Google, Amazon and The Shape of SME Finance

In November 2007 it seemed clear that facilitators like Google and Amazon would capitalise on their alignment with their customers' day-to-day activities to disrupt banking. Both of these giants already have e-money licences in Europe (I helped Amazon apply for its own), and the latest foray is into trade finance. Google will offer a line of credit for AdWords advertising spend, while it appears Amazon will lend to selected small businesses against their projected sales over the Christmas season. 

While these services may be offered initially in the US, where there are lots of small business funding options, bear in mind that only four UK banks control 90% of the small business finance market and are lending less and less to them. And while some UK banks enable some merchants to obtain cash advances against their card receivables, it's not exactly a core activity.

The competition alone must prove welcome, yet the critical feature of both the Google and Amazon services is that they are seamlessly intertwined with customer behaviour. Both businesses could have decided to launch free-standing, me-too banking services (like the UK supermarkets), but they have not done so. No doubt they also intend to attract new customers with the latest services, but only by showing that they support what small businesses want to do - namely, sell their own goods and services across a staggering array of markets and demographies.

And by patiently facilitating their customer's activities, neither Google nor Amazon needs to incentivise staff to sell services to people who don't need them, as banks have done.

Banks Winning War On SMEs

The latest Bank of England "Trends in Lending" report reveals that a further contraction in funding available to SMEs, combined with unjustified hikes in the cost of finance, are causing small firms to conserve cash on deposit for 2012 - which in turn means free money for banks (my emphasis added):

"The major UK lenders stated that credit availability to SMEs remained unchanged or had eased. Most major UK lenders reported that their expectations for SME credit conditions during 2012 were less optimistic than their expectations six months ago. Under this outlook, which they attributed to current economic uncertainties, SMEs were expected to continue to have a reduced risk appetite and to be cutting back on investment and non-essential spending.

Concerns about credit availability have been reported, however, by business contacts of the Bank’s network of Agents. Contacts of the Agents reported that credit conditions continued to be tighter for SMEs compared to larger corporates. Small businesses and new business start-ups still found it difficult to gain access to credit. The Bank’s Agents also reported that some small firms were holding sizable cash balances because of concerns about the continuing availability of overdraft facilities. They reported that some small firms were reluctant to approach banks out of concern for an increase in the cost of existing borrowings, or reductions in overdraft limits, and sometimes had resorted to the use of personal loans instead."

Meanwhile, loan pricing by banks "continued to drift upwards", notwithstanding that:

"Default rates and losses given default were reported to have fallen for both small and medium-sized firms over the past six months, although some pickup in these quantities was expected in 2011 Q4 for medium-sized firms. Most major UK lenders, however, reported little evidence so far of deterioration in their existing SME credit portfolios."

A Litigation-led Recovery

Those struggling to find a job take note. The recents string of law suits filed against major banks by the Federal Housing Finance Agency confirms that the litigation services market will lead us to economic recovery.

By the time the parties have counter-claimed, cross-claimed and largely disappeared, taxpayers on both sides of the pond may of course syphon some damages out of the giant round-robbin. But it's when you add in the legal and other professional/support time, software and cloud-computing capacity, stationery, coffee, taxis, restaurants and takeaway food that you know we're into some serious redistribution of wealth. Then there are the spin-offs: all the discretionary spending of everyone involved, on holidays, cars, boats, pub lunches and ice creams for the kids - all trickling through into the real economy.

I reckon there's a good five years left in it yet, by which time the same machine will be chewing hungrily into the next mess.

Litigation is the future.

Joking aside, anyone who thinks that being a securities litigator might be a bit dull should watch how much fun Senator Carl Levin had cross-examining Dan "Shitty Deal" Sparks of Goldman Sachs on their Timberwolf CDO deal:

Sunlight Fades From EU Summer, Hairy Bankers To Holiday In Caves

Well, that's it folks. It's mid-July, and we can all head for the beach, the hills or the village boules court, secure in the knowledge that only 8 banks failed European Stress Tests with a total shortfall of €2.5bn.

Everything will be here when we get back.

Right?

I mean, it's not like Italy's predicament is putting any strain on the zerozone, or the US is in the process of bursting it's 'debt ceiling' and teetering on the edge of a downgrade by those ever-reliable ratings agencies, is it?

And even if the bigger picture does take a turn for the worse, surely the hacks will finally stop hacking celebrity voice mails and warn us?

