Stabilising a Europe of tottering regional banks

In September the Independent Banking Commission appointed by the Cameron government published an issues paper and we have responded by bringing to their attention the regional pattern to the UK banking collapse of 2008. This has crucial implications for the bank reforms that are needed in the UK. But the regional dimension of 2008 has hardly been mentioned in public policy discourse – including in the Commission’s issues paper. 

In short –

Although we explain our concerns in detail on a more extensive webpage, in short, we have concerns about the UK banking system that no-one else is addressing. The UK banks that needed the injection of public money as shareholdings in 2008 were mainly those banks which had developed out of regional banks and building societies over the course of the last generation.

The outline map below shows the principal banking groups that were part of this story.

By the end of 2008 only 2 of these banking groups were not under some serious degree of control by the government company United Kingdom Financial Investments.

Lloyds TSB had become closely involved with already tottering institutions in the final months of 2008. However, HSBC and Barclays, the more archetypal London (city) banks, did not collapse in any comparable way. Nothing of this is referred to in the issues paper published by the banking commission. Box I on page 14 would have been where we might have expected to see some reference to the dynamics of the banking collapse.

This collapse resulted from the provincial financial bodies apparently taking ‘globalisation’ to mean that they could borrow huge sums of money in New York and then lend it excessively in a way that bid up property prices in the Celtic territories of the UK, and even more so in provincial England.  The importance of ‘regional’ ambitions can also be seen in the crisis in both Spain and Germany.

The Regional Crisis in Germany

In Germany it was  the regional banks that got into the sort of difficulty where they needed some sort of rescue. Hypo in Munich and the Saxon Bank were the first to have difficulties. But unlike the UK where the regional great champions could no longer borrow from the New York markets, here it was a case of the German Banks having loaned money to the New York markets and there was now a question mark over how much of it they would get back. The first 2 banks to have to admit they were in serious trouble, Hypo and Sachsen, had been seriously lending money on the New York market through subsidiaries in Dublin, Ireland.

It was in the weekends following  the UK banks being taken over by government that other regional German banks had to admit that they were in difficulties, and these are referred to in the outline map below.

Although it was regional banks in both countries that got into difficulty, we must not over look the important difference. Our UK banks were relying on the US money/secondary mortgage markets to fund their lending and even their cash flow.  Unlike the German banks that ended up in need of state help, none of the UK banks collapsed because of any gambling of their savers’ money on any more esoteric market than their standard lending – based on the UK residential property values as collateral.

Path to reform

As these UK banks are re-organised and sold off by the state, we want to see the future banks that emerge from this mess reporting to the authorities on a region-by-region basis. This would be the basis of the future structural separability of the parts of larger banks we would like to see. Whether or not they become more regionally owned any time soon, we want their financial health evident and policed on a region-by-region basis.

This would allow banks to be taken in and out of any necessary public custody on a more limited and manageable basis: manageable in both managerial and affordability terms. This would limit the risks to the government’s fiscal position. The banks ‘living wills’, in which the commission are interested, should be written in such a way as to facilitate them being dismantled on a regional basis. Our website also includes pages outlining other ideas on the regionalisation of central banking.

Over time, regionalised separability would foster the development of a more decentralised and less monopolised financial sector. Structure related surcharges on the most centralised banks would probably need to have a role in this process. This regional separability would be a solution more relevant to our national banking crisis than the more discussed issue of a supposed need for ‘casino banking’ to be separated from savings banking.

We hope our regionalisation proposals could be of use to the commission in finding a politically acceptable way forward. The Commission was set up because the Conservatives would not agree to the Lib-Dems’ idea of how the banks should be broken up. On the face of it, it does not seem likely that they should now come round to this concern over ‘casino banking’ through any further examination; but neither do we see any logical reason why the Lib-Dems should now rally to the Conservative – or even a conservative – approach.

Our distinct take

We recognise that our proposals are competing for attention against very wealthy and established interests: interests themselves funded hugely by – amongst other sources – the taxpayer.  We will follow the Commission’s deliberations as far as resources permit and will look to make further contributions to those considerations when we know more about the direction taken by their thinking.

