Cable\’s acting a bit strange

He will propose a “carrot and stick” approach to ensuring that banks maintain lending to struggling enterprises.

The strangenesses:

1) We all now agree that lending money to people who cannot pay it back is a terribly bad idea. We\’re in a recession (well, not technically, but you know what I mean), there are more struggling companies (this is one of the things a recession means) thus lending should bnaturally fall.

2) We\’re asking the banks to increase their capital reserves. This means that they must, by hte very nature of these matters, lend less.

3) We\’ve as yet not solved the chicken and egg problem. Is lending falling because banks won\’t lend or is lending falling because companies don\’t want to borrow? Given that corporate cash holdings are at a high (must be, this plus household savings is an accounting identity equal to government borrowing plus overseas doobries) it might be that companies don\’t want to borrow.

This though is a good idea:

The Department for Business green paper will also outline plans to revive regional stock markets. The proposals will turn the clock back to 1973, when the regional bourses were merged into the London Stock Exchange. The idea for regional stock markets has been mooted on a regular basis since the early 1970s. It is designed to improve access to finance for smaller regional businesses.

However, it\’s only going to work if there is lighter regulation. Much lighter. I vaguely looked into an AIM listing a few months back. Entirely possible with a good story (and little more needed than that. It\’s a market for those willing to take a punt on an entreprenurial idea) but some £150,000 needed up front to pay for the documentation. To create a vibrant market that needs to come down.

I\’ve long been, in a grossly utopian manner of course, a fan of really local exchanges. Not just one in Bristol, but one in Bath, in Chippenham, Cirencester, Gloucester and so on. If the greengrocer is looking to buy the shop next door to expand, why not an equity market to allow him to raise £30k to underwrite bank borrowings? If localism is all the rage, why not local capitalism to go along with local communalism, local mutuals and so on?

But to work regulation would have to be very light touch indeed. Note, however, that there are such local capital markets, they\’re just very informal and very inefficient. By bringing them to an exchange we\’ll make them more efficient and even a low level of regulation would improve upon the none other than standard commercial law extant at present.

9 thoughts on “Cable\’s acting a bit strange”

  1. In my world, the one that is real to me, there is only so much money. New money comes into this world by the undertaking of labour and the bringing of natural resources (eg oil, metals and cement) into human use. [Aside: inventing money without such work/mining/etc eventually reduces the value of the money to better match what was earned/dug-up/etc: that’s inflation.]

    Given such a finite resource as money, if one lends a lot more of it to A, there is less to lend to B.

    The current problem is that there is not much money left to lend to B (businesses and people) because too much has been lent to A (government).

    Most interestingly, A (as represented by Mr Cable, government minister of about one third of too much of nearly everything) is now complaining. But is A (the government) going to spend less and reduce its borrowings. The best I hear is not yet: so I must tell Mr Cable that there will not yet be more money to lend to B.

    Best regards

  2. Regional exchanges.

    Don’t tell me, 8 English ones and London? Another regionalisation move?

    Surely the way forward is to just remove obstructions on setting one up and let it happen naturally. The control freaks will not want that , I suspect, and will be busy studying and planning to decide where, when and how.

  3. I predict a chain to remuneration: “bonus” will disappear and “sales commission” or “profit share” will emerge. What will Saint Vince do then?

  4. Most of the bleating I have heard is about lending to small businesses as opposed to corporates. It seems to be along he lines of – I’ve got a rock solid idea but the bank won’t lend.

    Part of the problem is that even if banks devolve decision making to the few branches they have left they don’t have the expertise to assess whether a business plan is sound or not.

    Secondly, as demonstrated admirably by Dragons’ Den, most people are incapable of being objective about the feasibility and value of their own business idea. (And yes I know that people are selected for Dragons’ Den for their entertainment value as much as the business idea)

    So the idea of local exchanges might solve those two problems, but its hard to see that in our risk averse world that politicians allowing the light touch you advocate and the regulatory cost will lead to still births.

  5. I’ve gotten a funny feeling thatafter the events of 2008 another factor has also come into play. People and companies aren’t just not borrowing, they are actively shedding debt as fast as they can. Whether this is a clever long term strategy or not I cannot tell, but I am pretty sure that having been scared sh1tless once they do not intend to be caught in the same position a second time.

    At least not for a few years – I’m guessing that in about a decade we’ll all be deluding ourselves that someone’s discovered a new economic model that makes the next debt fuelled binge totally different from and much safer than the last one.

  6. @Remittance Man: that’s exactly what usually happens in recession – during hard times corporate and personal debt is written off or paid down while government debt increases due to increased social costs and falling tax receipts. Conversely during periods of growth/boom corporate and personal debt increases as people take on more debt to buy assets or invest in businesses whereas government debt declines for the opposite reasons to above.

    What “the monocular Scotch twat and his badger-faced sock puppet” (c. Devil’s Kitchen) managed to do was navigate HMG through teh longest period of illusory debt-fuelled economic ‘growth’ in history and STILL end up with more government debt than we started with. *slow handclap*

  7. I’ve never heard anyone before say the requirements to get an AIM listing are too onerous

    Tim adds: I didn’t say “too onerous”. I said “too expensive”.

  8. One of the downsides of AIM, at certain times, has been the chronic lack of liquidity of some of the equities quoted on that bourse. The bid-offer spread can often be very wide.

    I would not recommend AIM stocks to those who don’t want to take a long-term view.

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