Wrong.

If we're lucky there might be some hand-wringing and dithering over uncertainty about what's to be done; before a staccato burst of post-Lehman style, over-the-weekend bail-outs, bail-ins sales and mergers involving banks, insurers, pension funds and even whole countries. Greece will become an EU-protectorate - no sovereignty, but a great place to go sailing.

But what's really so uncertain?

When a borrower - be it a country, a bank or anyone else - is insolvent, there's a stark choice for lenders to make. That choice is not between a higher and lower rate of interest or return on your principal. It's about how much of your principal you are prepared to lose. All, or some? A 'haircut' you must have. Like the one Nicholas Brady arranged for lenders to Latin America in the '80s. Louis Gargour of LNG Capital (with whom I found myself chatting about Brady Bonds and short-selling on Thursday night) explains this nicely in the clip below.

In Europe we lack leadership. We lack decisiveness in the face of uncertainty. And, without either, there's little official appetite for sunlight - for hard facts. Officials who are supposed to be 'in charge' placate each other with 'stress tests' and other PR puffery. In effect, they would rather live in the dark and let their hair grow, than lead the way to the barber.

I presume they will holiday in caves.

Cut Greece Loose

Cutting the Gordian knot

Talk about Zeitgeist - last Saturday morning I was in Porto, reading about the Greek crisis in The Economist. It was my first trip to Portugal, which I guess was good timing for them, economically speaking. Next month, Spain receives some of the Pragmatic Pound. And I'd like to think I'm doing my bit for Ireland, albeit on the meter, by assisting a financial start-up there (sorry, still in stealth).

But I won't be bailing out Greece.

Tax-dodging, low productivity and overly generous pensions aside, The Economist reckons the key to that country's dismal plight is political patronage. "Greece needs transparent and impartial rules, but politicians are not keen to limit the scope for dishing out favours." Everything from railways to medical budgets leaks cash to powerful lobby groups.

And, reading on, it seemed to me that in this sense the Greek rioters have more in common with the proponents of the "Arab Spring" than their EU colleagues. As the ebbing economic tide exposes the littered wrecks of corrupt schemes and relationships, the have-nots are descending in droves on the survivors and what's left of their loot. In Syria, the crowds are putting the "squeeze on Assad" by demanding a "civil democracy" that comprises free elections, freedom of speech and assembly, protection of minorities and an end to repression. The longer the government resists, the more citizens withhold labour, and capital flees. In return, the regime dishes out more favours, stokes inflation and the country edges further toward meltdown. Egypt is clearly further along. Libya perhaps further still.

This chaos is vital for renewal - though bloodshed is not essential. Back in June '09 I suggested that the UK's constitutional reform must be a messy process, and it's proving just that, but riot-free (you can ignore the photo calls). A dynamic, open, democratic process that encourages broad engagement by all stakeholders cannot realistically be neat and linear.

Though in May 2010 I also suggested going short EU banks and long riot shields. And if things do turn nasty it's perhaps worth bearing in mind Mathias Koenig-Archibugi's reminder to The Economist of the lines from "The Third Man":

“In Italy for 30 years under the Borgias they had warfare, terror, murder, and bloodshed, but they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland they had brotherly love, they had 500 years of democracy and peace, and what did that produce? The cuckoo clock.”

The point is, we do the Greeks no favours by bailing out their system of political patronage. The bureaucratic emperors must be shown to have no clothes.

So cut Greece loose, I say. Only then will the Greeks have their Renaissance.

How We All Pay For Card Payments

Few people are aware that when you pay using a credit or debit card, your 'issuing' bank charges the retailer's 'acquiring' bank an "interchange fee". The rate is either agreed directly between the banks, or is imposed via a card scheme, like Visa or MasterCard. Nobody outside the banks and card schemes really sees this fee. The retailer receives your money for the purchase price, less a service charge. A little bit of that service charge is kept by the retailer's bank as a payment processing fee, but most is kept by your bank as its interchange fee.

Like any other retail overhead, these charges need to be accounted for in retail pricing. So, even if you aren't paying by card, interchange fees are a significant drag on your personal economy. The European Retail Round Table, a network of large retailers, has found that "the average European household pays €139 per year on interchange fees". And, according to the European Commission, "in the EU, over 23 billion payments, exceeding a value of €1350 billion, are made every year with payment cards." In other words, retailers have no real choice but to accept payments by card.

