Miliband: British Investment Bank could provide government banking for entrepreneurs when market fails


 

Ed Miliband’s speech this morning will be overshadowed by the events surrounding Chris Huhne and any coverage that he does get will focus on his banker bashing. But the more interesting section of his statement at the Thomson Reuters building is on potential reforms to the banking sector.

Blueprint-for-a-British-Investment-BankIn a section of his speech outlining how small and medium sized firms are still struggling to get credit, Miliband puts Britain’s banking sector in international context:

“There are two reasons why not enough capital currently reaches the small and medium sized enterprises in this country which are crying out for it. The first is that it’s always hardest to get credit when the economy is in a downturn, even though that’s when small and medium-sized firms need finance the most.

“And the second is that it is cheaper for banks to lend to big companies than small ones. Particularly when credit is already being rationed, lending to small firms is often deemed not worthwhile for banks. The market on its own does not work for small businesses.

“All the most successful economies around the world recognise this: from Asian capitalist states like Singapore, through active industrial states like Germany, to supposedly free market states like the USA.

“And they make sure that the state helps finance to reach the small and medium sized enterprises which need it.

“This isn’t about picking winners.  It is about the state getting the market moving, like our most successful competitors have been doing since the fifties. It’s no coincidence that in Britain we haven’t done as much to develop a Mittelstand like Germany.

“Or fast-growing young companies like Apple and Intel – both of which got growth funding from the US government’s Small Business Investment Company programme.

“When it comes to competing internationally, our small and medium sized companies are fighting with one hand tied behind their back. One nation banking means the private sector and the state need to work together in partnership to get the system working for small business.

“It means we will need a much more diverse and competitive banking system which is more rooted in our communities. And it means looking at the case for a British Investment Bank which would provide government backing for entrepreneurs when the market fails.”

IPPR’s recent report (pdf) with Lord Mandelson on globalisation advocates a National Investment Bank. The remit we suggest is narrower than Miliband’s. Building on an idea (pdf) developed by venture capitalist Gerald Holtham, we suggest that the bank should invest in ‘marketable services’ which would develop a rate of return for the Exchequer.

This would include big infrastructure projects in the energy and transport sectors but could also cover house building and the roll out of superfast broadband. The policy would turn the much derided Private Finance Initiative on its head by having the public sector lease profitable services to the private sector rather than the other way around.

With the UK potentially already in a double dip recession and yields on government bonds at historically low levels, currently 2.03 per cent, there has never been a better time for this idea.

See also:

Mandelson weighs in behind National Investment BankAlex Hern, January 27th 2012

The economy is crying out for more investment; we need a British Investment BankWill Straw, January 14th 2012

George Osborne is the downgraded chancellor of a deflationary governmentWilliam Bain MP, December 8th 2011

The coalition could end up borrowing more than LabourCormac Hollingsworth, July 27th 2011

A middle way for economic recoveryGerald Holtham, September 16th 2010

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  • PenDraKon

    It is about time we invested in small to medium businesses.

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  • JC

    Now here’s me thinking that we wanted to be like the Germans with our industrial policy. We should be lending public money to organisations that will pay us back with things of social value to the country not to ones with a high risk of failure. When we persuaded banks to lend money to people who were unable to pay it back we ended up with the last banking crisis. I don’t think we really want to do that again.

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  • Anonymous

    The last banking crises was caused by buying up debt from America not the failure of small firms or small loans, it was the idea that you can make a profit from gambling on sub prime mortgages.

  • JC

    Just what I said. US banks lent money to people who couldn’t afford to pay it back (sub-prime mortgages), as did Northern Rock. The sensible US banks then bundled these up as CDS and other such stuff which our banks (and others) bought. Many of the UK based banks also went on a lending spree to allow companies to buy other companies with debt and not money. We don’t want that again.

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  • Burnscr

    To be honest I don’t think Miliband is feeding enough chickens to allow business to grow more ostrich farms.

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