Britain's banks queued up to offer assistance to companies that will suffer difficulties as a result of the failure of Carillion yesterday. When I last noted something like £225 million was on offer. And it was being greeted as if it was some sort of lifeline to the companies in question.
In a few cases that may be true. In most that will not be the case. A loss from a bad debt, which is what most sub-contractors to Carillion will suffer, reduces the value of a balance sheet of a company. And in many cases the eventual loss to those companies will exceed the value of the bad debt as a period of adjustment to new circumstances is required, including downsizing, the costs of laying off staff who will suffer through no fault of their own, or the costs of procuring new work are incurred. All those will in turn reduce the value of the balance sheets of the companies in question. Many that were solvent will now look to be insolvent. Companies may not trade whilst insolvent. That is precisely the crisis that Carillion has created.
An offer of a loan from a bank does little to change this. A loan from a bank is a liability on the balance sheet of a company. It is true that the company has more money and so has more short term solvency, but that is only because it has taken on a loan, and by their nature loans must be repaid. The net balance sheet worth of the company does not change as a result of being offered a bank loan.
And the stress that the company must suffer - because the ratio between the capital that it can provide from its own resources to the capital that it has borrowed - has increased. This relationship - called the gearing ratio - is always a clear indicator of potential stress in any company and in the case of all companies taking these loans that ratio will increase. Like night follows day it is a fact that all of them have a reduced chance of long term survival despite receiving these loans.
What this indicates is the sheer inability of the UK's financial system to provide the support that smaller businesses need. The companies that have suffered these losses do not need loans: they need new capital to replace that which they will have lost. Some, to be candid, will not justify that capital injection. That will be because they have no business model left worth injecting funds into. If they were heavily dependent upon Carillion and there is no guarantee that those taking over that company's contracts will continue to buy services from them that may well be the case.
But others will have the ability to survive if only they are not burdened with considerable new fixed obligations to service debt and any associated interest but could instead concentrate on returning their businesses to profitability and then pay returns when they have done so.
In other words, what these businesses need is an injection of new capital now. Let's not get into the precise form that capital could take: that will vary from case to case, and anyway it's hardly worth considering because there is no venture capital fund on hand to provide that funding.
There could be, of course. If the UK had a National Investment Bank it could provide that replacement capital. That National Investment Bank could borrow at next to nothing in financial markets and then invest for the long term in the businesses in question as a partner who can do three things. First they can provide long term capital. Second, they could provide business support to assist management focus on long term survival. And third they could provide the assurance that a return would only be required when the business was able to make it.
And underpinning this offer, in case it was needed, would be People's QE, guaranteeing that the funds would be available in the long term whatever happens in the financial markets. That guarantee might never be needed, but it would be there to make sure the required stability to assist those afflicted by this crisis had the necessary breathing space to recover from it.
People often seem to wonder what a National Investment Bank is for. Many seem to see it as some sort of wild left wing enterprise. I do not deny its social purpose. That is apparent, I hope, in what I say it could achieve, as noted above. But this is no ‘nationalise at all costs' proposal. Instead it's in no small part about the state using its clout to release the potential in the smaller business community to serve society in ways that the existing financial markets, mechanisms and banks in the UK seem quite unable to do.
This is about ‘getting real' for the UK economy.
It is about addressing market failure.
It is about building prosperity in real public / private partnerships where each party bears their appropriate share of responsibility and expects the rewards that might arise from that.
And it's about building an economy robust enough to operate sustainably in the twenty first century.
That is precisely what the ideas inherent in People's QE were all about.
Now it's time for them to be delivered.
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[…] And, fourth, the market's always there to lend a hand (even if, as I argue, not suitably). […]
I would like you to be invited onto the BBC to get this clear message across as they are simply peddling a Government message of a lifeline being offered.
Little chance, I fear
I personally think your arguments are flawed in so many ways but that’s my opinion. Most prople on this forum support the belief often because it provides an easy fix to social problems so most of your campaigning gets a positive response.., but why are you banging this drum to this tight little community.. why are you not seeking coverage on a much wider platform? Surely post carillion and the problems with the NHS over Christmas and austerity in general your solution of people’s QE would get a hearing on the Sunday morning political programmes, newsnight, question time etc etc..iif you believe in this you should be trying to gain wider acceptance? The same rhetoric to the same people on here will achieve very little.
Do you know you have to be invited onto those things?
And I have been?
Albeit occassionally
@ Dc
If only it was a more level playing field – https://www.theguardian.com/politics/2014/mar/12/lobbying-10-ways-corprations-influence-government (e.g. – https://www.plmr.co.uk/about/plmr-political-lobbying-and-media-relations).
And it’s ‘nice work’ if you can get it – “According to VMA Group’s 2012/13 survey of those working in public affairs jobs, the average basic salary for lobbyists in the United Kingdom is £61,920, with 13% of public affairs practitioners earning more than £100,000.”
To play the MSM game you need to know the dice are loaded – both literally and proverbially.
Richard, I wonder of the thousands of business’s facing losses how many homes pledged as collateral will be lost? Labour when it gets into office should take over the whole of RBS and convert it into a peoples QE investment and retail bank. It should be forbidden to accept homes as collateral. In other words it should be constituted to help business along the lines you suggest, not bankrupt them.
Do you think the Scottish Government are on the right track then? Could Westminster learn a thing or two from them? Details at https://news.gov.scot/news/scottish-national-investment-bank.
I never agree entirely with any government I know of
And in principle if Scotland was right econom is freedoms its would not need to raise tax now
But is the SNP doing a better job then the UK government? Yes. Simple.
Are you saying that the government should simply bail out companies that lose money to the point that they go bankrupt?
I guess you might want to read what I wrote.
I said some companies might need to fail.
I am struggling to think what there was to miss in that suggestion.
OK if some companies need to fail, which ones?
Are you seriously trying to tell us that the government should decide which companies should stand or fall, or indeed that they are even competent to do so?
Have you ever heard of investment appraisal?
It’s what banks do when lending
Tell me why a government can’t do it too?
After all, it’s all just down to people exercising judgement. Or maybe you didn’t realise that?
It is a crying shame we didn’t do this when the taxpayer bailed out large banks!
Probably its now a little late but a state-sponsored bank would be an excellent idea. The banks don’t like to lend to real business, they’d rather lend to people doing up property. The bank can never lose lending to people doing up property. This is probably the single reason why our economy is so ****d.
An alternative approach, of course, would be to ensure house prices fell by 50% which would
1 Massively improve the lives of most working people in this country &
2 Give the banks a lesson they’d never forget
unfortunately it would also
3 Cause some banks to fall over
And, 7nfortunately, bankrupt millions
“and unfortunately bankrupt millions”. House prices will only fall when the supply increases to meet demand. However, that is no reason why home owners who bought their properties during the boom should face financial ruin. If the asset falls in value write down in sympathy its associated loan. All that is required is the necessary journal entry, which I suggest one side of which could find a home in secrecy jurisdictions (tax havens). The advantage of this solution is that only the rich pay. The rich have plenty of money. Of course if we believe as an article of faith that debt has the status of a deity that may be a bit of a problem. But we all know we shouldn’t worship money.
I argued a decade or more ago that mortgages should only be redeemable to the market value of the house, shifting lending risk to the lender
I still see quite a lot of merit in that
However what would be certain is that the top 300 bonus earners in the bank would profit and all the losses yet again would be born by the shareholders pension funds etc. until uk shareholders adopt SNAC committees and actively choose and replace Directors this farce will wreck us like it’s done to RBS.
I fully support and understand the idea and logic of the argument now it’s time to implement.