But who benefits? The ERRT cites a 2006 report found that only 13% of the fees go toward your bank's processing cost, while 44% of interchange fees pay for cards reward programmes - which of course only benefit cardholders. That leaves a healthy profit for issuing banks. In their defence, Visa and MasterCard claim that interchange fees are essential to investment in systems, marketing and anti-fraud efforts. Which is what banks must do themselves, anyway, to meet their own anti-money laundering and prudential requirements. The schemes also suggest that interchange fees may be cost-neutral to retailers if savings on the acceptance of cash and reduced check-out times for card payments are factored in (which has not been accepted in Europe).

Looking at the situation from the consumers' standpoint, non-cardholders get no benefit from card loyalty schemes at all. And even cardholders themselves might prefer the equivalent of interchange fees being spent in ways that directly improve their retail experience.

The card schemes argue that because retailers say they have no choice but to pass on interchange costs to consumers, the measure of whether interchange fees are really too high is whether retailers would actually lower their prices - and they would not. That doesn't hold water. Firstly, all of a retailer's costs are ultimately accounted for in its prices. So it would be wrong of retailers to say that all consumers are not paying for interchange, unless the retailers specifically imposed a specific interchange-related fee only on those paying by card. Secondly, as I commented earlier on Digital Money, the card schemes' assertion rests on the assumption that the only way retailers should reasonably differentiate themselves from each other is in terms of price. So the card schemes would have it that every time a retailer cuts any of type of cost, including interchange fees, the retailer should take the ultimately suicidal step of always reducing prices to the consumer, rather than, say, investing in increased selection, improved customer experience or expansion to achieve economies of scale. That's an unrealistic position in itself, let alone one that would support the assertion that if retailers do not cut prices to consumers on the back of lower interchange fees, they are somehow behaving just as anti-competitively as the card schemes are alleged to be in imposing them. The retail markets are distinct from the market for payment services. Lack of competition in retail markets can be - and is frequently - addressed on its own merits and action taken accordingly.

So it's no surprise that competition regulators have given a lot attention to how interchange fees are set and imposed. The Reserve Bank of Australia has perhaps been the most progressive. It was the first to impose a standard rate for interchange fees in July 2003 and has maintained downward pressure ever since. In December 2007, the European Commission ruled as anti-competitive interchange fees on cross-border MasterCard and Maestro branded debit and consumer credit cards. The EC later accepted certain undertakings to settle proceedings for alleged breach of the ruling. European Commission action in relation to Visa Europe's interchange fees has culminated in a reduction of debit interchange fees. But importantly that decision "does not cover MIFs for consumer credit and deferred debit card transactions which the Commission will continue to investigate. The proposed commitments are also without prejudice to the right of the Commission to initiate or maintain proceedings against Visa Europe's network rules such as the "Honour All Cards Rule", the rules on cross-border acquiring, MIFs for commercial card transactions, and Inter-Regional MIFs."

The battle is also raging in the US, where three bills were put before Congress in 2009 to regulate interchange fees. The Federal Reserve is consulting on proposals to limit debit card fees from July 2011 "one that would base fees on each issuer’s costs, and one that would set a cap of 12 cents per transaction", as explained here by Jean Chatsky, and discussed on Digital Money. Potential implications for bank stocks are discussed here.

Ultimately, however, the outcome of all this depends on which payment services best facilitate the end-to-end activity in which a payment is being made. The winners will not be those who insist on viewing consumers' activities through the lens of their own payment product.


Image from GAO report on interchange.

Hey Eric: Lend Your Euros Directly To Other People

Like previous financial crises, this one won't end until individual and collective confidence in banks and the financial system is restored. And while it's all very well for the Eurozone's political masters to be demonstrating their 'political will' to hold the Eurozone together at individual taxpayers' expense, their latest attempt at restoring confidence has not exactly impressed Spain's debtors...

But such bail-out headlines merely the typically dominant institutional narrative. The real question is whether the Euro and EU institutions actually have the confidence of EU citizens - especially taxpayers. A recent poll suggests they do not: only 42% of Europeans trust the European Union - reflecting a general disenchantment with EU institutions over the past few decades. Meanwhile, in sharp contrast, bottom-up facilitators that enable citizens to participate in shaping and personalising their own services have done very well.

