions about the testing method, which test-givers said could reveal the children's aptitude in music, mathematics and languages.
"We have issued a circular to criticise the three kindergartens that offered palm-reading tests for 1,200 Yuan (£120.80) per person," Xinhua quoted Ma Zhaoxing, the local education bureau chief, as saying, adding that the practice had been banned.
Fortune-telling, including palm-reading, has deep roots in Chinese tradition, although China's leaders have discouraged and punished devotees of the practice which they brand 'superstition'.
And also.......................
I loved the quote from a Scottish comedienne about a poll of Glaswegians voting on whether to change the currency if Scotland became independent -nine out of ten said it should stay the same and keep the Giro.
Oh yes and one useless anniversary for last week. The 2nd February 1852 saw the opening of the first public loo in the UK at 95 Fleet Street in London.
However, more importantly, the 6th of February is the anniversary of the day that the Queen came to the throne. Happy anniversary Your Majesty and I hope you have a good week as well.
Justin Urquhart Stewart
Director
Seven Investment Management Limited
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