Andrew Lydon

Birmingham: the city of a thousand big business satellites?

John Clancy is Director of Media Futures, who speaks of initiating the ‘Brummie bond’ debate and of an interest in land value tax as a way of raising funding for front line public services. 

In a recent Birmingham Post blog, he wrote:

“Birmingham was a city of a thousand trades – it has become the city of a thousand big business satellites which badly serve the market and the consumer with a creed of shareholder value which has perverted the very point of business.” 

Referring to ‘the mess we are in’ 

“Failure was across the piece: failure of the market, of markets, of the marketplace, of global markets, of global finance, of credit systems, of the light-touch regulation to keep the market supposedly as free as possible. Had the private sector been left to itself (as true free marketeers should argue) and the taxpayer not stepped in to save it, there would have been widespread, catastrophic private business collapse across the West Midlands and descent into a long-lasting depression. That’s what the real free market would have brought us.” 

Clancy describes the banking sector as an ‘oligopoly verging on a cartel’, advocating government entering the marketplace and providing banking services itself – lending direct to businesses instead of trusting the market to deliver. 

The city’s public and private sector are interdependent 

Stressing that the relationship between the public and private sector is, and must be, symbiotic, Clancy emphasises that one cannot exist and thrive without the other – neither can be independent. The outsourcing of services and employees from the public sector means that more of the ‘private sector’ is actually functioning as quasi-public sector business. 

It has been said that local councils/the public sector do not create wealth, but Clancy points out that a teacher does create wealth, doctors and nurses create wealth, a local government officer creates wealth; bin men and women create wealth. 

Could BCC once more be a key player? 

In an earlier blog, he reminded readers that in the days of Chamberlain-style corporate municipal activity the council played an integral part in the provision of goods and services: “Whether providing gas, clean water transport or establishing museums, galleries and libraries, it was a corporation to be reckoned with economically and otherwise. It had real power. And the region’s economic power led by the likes of the Birmingham Corporation was central to the nation’s economic growth.” 

Clancy concludes: “In the West Midlands we need the public and private sectors to join together to create a mutually respectful business environment and patterns of economic activity which will allow the West Midlands to fulfil its economic potential as a region.” 

Many would agree that the city’s Green New Deal/Energy Savers project is such a joint creation.

“The business models and business approaches of the South East which we have relied on for too long, and the big businesses and big finance headquartered and controlled from there are not of this nature, and are becoming alien to the business culture needed in the West Midlands.” 

Rewire the financial system . . . 

“We have to start by ensuring that significantly more of finance, wealth, pensions and savings which start off in the West Midlands actually stay here, circulate here and are invested here, and primarily in the SME sector: rewire the financial system to retain it . . . 

“We do not want handouts from the South East.”

Working to ‘bring power to the people’

Localise West Midlands Vice-Chair, George Morran, continues his work to ‘bring power to the people’, building on a wealth of experience in local government.

He recently submitted a response on behalf of Localise West Midlands to a House of Commons Select Committee about the Coalition Government’s decision to revoke and abolish Regional Spatial Strategies [RSS]. 

There has been coverage of his submission on the New Era and Thomas Attwood websites  and the full seven-page text is available on request.  

The submission ended with a summary of LWM’s views. Recent events have confirmed that a focus on global economic competitiveness and credit-driven economic growth is not sustainable and very high risk in terms of social, economic and territorial cohesion across regions. Of particular concern is the impact of this approach for employment.  

The idea that we can out-compete China and India in future high tech markets is a delusion. While they have, and will continue to have far cheaper wage rates, they are already developing very large graduate workforces, and increasingly we are seeing many higher skilled jobs moving to these and other countries with their workers able effectively to deliver many professional and administrative services via the Internet.  

From the final section: 

• The way out of these problems is to decentralise fiscal and monetary policies so as to connect them more closely to the local and to focus on bringing together the demand and supply of goods and services so as to strengthen social, economic and territorial cohesion. 
• Interest rates need more accurately to reflect local and regional inflationary pressures. 
• New sources of finance such as local and regional bonds need to be promoted to finance local and regional investment, including housing, which could generate a huge number of hi and lower tech jobs, substantial new businesses. 
• Most importantly regional and local action has to tackle climate change by cutting carbon emissions.  