This is reflected in the behaviour of EU citizens on the economic front. The implications of the one-size-fits-all Eurozone monetary policy seem to be regarded as just as unfair by German taxpayers and the French savers supporting Eric Cantona's suggestion for mass bank-withdrawals on 7 December as by those hitting the streets of Greece and Ireland. The Guardian quotes Valérie Ohannesian, of the French Banking Federation, as saying Cantona's appeal is "stupid in every sense". Yet, crucially, she did not explain why people should feel more confident about leaving their money on deposit, or why it is fair that banks receive taxpayer bail-outs while taxes increase and spending is cut. In the absence of any other narrative, each bail-out undermines our confidence even further, to the point where we hit the streets and seriously consider suggestions like Eric Cantona's.

But it doesn't have to be this way. There is a bottom-up narrative emerging, and our politicians need to focus on it.

Eric Cantona's confident call for mass withdrawals hints at the fact that people are prepared to put their money where their mouth is. But it would be futile for those with surplus cash languishing in low interest savings accounts to withdraw it all and hide it under their beds. Instead, they should join those who already put their money to work helping others, by lending it directly on peer-to-peer lending platforms to creditworthy people and businesses at a decent rate that also represents a decent return.

Does Debt Due Diligence Scale Well Enough?

I've often made the point that we will only curb excessive fees and risk-taking in the financial markets by vastly simplifying products and making them more broadly accessible. In debt terms, think of this as the 'flat' distribution of risk - or parcelling each loan amount into tiny loans at inception, like at Zopa - rather than the hierarchical or vertical distribution of risk in today's bond markets - where a series of separate loans is packaged into 'tranches' that a bank and credit rating agency estimate will perform similarly, and bonds are issued (and derivatives concocted) according to the varying grades of likely default risk.

The critical potential downside to hierarchical risk distribution is being illustrated by the ongoing 'fraudclosure' and 'forced repurchase' problems in the US mortgage-backed securities market. A root cause may be that due diligence on the scale at which loans must be packaged to fuel the existing bond markets may not scale well enough to provide adequate risk estimates, particularly when the loans have a short history or there is a lengthy chain of loan ownership or loan servicing obligations. Of course, we have a similar challenge on a grander scale in the market for credit default swaps and collateralised debt obligations. But that's a layer above where the current problems are occuring.

The 'fraudclosure' problem arises from allegations in a large number of cases that subsequent loan-owners have not satisfied the formal requirements involved in foreclosing on problem loans. JP Morgan analysts reportedly believe that delays in foreclosures while the technical issues are addressed "will damage senior-ranked non-agency mortgage securities, costing as much as 4 cents on the dollar for certain bonds if postponements take six months."

The 'forced repurchase' saga centres on allegations that certain loans that were sold did not meet underwriting or appraisal standards under the relevant debt sale agreements. The same JPMorgan analysts reportedly believe the banks' losses from repurchases of such loans "will likely total $55 billion to $120 billion, or potentially $10 billion to $25 billion for the next five years."

The fact that these risks have gone unnoticed on this scale until recently suggests a substantial flaw in the due diligence methodology employed in the securitisation and/or subsequent 'collateralisation' process. And one wonders whether any different methodology has since been used by those reporting on whether or not they have an issue amongst their existing holdings, and the scale of any such issue. The explanation of one methodology allegedly used by an anonymous 'whistleblower' to package loans into bonds, was published today by Zero Hedge, and makes interesting reading. In short, the person says:

"...we worked with underwriters of the deal to perform due diligence. That is where this process breaks down. They use sampling to verify the makeup of the pools. There is a lot of pressure to get the deals done in a timely manner so they don’t have time to check every asset. The most I’ve ever checked on a deal is 30%. We’ve done some pools that came back very different from what the trader originally told us.

...

Don’t get me wrong, I’m not saying that all deals are incorrect, most aren’t. I’m saying that many are, and we have no way of knowing which deals are tainted. Fortunately, most deals have been seasoned a bit which make them easier to value, but the foreclosure documentation is just one instance where my shady scepticism has been vindicated. I knew there was shit floating around in the pools we were putting together, but the sampling technique and level of due diligence was never going to clean it out."

In other words, the scale of bond issuance, pressure of time and the cost of 'full' due diligence seem to encourage costly short-cuts which generate hugely uncertain outcomes.

