US press: pick of the papers

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

1. Rick Santorum cries Nazi (Washington Post)

Rick Santorum sees Nazis everywhere: in the Middle East, in doctor's offices and medical labs, in the Democratic Party, and now in the White House, says Dana Milbank.

2. Where's the change behind rhetoric? (Politico)

As the campaign season heats up, I can't help but notice President Barack Obama is dusting off the same old sweeping rhetoric and speechwriting skills that catapulted the first-term senator to the presidency three years ago, says Rep. Aaron Schock.

3. GOP's bailout battle buoys Obama (Omaha World Herald)

As long as Republicans are focused elsewhere, they are providing Obama with his own private bailout, writes Michael Gerson.

4. An Obama-Santorum matchup would be good for the country (Oregonian)

If Santorum wins the nomination, he and the president will be forced to defend their respective parties' views of what good government entails and which policies are best for the country. In other words, an Obama-Santorum matchup will focus on things that actually matter, says Kyle Scott.

5. The trials of Saint Santorum (Denver Post)

The American people are loath to elect a preacher or a prophet to lead them out of the desert of unemployment, writes Kathleen Parker.

6. Obama's budget blind spot (Los Angeles Times)

The stimulus act taught us that the country would be better served if the president did less tinkering in his budget and more leading, argues David M. Primo.

7. How to talk down Tehran's nuclear ambitions (Wall Street Journal)

Before deciding on war or containment, the West should offer a good-faith compromise to the mullahs and the Iranian people, says Richard Haass and Michael Levi.

8. Peaceful protest can free Palestine (New York Times)

Palestinians who seek an independent state and an end to the Israeli occupation should avoid violence and embrace peaceful resistance, says Mustafa Barghouthi.

9. Are liberals beginning to embrace the Constitution? (Politico)

In recent days many radical liberals have changed their tune regarding campaign finance laws, says David Bossie.

10. The failure of austerity politics (Washington Post)

The advocates of austerity -- here and in Europe -- have argued that cutting spending and reducing deficits, even with interest rates already near zero, would revive the economy, writes Katrina vanden Heuvel.

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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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