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Bookmark and Share David Boyle is a nef fellow, a writer and the editor of nef‘s newspaper, Radical Economics.

“Future students of history will be shocked and angered by the fact that in 1945 the same monetary system that had driven the world to despair and disaster [in the Great Depression], and had almost destroyed the civilisation it was supposed to stand for, was revived on a much wider scope.”

So wrote the French economist Jacques Rueff in 1964.  It feels much the same now: we would be insane to go back to the same disastrous banking pattern we had before the bail-out, but – thanks to the government – we probably will.

Only a miserable 0.6 per cent of the government’s stimulus package is going on green measures, to genuinely shift the way the economy works.

Lord Mandelson has come out as a born again defender of the financial status quo.

But worst of all, the latest Bank of England assessment shows that, despite everything, business lending to small and medium-sized businesses is down again.  Differential interest rates and fees are both still rising.

Local bank managers who know their community well are largely a thing of the past.

Local bank managers who know their community well are largely a thing of the past.

It has become a lot more expensive to borrow money, even for the lucky few who make it through the approval stage.

One of the many tragedies about the Westminster expenses scandal, as Vince Cable pointed out last week, is that it robs MPs of the moral authority to tackle our dysfunctional banking system.

Ministers daren’t say anything too interesting, or too bold, in case heir colleagues assume they are throwing their hand into the ring for the Labour leadership.  It is a miserable prospect, and it may guarantee a swift return to banking business-as-usual.

To start with, it is time we broke the all-party consensus that somehow the government can use their holdings in the big banks to kick-start local lending again.  It hasn’t worked, and seems unlikely to work any time soon.

This is not only because banks won’t lend, but because they can’t lend using their current infrastructure and systems.

They have been consolidated to the point where they point towards the speculative economy and have little local lending infrastructure left.  Their lending decisions are taken by computerised systems which, because we are in a recession, naturally recommend against.

There are no longer bank managers, or local staff with the authority to pick out the success stories, using their knowledge of their local economy.

Our businesses are now in a far weaker position than American or German competitors, and potential competitors, because we have no equivalent lending infrastructure.  There are only 170 branches per million people in the UK, compared to 520 in Germany and 960 in France.

Now that the elections are over, this is what politicians need to do immediately:

money matters Why is this still not top of the agenda?  I think this is partly because, in this country at least, people don’t understand the money system.  Their mental map of it is nearly a century old: safe reliable Captain Mainwaring and vaults full of money.

I was assured some years ago by the Washington correspondent of a national newspaper (admittedly it was the Sun) that all money is based on gold.  It hasn’t actually been since 1931.

This is my excuse for writing an accessible guide to the way money works: Money Matters: Putting the Eco into Economics.

I hope (no small ambition this) that it might help dispel some of the bizarre mystique that bankers continue to exercise over the minds of the English.  Because what we really need to do is abandon the idea that our current useless system was somehow placed there by God, and demand the new local banking infrastructure we need.

Bookmark and ShareJosh Ryan-Collins is a researcher in the Connected Economies team at nef.

Oh to be a fly on the wall when Gordon Brown and Alistair Darling haul the big banks in to Downing Street, demanding to know why interest rate cuts are not being passed on to small businesses and homeowners.   The press, not least the tabloids, have jumped on the ‘blame the banks’ bandwagon with relish.

But as we have seen since September, there is little national governments can do to encourage lending when the Banks are locked in to a global credit crunch with plenty more steam in its engine.  The reality is that these behemoth banks, through successive rounds of deregulation and mergers, are no longer structured in a way that properly serves the needs of local communities and businesses.  They weren’t doing much of a job even before the crunch, making their money not through careful loans to local businesses they knew and understood but  through investment in the speculative markets of high finance and consumer loans.

But as recession looms, community banking is making a come back.   In the last two weeks, Essex County Council and the City of Birmingham local authorities’ have announced plans for local banks.  Their aim will be to  lend public money at reasonable rates to cash strapped small businesses and homeowners in their areas.  What a wonderful idea.

Essex has been inspired by the successful lending models of small regional banks in the US, including its namesake across the Atlantic based in Virginia.  Importantly, legislation – the Community Reinvestment Act – in the US requires banks to disclose where and to whom they lend in their local community. Compliance with this act is part of the bank licensing requirements, and it also exerts public pressure if they are failing to invest in local communities.  As nef has argued in a recent report, similar legislation should be created for the UK.

Meanwhile, Birmingham City council, the UK’s largest local authority, is planning to create a bank to lend up to £200m to small businesses, as reported in the Financial Times.  The Bank of Birmingham (AKA BoB), which had its first incarnation in 1916 when Neville Chamberlain was the Mayor of Birmingham, will apparently also take retail deposits.  

nef has been making the case for community banking for some years and is currently involved in developing Community Banking structures with Local Authorities and other partners in mid-Wales, Merseyside, London, the Midlands and Somerset. 

A secure and stable economy requires a diversity of local and regional financial institutions, none of which will be too big to fail but all of which will be small enough to care about their local economies.  Essex and Birmingham have shown the way, now lets hope others, including perhaps the post offices, will follow.


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nef employees blog in their personal capacity. The opinions expressed here do not necessarily reflect those of the new economics foundation.