But this seems to be far less of a problem where loans are appraised and parcelled out at inception according to transparent underwriting standards. Lenders' experience at Zopa is instructive here. But I would say that, wouldn't I? Funding Circle and the Receivables Exchange are examples in the small business finance space, as is the idea of reverse invoice discounting.

Of Exhaust Pipes, Tyres And Social Lending

I was lucky enough to be invited to Tuesday night's Financial Services Club talk by Giles Andrews, CEO of Zopa. It was a real treat to hear an update on progress at the 'old firm', especially when Giles showed the unmistakable 'hockey stick' inflection point in the £100m of social lending on Zopa since March '05. Zopa estimates that its members have cornered a 1% share of the personal loan segment of the UK lending market, but with an average default rate of 0.7%.

In an intriguingly fresh take on the social lending phenomenon, Giles explained that savings and loans are in the same class of vulnerable, cosy-little-profit-centre for retail banks that exhaust pipes and tyres once occupied for car dealerships before Kwikfit came along. And just as Kwikfit's focus on price and convenience enabled it to steal an unassailable march on the incumbents in the car servicing market, Giles estimates that in another 5 years Zopa members could easily achieve a 10% share of the personal loan segment of the UK lending market - and people's participation in social lending of all forms could account for half of all UK personal loans.

Given everything else likely to be going on in the retail banking market over the next 5 years, I guess banks could be forgiven for leaving a little more money on the table for the rest of us.

Of course, economically, the reality of social lending is starkly different from the cosy-little-retail-bank-profit-centre represented by traditional savings and loans. Individual lenders and borrowers divide most of the 'spread' between social lending and borrowing rates, not Zopa itself - and certainly not retail banks.

In addition to the economics, Giles believes that transparency is a key driver of Zopa's success. That's not an empty statement, given that members set their own terms and seasoned Zopa members moderate their discussion boards rather than Zopa staff. Zopa also encourages members to use Twitter for informal requests, queries or non-sensitive admin, because it's faster and more accessible, efficient and transparent than email or spending ages holding on the phone or visiting a physical branch.

With these competitive advantages, social lending is definitely here to stay.

Here is Chris Skinner's in depth report on the evening.

That Government Waste Report In Full

Isn't it annoying that the 'news' media 'report' on the results of research, but never provide a link to the source? Well, here's the link to "Efficiency Review by Sir Phillip Green", without any link to media reports. So there.

It's only 33 slides, and I urge every taxpayer to take it in.

My 'takeaways' are that nobody knows enough about how the public sector spends our money to ensure we get real value for it. So we don't even know how much money could be 'saved' by finding out. But Sir Phillip's best guess is that getting a handle on it all will be very worthwhile in terms of policemen, teachers and other essential front-line public services, if not outright spending cuts.

I hope they get on with it. Fast.

Greed Investment Bank?

Great to see Private Eye focused on the proposals for a Green Investment Bank ("The Green Stuff", p. 9, No. 1269).

On top of the objections I've mentioned previously, the Eye has rightly added its concern that the GIB would absorb billions in public funds by absorbing a hotchpotch of other green funding initiatives and quangos, yet "should not be accountable to ministers or to parliament [and] would be unlikely to be subject to the Freedom of Information Act". Or anyone, probably.

But don't worry. When the GIB hits the wall because no one understands the risks it's taking on, we can all bail it out.

It's as if the credit crunch never happened.

Image from Zazzle.

The End Of Cheap Travel?

I've been an avid supporter of low cost travel operators, but recently I've detected a marked change in their attitude, and some fairly hair-raising pricing ploys. Perhaps it started with some of Ryanair's tactics, but I'm afraid it may not have stopped there.

My recent experience seems to bear out Stelios's complaint that easyJet no longer deserves to use the word "easy". Not content with a 2.5 hour delay on the way to Mallorca because of the need to change crew, easyJet cancelled the return flight for 'operational reasons', according to the unapologetic desk attendant. We opted for a flight scheduled to leave 2 hours later, but a further 2 hour delay ensued while a charter company jet (typically configured on the assumption that humans grow no higher than 6 feet) was summoned because EasyJet had run out of planes (according to the pilot, who also mentioned strikes by French air traffic controllers). It appears that if we'd chosen to fly at midnight, we'd have paid £25 less per head. Should low cost airlines be obliged to refund the difference if flights are delayed beyond such a price band? The difference was almost enough to cover the cost of carrying our bags, especially as I'd foolishly failed to pay for baggage online when booking the flights 5 months ago, so incurred a baggage charge at double the online rate - £109 or 17% on top of the flight itself.

