Still not top of the class – Lib Dem finance policies fall short

The broad objectives of the Lib Dem finance proposals are to make banks smaller, encourage them to lend and help local businesses access capital.

This morning, the Liberal Democrats set out their five point “radical banking reforms“. The broad objectives of the proposals are to make banks smaller, encourage them to lend, and help local businesses access capital. Like much of their manifesto, this sounds perfectly attractive, especially when communicated via the increasingly appealing Clegg/Cable double act.

However, now that there is a realistic chance of the Liberal Democrats having a role in actually governing, it is not enough to merely be heading in the right direction with financial policy. Sentiment is important, but detail more so. Left Foot Forward scores the proposals at 2.5 out of 5, suggesting that when it comes to the detail, the Lib Dems still have some work to do.

1. Breaking up the banks and a banking levy: 0.5 / 1

This blog has repeatedly called for the banks to be broken up. Vince Cable was the first senior politician to correctly call the banking systems a “cartel“, and has made the crucial link between bank size and interdependency (which was the fundamental driver behind the financial crisis). Unfortunately, a policy that stops at merely splitting retail and investment banking units doesn’t go far enough – Lehman Brothers, for example, was a pure investment bank.

What is needed is a cap on both the size and complexity of institutions, even within business lines, to ensure that one badly run bank doesn’t bring the whole pack tumbling down. The other benefit of a more competitive market is that astronomical bonuses would cease to exist – something Mr Cable is rightly keen to tackle.

A temporary tax on massive profits generated through taxpayer support is not a bad idea. Labour’s bonus tax, for example, was a qualified success. Indeed a permanent tax agreed internationally on all banks, given their ludicrous profit margins, is also worthy of serious consideration. However proposing a unilateral 10 per cent levy on bank profits (a ‘go it alone’ approach the Tories also appear to support) is foolish.

It won’t work for two reasons – either banks will shift their profits abroad, or they’ll shift their operations to more welcoming climes (particularly the US or mainland Europe). The effect will be the same – lower overall tax revenues in the UK and the erosion of what remains an important UK industry. So again, the Lib Dems are right to argue for a tax, but to do so without prior international agreement from the major competing financial centres would be idiocy.

2. Getting the banks lending: 0 / 1

Forcing taxpayer owned banks to lend a defined amount of money to businesses each year is wrong. By all means create incentives to lend, and putting in place an independent arbiter to help businesses who have been wrongly denied credit. But taking the decision of whether to lend or not away from banks ignores the fact that in times of economic instability, banks should not be lending with abandon.

This is a populist measure that ignores the reality that pre-crash, bank lending was too high. A correction is necessary if these banks are to repair themselves sufficiently to return value to taxpayers – the role of government is to ensure that the decisions made on lending are fair to banks and borrowers alike.

3. Local Enterprise Funds: 1 / 1

Tax incentives for providing equity capital to small businesses and entrepreneurs are a smart way to invigorate the private sector. The short term tax hit is likely to be far outweighed by the medium term benefits of local SMEs driving regional growth – and the Lib Dems appear to recognise this. Furthermore, making the link between local wealth and businesses is equally laudable; for too long regional disparities have been ignored by policy makers. Further detail is needed, of course.

4. Regional Stock Exchanges: 0 / 1

Unfortunately, the fetish for localism goes too far here. Certain institutions require scale and a large supporting infrastructure. General stock exchanges located around the country, without significant trading volumes and no specific technology or sector focus, will struggle to attract capital, function cost effectively and deliver the growth finance to local companies the Lib Dems seek. This is particularly true in a small country like the UK with a concentration of wealth in the South East. An extension of their Local Enterprise Funds for larger businesses would suffice.

5. Supporting Mutuals: 1 / 1

There is a clear need to explore alternative models of corporate and public sector ownership / governance. The three main parties all support some form of greater mutualisation, and the specific Lib Dem proposal of starting with Northern Rock is a good one. Tough to analyse in detail until the first few test cases are implemented, but there is no disputing the value of thinking carefully about the approach.

Verdict: The Left should be encouraged by what are fundamentally progressive, innovative and differentiated policies on financial reform and the economy. Whether the Lib Dems have the experience and capabilities to implement their ideas is another question – but their increasingly prominent contribution to the debate is welcome.

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