The relevance of the new Green Deal/Birmingham Energy Savers [pilot project in Birmingham] was highlighted in the final section. 

George Morran: Director of the West Midlands Regional Forum of Local Authorities (1991-98), Assistant Chief Executive Dudley Metropolitan Borough Council, currently consultant specialising in regional governance, Vice-chair of Localise West Midlands, research associate at Aston University’s Business School and project director of the West Midlands Constitutional Convention.

Rebuilding a stable, diverse, localised economy

 Today’s bulletin from the New Economics Institute in Massachusetts eloquently describes the diverse economy still remembered by their oldest inhabitants: 

The men and women of the United States were once builders of boats, weavers of fabric, turners of pots, crafters of furniture, keepers of bees, operators of mills, welders of steel, creators of new technologies, and in general makers of the goods used in America.   

Entranced by the doctrine of efficiency of scale, bulging corporations merged, closed plants, moved production outside the U.S., and effected a loss of regional manufacturing skills. 

 It continues:

To build stable regional economies in the U.S. and create an example for sustainable development in other countries will require regaining dying skills, especially in production of the basic necessities of food, clothing, shelter, and energy. 

It will mean rebuilding a manufacturing infrastructure, re-establishing technical schools, and recommitting to the purchase of locally made goods.  Jane Jacobs used the phrase “import replacement” when describing this strategy:  smaller batches, more jobs, less transportation, greater complexity, without more goods.

A sound goal for a new economy.

The NEI recommends the report of the UK’s New Economics Foundation:

Creating a new kind of economy is crucial if we want to tackle climate change and avoid the mounting social problems associated with the rise of economic inequality. The Great Transition provides the first comprehensive blueprint for building an economy based on stability, sustainability and equality.

A promising opening:

“Anyone who believes exponential growth can go on forever in a finite world is either a madman or an economist.”  Kenneth Boulding, economist. 

An extract: 

“The Great Re-skilling continues the emphasis on re-localisation, starting from the position that greater local production will require us to relearn many skills that have been forgotten.

“From agriculture to manufacturing to the provision of local finance, returning to appropriate scale means equipping ourselves with the means to do so.

“Becoming less passive in terms of consumption and production we will start to regain our autonomy, which will extend to culture and arts, where we see the beginning of a life-enhancing renaissance.

“This is not the case only for the economy and for the arts, however; local decision-making based on active participation will be most effective when people are well informed about what makes their local economy tick and what makes public services able to achieve the best outcomes. Achieving consensus requires as full an understanding of these issues as possible.”

This report sets out the theory of and rationale for localisation, with some well-known case histories and a checklist of what the individual and government can do to further the process. 

Localism and localisation – a potentially symbiotic relationship?

The June Co-operative Congress, organised by the Co-operative College and Co-operatives UK, backed the concept of co-operative localism. Wooldale Co-op secretary Mark Lewis said “the 21^st century global economy had tended to strip away local economic activity in favour of distant, centralised solutions but added that there is a huge opportunity to help provide vital services to local communities and underpin local economies”. Tony Gudgeon, the Chelmsford Star Society’s chief executive, said, “The time is right to take a strategic approach in support of co-operative localism”. [both quoted in the Co-operative News 6-20 July] 

Localism describes a range of political philosophies which prioritise the local. The suffix ‘ism’ refers to a principle, theory, belief or movement. 

Localisation is a practical process. MP Caroline Lucas writes: “[E]conomic localisation is the antithesis of economic globalisation.It involves a better-your-neighbour supportive internationalism where the flow of ideas, technologies, information, culture, money and goods has, as its end goal, the rebuilding of truly sustainable national and local economies worldwide. Its emphasis is not on competition for the cheapest, but on co-operation for the best.” 

As LWM’s co-ordinator puts it: 

“Localism is about localising decision-making, for example by devolving decisions to ‘lower’ levels such as from national to local government or from local government to communities (Big Society etc). 

