Bold investment in innovation can help us battle the economic crisis
Saturday 08 October 2011
It is not often you hear a suggestion or comments from a Chancellor that make you want to yell out in praise, and shout: "YES!" But George Osborne elicited precisely that response from me earlier this week. Actually, it was a reluctant yell. I don't consider myself a fan of Mr Osborne, but if the plan is good, regardless of whose idea it is, it's a good plan.
Mr Osborne's proposal is for the Government to buy bonds in small and medium-sized enterprises. Adam Posen, member of the Bank of England Monetary Policy Committee, presented a very similar approach a few weeks earlier.
Yet the critics line up. They say it's not up to authorities to fund entrepreneurs; it is up to the markets. Please! Has the lesson still not been learnt? Sometimes, markets can be downright masochistic, and if the greater good is best served by more money being ploughed into new businesses, you can be sure the markets will promote the opposite approach. And entrepreneurial spirit can transform an economy. Give a thug the opportunity to create wealth, and knives are replaced by PowerPoint as the tool of the trade.
Over the last 10 years or more we have been turning our backs on entrepreneurs. Markets led the way. As for banks, most criticism misses the point. The problem with banks was not that they took too many risks; rather it was the complete opposite.
It all began when dotcoms crashed. The West turned away from risk. Instead, we opted for safer assets, such as property. The housing market boomed because it was seen as safer than equities. Consumer spending was funded by debt, but it was not irresponsible debt, or so they said. After all, in most cases, people's borrowing was covered by the net equity in their property. And property is as safe as... well, as safe as houses. More recently, when house prices stuttered, investors looked for alternative safe assets, such as gold and government bonds.
The problem is that risk-free investing may seem appealing, but if everyone adopts that approach, innovation in the real economy is killed, growth stutters and so-called safe assets look dodgy.
During the boom, topping up your mortgage was easy, so was obtaining a loan to fund a holiday in the Maldives. But getting a loan to kick-start a new business was hard. Unless you lied, and said you needed the money to speculate in the property market.
The lesson of the dotcom crash was that investing in entrepreneurial business was risky. The lesson was wrong. The FTSE 100's highest ever closing score was posted on 30 December 1999. That was when risk-taking peaked.
The IMF got caught up. It congratulated banks on the invention of mortgage securitisation. That's when mortgages are chopped up and sold on in pieces, so no bank had full exposure to the lending decisions they made. In 2006, the IMF, that august institution that is currently trying to lead the world out of crisis, said that the chances of a banking crisis had been greatly reduced, thanks to mortgage securitisation.
Can you believe that? In future all IMF communiqués should carry a statement saying: "Warning by international governments, complying with IMF recommendations can seriously damage the economy's health".
Sure, we had financial innovation, but very little real innovation promoted entrepreneurs.
The truth is that occasional busts are good. Not every new business succeeds – far from it; most fail. Yet, research carried out by the European Commission's Flash Eurobarometer found that 43 per cent of Britons agreed with the statement that a business should not be formed if there is a risk it will fail. Our cousins in Europe are even more risk averse, while the survey found that just 19 per cent of Americans shared the same belief.
The US's success was built on failure. Walt Disney, Henry Ford and Abraham Lincoln all flirted with some form of bankruptcy. Today's crisis can be solved by bold entrepreneurs backed by bold investors. But first the Government needs to take initiative. Instead, corporates hoard their massive cash mountains, while government bonds and gold soar in price. Markets flee from risk and, in the process, take the risk that the global economy will stagnate for years.
Only something far reaching can change the mind-set.
For all that, there remains a flaw. More lending to inherently risky entrepreneurs is not enough. Investment in exchange for profit share, or equity, which can make up for the inevitable losses that will occur on some loans, provides the answer. I don't think either Mr Osborne or Mr Posen is there yet, but they are getting closer.
Michael Baxter is the author of The Blindfolded Masochist: Creation Versus Destruction: The Power of Economic Networks, which was recently published by HotHive and is available at book shops, or online from www.thehothive.com. You can read his daily musings at http://blog.share.com
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
How couples can protect their financial interests when cohabiting
Authorities failing in hunt for 'most wanted' tax dodgers who owe HMRC £844m
Buyers beware of new-build home headaches
Dirty tricks in a divorce can cause some nasty surprises
A student's guide to financial survival: You don't have to drown in debt at university
- 1 Notting Hill Carnival: Woman shares selfie after being ‘punched in face for telling man to stop groping her’
- 2 Joan Rivers: 'Palestinians deserve to be dead'
- 3 Daily Show's Jon Stewart destroys Fox News for its Ferguson coverage
- 4 ALS ice bucket challenge co-founder Corey Griffin drowns, aged 27
- 5 Botched ice bucket challenge leaves man critically injured after plane drops hundreds of gallons of water
Exclusive: We share blame for creating 'jihad generation', says Muslim strategist
Robin Williams Emmys tribute led by Billy Crystal criticised for including 'racist' joke about Muslim woman
The Rotherham child abuse scandal is a tale of apologists, misogyny and double standards
Scottish independence TV debate: Pumped-up Alex Salmond bounces back in bruising second round against Alistair Darling
Do you realise just how foolish the UK looks?
Ukip Douglas Carswell defection: Tory MP jumps ship to join Nigel Farage
- < Previous
- Next >
iJobs Money & Business
£85000 - £100000 per annum: Ashdown Group: Head of Marketing - Slough, Berkshi...
£35000 - £55000 per annum: Harrington Starr: A Global global asset management ...
£55000 - £65000 per annum: Harrington Starr: A Global Financial Service Organi...
£50000 - £60000 per annum: Harrington Starr: A world leading business intellig...
Day In a Page
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village
A secluded seven-bedroom detached house with large private garden, £490,000
A three-bedroom cottage overlooking Sarratt village green with open fires and solid oak floors
A three-bedroom maisonette flat in a Grade I-listed, Georgian townhouse in a sought-after location
A one-bedroom apartment located within a private gated development, north of Turnham Green
Look forward to a brighter future at two-bedroom Sunny Cottages, ideal for Londoners looking to downsize
A three-bedroom red-brick cottage with outbuildings and pretty gardens, £200,000
This three-bedroom flat within a former textile factory spans the corner of the fourth floor and has a balcony