Anorak News | New Economics Foundation: Loons on the Loose

New Economics Foundation: Loons on the Loose

by | 7th, December 2011

THE new economics foundation (they’re so green and hip that they think there’s a shortage of capital letters) has decided that British banking is broken and that we really ought to all go and adopt the German system.

Local banking works. The experience of other countries that have thriving local banking sectors, including the US, Germany and Switzerland, has demonstrated that smaller, locally focused institutions are the ones that provide economic resilience.

Germany in particular provides an excellent case study of a different way of doing things. Once considered plodding and underperforming compared with swashbuckling British banks led by the likes of Fred Goodwin, the humble German savings banks, or sparkassen, have been quietly showing their mettle since the financial crisis began.

There are 430 of these banks, each of which is focused on serving its local area. They are public interest institutions with explicit social as well as economic objectives. They are prudently managed, but also will back new business ventures and stay with customers for the long term. Lending decisions are not made by computers, or sent to some remote regional office. Your branch manager has the authority to back his or her judgment.

All of which is really rather fascinating. One reason that it’s fascinating is that it entirely ignores the way in which Anglo and Rhineland capitalism are very differently financed. We tend to use equity, shares, to finance a company and they tend to use loans. So of course the way the banking system is set up is very different.

But perhaps they’re right? Perhaps we ought to move over to that other system?

Well, yes, maybe, but have a look at this chart here. The Germans had to spend more bailing out their banking system than we did ours. €450 billion they spent: that’s not just more money than we spent, that’s more as a percentage odf their larger economy than we did.

So the nef is actually suggesting that we should move to a banking system more likely to fall over and to be more expensive when it does.

Loons on the loose is too polite a description for them really.

Posted: 7th, December 2011 | In: Money Comment | TrackBack | Permalink