Adrian Costain on How To Find Democratic Money and Capital for SME's
"TOWARDS DEMOCRATIC MONEY AND CAPITAL (FOR SMEs)
SMEs seldom reflect upon the risks of market failure. Yet in 2008 UK entrepreneurs were forced to confront the serious prospect of one or more of our major banks failing, a threat finally resolved by the intervention of the Government, effectively acting as lender of last resort. Now in 2016, with global financial markets making a disastrous start to the year, SME depositors are on the hook, faced with the prospect of compulsory ‘bail in,’ if our still highly consolidated retail banks, are seriously jeopardised. Yes, our clever law makers have decided this time round SMEs should bail out the banks, not the Government. How is this measure just and fair?
SMEs may toil for decades to build up a comfortable equity and working capital buffer– our banker friends play by an entirely different rule book. Political pundits embrace Adam Smiths ‘invisible hand’ of the market, but SMEs in the real economy know that bad customer service should mean lost customers.
Unfortunately, the first rule of banking in the UK is ‘monopolise the market’. Few entrepreneurs understand that 95% of the money supply in the UK is created privately by the banks, a process initiated whenever they make a loan. Although since 2008 banks have tacitly coordinated reducing their lending to SMEs driving the real economy (SME in aggregate are self funding), their mortgage lending into the booming household sector has increased dramatically.
The final rule of banking is of course ‘SME customers come last’, consumers at least obtain free banking. Indeed the major retail banks prioritise dealing with other members of the financial establishment – a process called intermediation - generating fees out of nothing and alleging to cover the associated risks with derivatives.
With derivative trade volumes tenfold higher than balance sheet valuations – it is critical the banks derivatives positions truly balance. SME deposits are of course credit ranked below derivatives trades. In recent weeks Europe’s largest banks market capitalisations have plummeted, yet we can still confidently anticipate the usual excessive greed in the looming banker bonus season.
With the banks primarily focused on extracting rents, rather than growing the real economy, It is not just SMEs who have a problem, it is society at large. SME deposits are not freshly minted ‘fast money’, they reflect a lifetimes accumulated equity, or ‘slow capital’. If the current banking system cannot adequately safe guard ‘slow capital’, we surely have a common interest with wider society in demanding a better system.
In Germany, SMEs thrive on the back of strong mutually beneficial relationships with low risk local Sparkhassen public banks. But UK regulators have yet to come up with a serious structural remedy to resolve market failure. Recently, Banking Commission member, Martin Wolf, has pontificated that another banking crash will justify a move to Public Money – where the State effectively manages monetary transmission. But entrepreneurs will also recognise the advantages of other Financial Technology innovations, including the potential of multiple Digital Currencies in an age of ubiquitous digital networks.
The domain of cooperation might seem alien to SMEs and yet in the context of massive market failure – cooperative financial innovation can help break down the worst monopoly enclosures and facilitate an era of (smart) parallel digital currencies. Effective currency competition might best serve the public interest, and even reduce financial portfolio risk for businesses. SMEs can support a ground breaking UK public policy debate on the future of our banks, currencies and financial markets generally. SME’s should call for action - ‘Save My Equity’." (via email, February 2016)