Last minute nerves

Obama may be looking like a shoe in but Democrats have had too many disappointments in recent years

A few hours out from Election Day, both candidates have made their closing arguments and all the cards appear to be on the table, so I don’t anticipate much more drama in the presidential race. The good news for Democrats is there is not a single poll that has McCain winning the election. Among Conservative opinion-leaders, the mood is subtly shifting from the desperate search for evidence that McCain's steadily closing the gap, to self-consolation that he's kept the race relatively close despite all his disadvantages.

I don't think any remaining uncertain factors will be enough to undo Obama's lead. That being said there is a feeling of anxiety among many Democratic activists right now that something could go terribly wrong on Tuesday. There's not much evidence to support such fears, and that even if McCain winds up doing exceptionally well among undecided voters, he's probably too far behind to close the deal.

I'd argue that aside from there well-earned Democratic pessimism based on past close elections, there might be two factors underpinning this anxiety. The first is obvious enough: race. With the McCain campaign heavily relying on submerged and not-so-submerged racial appeals, old fears about the willingness of white Americans to elect an African-American president have bubbled up.

The second factor is subtler: personal emotional investment in Obama. Democrats have long considered Obama a phenomenal, once-in-a-generation leader who can be "transformational;" others have reached this conclusion more recently. Still others simply think it's imperative, that the Republican lock on the White House is terminated this year, for reasons ranging from Supreme Court appointments to foreign policy.

I wanted to understand why there was anxiety amongst the Democrat activists and one personal experience summed it up best for me – a teacher who goes by the name Ed (who is campaigning in Pennsylvania) said to me that he has only had a strong emotional, as opposed to professional or ideological, investment in the outcome of two presidential elections: 1992 and 2004. And those two Election Nights represented the ultimate highs and lows.

“Back in1992, I remember the joy I was feeling sitting in Atlanta's premier political watering hole, Manuel's Tavern, surrounded by members of a class I was teaching, as Georgia was called for Bill Clinton just two minutes after the polls closed. In 2004, the bad news came to me from a friend of mine who was working for John Kerry in Florida, and told me: "We're done in Florida, and we're done nationally," finally dashing the illusions born of faulty exit polls.”

Many other Democrats have had similar experiences, more negative than positive, usually and many more were wrenched by the endless and ultimately maddening drama of 2000 than with the near miss of 2004. But virtually all of them seem transfixed by this year's election, and what it might signify. That can produce anxiety, which will only be resolved when all the votes are in, and the Democrats have prevailed.

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Labour's investment bank plan could help fix our damaging financial system

The UK should learn from the success of a similar project in Germany.

Labour’s election manifesto has proved controversial, with the Tories and the right-wing media claiming it would take us back to the 1970s. But it contains at least one excellent idea which is certainly not out-dated and which would in fact help to address a key problem in our post-financial-crisis world.

Even setting aside the damage wrought by the 2008 crash, it’s clear the UK’s financial sector is not serving the real economy. The New Economics Foundation recently revealed that fewer than 10% of the total stock of UK bank loans are to non-financial and non-real estate businesses. The majority of their lending goes to other financial sector firms, insurance and pension funds, consumer finance, and commercial real estate.

Labour’s proposed UK Investment Bank would be a welcome antidote to a financial system that is too often damaging or simply useless. There are many successful examples of public development banks in the world’s fastest-growing economies, such as China and Korea. However, the UK can look closer to home for a suitable model: the KfW in Germany (not exactly a country known for ‘disastrous socialist policies’). With assets of over 500bn, the KfW is the world’s largest state-owned development bank when its size is measured as a percentage of GDP, and it is an institution from which the UK can draw much-needed lessons if it wishes to create a financial system more beneficial to the real economy.

Where does the money come from? Although KfW’s initial paid-up capital stems purely from public sources, it currently funds itself mainly through borrowing cheaply on the international capital markets with a federal government guarantee,  AA+ rating, and safe haven status for its public securities. With its own high ratings, the UK could easily follow this model, allowing its bank to borrow very cheaply. These activities would not add to the long-run public debt either: by definition an investment bank would invest in projects that would stimulate growth.

Aside from the obviously countercyclical role KfW played during the financial crisis, ramping up total business volume by over 40 per cent between 2007 and 2011 while UK banks became risk averse and caused a credit crunch, it also plays an important part in financing key sectors of the real economy that would otherwise have trouble accessing funds. This includes investment in research and innovation, and special programs for SMEs. Thanks to KfW, as well as an extensive network of regional and savings banks, fewer German SMEs report access to finance as a major problem than in comparator Euro area countries.

The Conservatives have talked a great deal about the need to rebalance the UK economy towards manufacturing. However, a real industrial policy needs more than just empty rhetoric: it needs finance. The KfW has historically played an important role in promoting German manufacturing, both at home and abroad, and to this day continues to provide finance to encourage the export of high-value-added German products

KfW works by on-lending most of its funds through the private banking system. This means that far from being the equivalent of a nationalisation, a public development bank can coexist without competing with the rest of the financial system. Like the UK, Germany has its share of large investment banks, some of which have caused massive instabilities. It is important to note that the establishment of a public bank would not have a negative effect on existing private banks, because in the short term, the UK will remain heavily dependent on financial services.

The main problem with Labour’s proposal is therefore not that too much of the financial sector will be publicly owned, but too little. Its proposed lending volume of £250bn over 10 years is small compared to the KfW’s total financing commitments of  750 billion over the past 10 years. Although the proposal is better than nothing, in order to be effective a public development bank will need to have sufficient scale.

Finally, although Brexit might make it marginally easier to establish the UK Investment Bank, because the country would no longer be constrained by EU State Aid Rules or the Maastricht criteria, it is worth remembering that KfW’s sizeable range of activities is perfectly legal under current EU rules.

So Europe cannot be blamed for holding back UK financial sector reform to date - the problem is simply a lack of political will in the current government. And with even key architects of 1980s financial liberalisation, such as the IMF and the economist Jeffrey Sachs, rethinking the role of the financial sector, isn’t it time Britain did the same?

Dr Natalya Naqvi is a research fellow at University College and the Blavatnik School of Government, University of Oxford, where she focuses on the role of the state and the financial sector in economic development

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