US Press: pick of the papers

The ten must-read opinion pieces from today's US papers.

1. Indefinite detention violates American values (San Francisco Chronicle)

Compromise is part of the political process, but the foundational principles of this nation should not be tendered as the cost of passing a bill about national defense, this editorial argues.

2. Can I vote for a Mormon? (Washington Post)

Ken Starr argues that the Constitution, not faith, matters.

3. My Baloney Has a First Name, It's M-I-T-T (Slate)

Will Newt Gingrich's attack on Mitt Romney's "pious baloney" change the New Hampshire race? John Dickerson discusses.

4. Holder's Texas Intrusion (Wall Street Journal) ($)

The Supreme Court will rule on a racial redistricting ploy. This review investigates.

5. Talking to the Taliban (Los Angeles Times)

As the insurgents say, the U.S. has the watches but the Taliban has the time. Rajan Menon writes about the "new phase in a long struggle".

6. Drug-testing proposal discriminates against poor (Detroit Free Press)

More than a decade after courts wisely rejected Michigan's efforts to drug-test welfare recipients, state legislators are considering a new version of this discriminatory practice, this editorial writes.

7. Can U.S. adjust to Islamist Mideast? (Politico)

William B. Quandt writes that whoever is president in 2013 will want to have good relations with Turkey and Egypt.

8. Just the Ticket (New York Times)

Why Hillary Clinton is the answer. Seriously, writes Bill Keller.

9. Republicans Versus Reproductive Rights (New York Times)

Voters should not be fooled. The assault on women's reproductive health is a central part of the Republican agenda, this editorial warns.

10. Why should Prop. 13 be sacrosanct? (Los Angeles Times)

According to Jim Newton, the core provisions of Proposition 13 remain weirdly off-limits to normal political debate. It's time for that to end.

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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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