The UK economy is coughing and spluttering – the illness, let alone the symptoms, cannot be quickly cured. Economic growth has been non-existent, inflation is high, unemployment is increasing (in particular within young people) and interest rates are low. Low bond yields is a reflection on the equities on offer. Investors feel uneasy about the growth potential of the economy, therefore won’t invest in businesses and as such feel the only way to make a return is to lend to the state.
Furthermore, eurozone currency, austerity and political woes have called into question our ability to facilitate an export-led recovery while the US has a similar illness to the UK but hasn’t implemented austerity yet (a privilege for the owner of the world’s reserve currency).
All in all there has been a large and significant shift to emerging markets who hold large amounts of Western debt; India, China and the far-east.
A Keynesian would suggest that the government needs to pick up the slack in the economy through investment projects to stimulate demand as investors aren’t committing capital to projects. But with austerity measures at home and fiscal restraints abroad, hands are very much tied under current proposals.
If fiscal policy is not an option, what about devaluing the pound in order to gain a competitive advantage in exports? Well, the pound is already extremely competitive and there is no such need to initiate a ‘race to the bottom’ currency war.
Is monetary policy an option? Quantitative easing, ie creating money to buy government bonds, has strong theoretical advantages but debatable practical effects. It can stimulate the economy with extra spending potential and it can lower interest rates which would stimulate investment.
Realistically, if left to the market, a round of quantitative easing will have little positive effect. First of all, interest rates are at all-time lows in order to try and stimulate investment and so monetary policy wont affect this. Secondly, the extra capital, if invested into private individuals or private banks, would simply be used to pay down the large existing debt (the debt and liabilities which have grown facilitating the financial crisis in 07/08). The situation here would lead to money being taken out of the system by paying down debt, slows the economy which leads to deflation which, in turn, leads to an increase in the real value of the debt. The weird scenario whereby the more you service the debt, the larger the debt becomes (known as debt-deflation).
Therefore the only way to effectively use a round of quantitative easing is if there are conditions on its use or there is a framework which channels these funds to productive sectors.
This is where regional banks could flourish.
Firstly, regional banks can only operate within strict boundaries thus becoming the hub for regional investment.
These regional banks would have two main roles: 1. Invest through grants to stimulate business growth and local opportunities (similar to the role the Regional Development Agency had) and; 2. The ability to lend to small-medium enterprises in times of need or in expansion as it can borrow and therefore lend at preferential rates.
It would be funded through a revised Project Merlin agreement which would pool extra financial resources from private banks, use the quantitative easing finance created and harness the potential for local philanthropists to invest.
The real draw is that the risk across regional banks can be spread whilst the risk to an individual bank is decreased because it will have local experts, investors and business owners acting as decision makers. A regional bank, with staff consisting of local people who would know more about the local area and local risk, should be at the heart of local investment.
With a sensible and realistic margin it will contribute to the sustainability of the institution whilst gaining the strong investment record needed to attract the big investment banks to continue to supply investment capital. The problem investors currently have is that there is very little to invest in which has the potential to make a return. Therefore the state should give the regions an opportunity to show and prove their opportunities and attract the level of capital necessary for growth, perhaps also combining social/community projects.
It is absolutely paramount that we start to invest in productive assets and manufacturing in order to balance the economy alongside the large financial gains from the city.
Furthermore, the concept could gain political momentum quite quickly. The localism agenda would put power back in local people’s hands, give the regions far more responsibility to generate its own growth and will form key public-private partnerships that are so necessary for financial sustainability and efficiency. Moreover, the accountability and transparency structure will ensure local people understand and can see what is being invested and where.
Regional banks is just one piece of the puzzle for a new economy. A post-financial crisis economy has to become more stable and so innovative ways to boost growth have to be found.
Allow the regions to take responsibility for their own growth by harnessing the power of national institutions, government investment and private capital.
Regional growth for national prosperity.