US press: pick of the papers

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

1. Newt Gingrich, you're no Ronald Reagan (Politico)

Newt Gingrich thinks he's Ronald Reagan and 2012 is 1976, says Bill Schneider.

2. Syria: It's not just about freedom (Washington Post)

Imperial regimes can crack when they are driven out of their major foreign outposts, argues Charles Krauthammer.

3. Romney Isn't Concerned (New York Times)

If you're an American down on your luck, Mitt Romney has a message for you: He doesn't feel your pain, says Paul Krugman.

4. Government Cannot Create Sustainable Jobs (Wall Street Journal)

Useful jobs don't exist until producers discover them. Stimulating demand can at best return an economy to the pre-slump status quo, writes Arnold Kling.

5. An election that hinges on the smallest of errors? (Washington Post)

he granting of Secret Service protection following Mitt Romney's decisive Florida victory did not prevent him from immediately shooting himself in the foot, says Michael Gerson.

6. India's strategic importance to the US (Boston Globe)

If coping with a more powerful China will be the great challenge for the United States in the next half century, India may be the great opportunity, writes Nicholas Burns.

7. A matter of faith (Chicago Tribune)

HHS should provide a broader conscience exemption on contraceptive coverage, argues this editorial.

8. Stop harassing the Koch brothers (Politico)

President Barack Obama and his allies, including those in Congress, have shown what a nasty, personal and abusive reelection campaign we are about to experience, writes Mike Pompeo.

9. Phony college rankings (San Francisco Chronicle)

Claremont McKenna College - an elite liberal arts institution near Los Angeles - is admitting a campus official fudged the SAT scores of incoming freshmen to boost its place in advisory publications heavily used by would-be students and parents. No one should be shocked, says this editorial.

10. School nutrition: A kid's right to choose (Los Angeles Times)

As the federal government plans to improve nutrition in school lunchrooms, it's important to look at what works, and what doesn't, argues David R. Just and Brian Wansink.

Ralph Orlowski / Getty
Show Hide image

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

0800 7318496