One of the things I'm most pleased about in the reaction to the LIBOR fixing scandal is the attention that has followed for proposals for a British Industrial Bank, mostly due to Ed Miliband's speech today*, and the publication of Nick Tott's report into a British Investment Bank.
It's one of the ironies of modern British industry and politics that huge attention is now being paid to the German KfW bank, which was the invention of the British occupation of Germany as we looked to finance the industrial reconstruction of the occupied zone. So a revived British Industrial bank would not so much be another German export, but a rehoming.
The case for a UK industrial bank, or a similar institution like a US SBA or SBIR is strong. We have an issue with lending to small and medium size business for extended periods, our private sector investment levels are low, and the UK private sector doesn't invest in R&D to the same extent as our comparator countries. (This could be a consequence of our economic structure, as well as a cause).
Other people will know far more about the economics of a proposed UK investment Bank than I do, so I'm sure Duncan Weldon, Jonathan Portes and the like will be discussing it soon. Read their stuff.
I want to focus on the practical politics of establishing such a programme and ensuring it's success.
First, seeking to replicate an Eisenhower era initiative (SBA), or an Adenaeur programme (KfW) or a Reagan era programme (SBIR) does not make you an enemy of capitalism. Nor do I think what Labour is talking about would be horrifying to Vince Cable, or even Michael Heseltine.
This wide political spectrum makes sense when you consider what lies at the heart of such an initiative: It is a way for government to offer subsidy, support, and security to private sector companies, who will keep most of the return on their successes, and nationalise most of their losses.
We should go into this with our eyes open, we will offer such a subsidy because we want to encourage business formation, expansion and growth. Why is this a role for the state? Because we believe business provides a broader social benefit than it's own profit alone.
This is important, because establishing a national Investment Bank is not cost free and cannot be cost free.
The Tott report suggests using National Savings and Investment to fund a new bank. This is a smart move, but we should remember NS&I plays a role in reducing the cost of government borrowing already. Should NS&I funding be diverted to an Industrial Bank, this would be reduced.
If half of NS&I current support for govt were diverted to a bank, the Govt would need to pay an additional £400million to finance itself on the open market. Assuming we don't just add it to the deficit, that money has to come from somewhere, and that will likely mean extra public spending pressures. However such a bank is funded, there will be costs.
Similarly, introducing SBIR wholesale into the UK, would involve an 1-2% "tax" on all procurement spend, which could then be used to finance Small Business innovation. That would be a significant squeeze on suppliers, or on budgets.
Finally, there's the accounting treatment of such an institution. Most European style 'State Investment Banks' or loan guarantee/insurance schemes would lead to an increase in our Net Debt and borrowing figures. It might be possible to draw a distinction between "good" and "bad" borrowing when talking to the Bond markets, but this would create extra pressure to bear down on "bad" borrowing, which would mean pressure on welfare and public service expenditure.
Nor would such a bank always be an unqualified success. Germany's KfW earned the name "Germany's stupidest bank" after it sent money to Lehman Brothers on the eve of their collapse. Outraged politicians, a police raid and a criminal investigation followed
I mention all these negatives because we need to remember an Industrial Bank would represent a subsidy to the private sector from the state.
Second, such a programme never be a quick fix to the current crisis of the economy. It can't do that – it is a long term programme that has to be sustained for decades to have a significant impact. It will therefore require long term political support.
From this, the political strategy should flow. Rather than presenting our plans as fundamentally moral (or worse, anti-market) ones – we should regard them as fundamentally practical and purposeful (and pro-market).
The moral argument will be washed away when the pressure comes to reduce funding in some other area with an equally valid moral claim, or when the bank makes it's first really stupid investment, or when it is revealed that someone has wasted a loan made to them on a truly stupid business proposition (or committed a crime with public funds).
The practical, long-termist argument will stick as long as the purpose is agreed upon, and the objectives are being achieved.
This is a way for the state to make capitalism work- it can be supported for left of centre reasons – more job growth, higher living standards, better incomes. It can also be supported for right wing ones – a shift of resources from public to private, support for entrepreneurs. The political key is to employ both, to secure as broad a swathe of support as possible.
In my view, this would also have the useful short term political effect of casting Labour as a pro-Business party, though that is incidental to the long term gain for our economy.
* On some of the other proposals mentioned , I'm afraid I don't know enough about the structure of banking to understand why a system of small banks, like in Spain, or the old US Savings and Loans, is better than big banks, or less exposed to risk. It strikes me that is something is "small enough to fail" it probably will fail. I thought the reason we have big banks now seems to be that the small ones fell over in the crisis. I'm probably wrong though, and I look forward to being corrected.