“Localisation is about localising the economy, ie supply chains, money flow and the size/power relationships between large and small businesses/communities and businesses.” 

Dorset farmer Edward Gallia writes: 

“[B]uy LOCAL (direct if possible) for those foodstuffs that can be grown locally.  Then use the “Fair Trade” (or other) label for foodstuffs that can’t be grown locally and for which you need an external guarantee that what you are purchasing has been done so fairly . . .

“Such purchasing shortens the food-chain, makes a connection between eater, the land and the grower; and, probably most importantly at the moment, supports the local economy.”   

Douglas Chalmers of the Country Land and Business Association expanded on this economic interaction in 2004:

[Dairy farmers] kept the feed mills, vets, contractors, hauliers, merchants and tradesmen busy. Their non-milking neighbours had a choice of competitive suppliers. The ancillary businesses being busy meant they kept and paid staff, who in turn put money into local businesses and kept local services viable . . .  

Localised decision-making could and should favour decisions which strengthen the local/regional economy, bringing purpose and prosperity to those who have lost both under a globalised economic system.

Own Goal: Lessons for the West Midlands in the Globalisation of Football Finance

Localise West Midland’s latest report: Own Goal: the Globalisation of Football Finance, has officially been launched to the press today!

Since the founding of the first official football club in 1857, professional football has grown into a national obsession; teams are regarded as social and cultural institutions by their supporters, embodying a locality’s passion and identity. Today, the English Premier League is one of the world’s wealthiest and most successful sports leagues, as lucrative broadcast and sponsorship deals have permitted exponential growth of its top clubs over the past 17 years.

However, as the viability of these vast finances begins to crumble, ‘the people’s game’ is becoming exposed as an unsustainable, global industry. Larger teams are becoming disconnected from their localities as fans are alienated by burgeoning debt and foreign ownership, whilst smaller teams are becoming unable to compete, forced to plunge into debt in order to retain a viable squad and support base.

The recent rise of the Manchester United Supporters’ Trust and the massive financial implosion of Portsmouth have now placed these issues firmly under the media spotlight, with the UEFA proposing new regulations to be phased in over the next few years to curb economically irresponsible spending by clubs.

Part of a series looking at lessons from localisation for the West Midlands economy, the paper examines the impacts of globalised finance upon British football and discusses the benefits of returning to a more traditional, supporter-led model of ownership in the region. Findings indicate that by returning control to supporters, significant impacts can be made upon increasing competitiveness, redefining local identity and facilitating sustainable wealth distribution.

By relocalising financial structures and partnering with local institutions and organisations the game can retain and enhance its ‘glocal’ appeal, channelling international funding into supporting locally viable and stable clubs that remain grounded in the passion of the sport. There are lessons from this for the wider West Midlands economy where local ownership with global links can be a winning combination.

Listen to LWM’s Anna Watson on BBC Coventry and Warwickshire tomorrow at drive time discussing the findings of the report in relation to Coventry FC.

The report will shorty be available at the Localise West Midlands website.

Anna Watson

Where is Mark Kinzley now? LWM would like to hear from him.

Some years ago, Devolve’s Mark Kinzley wrote about the devolution of the economy:  

“The globalised economy is the export and import of products across the planet and between regions within the same nation-state. Its values are ‘economies of scale’ and ‘the principle of comparative advantage’: that each region should concentrate on producing those things that it is ‘best at’ and then trade for everything else. 

“Economic devolution is the rejection of economies of scale and of the principle of comparative advantage. It is production within a region to meet its needs, by means of maximum diversity of production.”  

He advocated shortening the length of supply routes for materials and marketing produce mainly within the region, continuing: 

“In order to manage the economy decisions have to be taken where the economy is; if the economy is national, the devolution of ‘political power’ to regions will be a charade. The real power will still lie nationally. If the economy was devolved to the regions, political power would have to follow it . . .”  

Kinzley advocated replacing the goal of perpetual growth of GDP by the goal of a steady-state economy, requiring a different form of business with an aim other than expansion and a regionally based education system, bringing up people with more autonomous attitudes, comfortable in co-ops etc . . .