Meanwhile, back at the car rental desk, there was the usual kerfuffle over the fine but expensive distinction between "damage waiver" and "super damage waiver". I confess to always querying staff about the rationale for two 'waivers', as I suspect the cost of a combined waiver would be significantly less. But this time I was truly gobsmacked at having to pay Europcar an extra €173.32 to cover the insurance excess of €730 for 14 days (€12.38 per day on top of a base rental of €35.92). I was similarly stunned to learn that Europcar proposed to charge €75 each for two booster seats that we bet (correctly) you could buy in the local Carrefour for €16 euros a pop (€32 for the Ferrari-logo version). We'd pre-paid the basic rental of €502.88, so €348.32 worth of pretty essential 'extras' meant that the real cost of what we wanted was an additional 70% of the prepaid amount. Certainly true to the Europcar tag line: "You rent a lot more than a car".

But why all this nonsense? Is it perhaps because if 'low cost' travel operators were up-front about the 'real' cost of their services the average budget traveller would simply stay home or travel less often but with a 'traditional' operator? How many infuriating experiences will it take for many customers to take one of those options?

I sense that in this Age of Conspicuous Thrift the Western experiment with low cost airlines and other allegedly budget travel operators may be coming to an end. And we may well see a return to the era when the closest most people came to international travel was the effervescent luxury of a Peter Stuyvesant commercial.

"Mad Men" Minister's Role Model Should Be Nanny McPhee

In this age of bold government budget cuts, it seems odd timing for "Equalities Minister" Lynne Featherstone to waste time and money recommending that British girls and women should aspire to be like some TV actress. How very New Labour.

Politicians like our Lynne should aspire to be like Nanny McPhee, who arrives only when desperately needed and knows exactly when to disappear into thin air. Like now.

Image from Total Film.

Is The Retail Finance Market Opening Up?

The Bank of England reports a "widespread retreat from risk" amongst UK banks, in the face of:

• the sovereign debt crisis;
  
• a heavy refinancing schedule until 2012;
  
• the impact of the banks' own reduced appetite for risk;
  
• greater insolvency risk, particularly amidst negative equity in the commercial property sector; and
  
• higher future capital/liquidity requirements.
  

That's why we've also seen:

• a 23% decline in lending under the government-mandated small business loan scheme in the 6 months to March (despite bailed-out banks being told to lend more, rather than less);
  
• Moneyfacts report that the number of mortgage products has fallen, and margins remain high.
  

And it's not just on the lending front that banks face pressure. Savers must be offered a better deal after the Office of Fair Trading responded favourably to a super-complaint by Consumer Focus. If consumers are careful to switch for better returns, that unduly cheap source of bank lending capital funding may begin to dry up.

Fear and caution amongst the banks is likely to continue for some time yet. Deloitte says CFO's fear a double dip and government paves the way for cheaper public sector redundancies as departments prepare to implement 40% budget cuts.

Yet businesses and individuals still need funding at rates that don't merely suit the banks. The fundamentals that made Zopa a great idea in March 2005 are even more favourable today.

Necessity remains the mother of invention...

Image from Monica's dad/Flickr/Some rights reserved

Cheap Working Capital For Small Business

Over at Oikonomics, we are discussing how to balance the relative importance of what happens inside the bubble of the City with what happens in the 'real' economy.

From a regulatory standpoint, the credit crunch should have taught us to acknowledge the links between the wholesale and retail markets and regulate them both as part of a whole.

Excessive investment banking fees and bonuses are a direct result of a regime that reserves the job of matching investment funds and opportunities to a privileged few. "Democratising" the financial markets, or opening them up to public participation via simple, transparent products and 'thin' intermediaries who charge proportionate fees could break this stranglehold and result in a more inclusive, reliable financial system.

Artificially separating consumer and small business credit from the FSA's narrow remit has also allowed giant banking groups to 'shade' their unduly high margin downstream distribution activities from regulator sunlight, even though they feed the wholesale markets for CDO's etc. Left to fend for itself as 'independent', the OFT has not had the clout to constrain the likes of high bank charges and  card interchange fees (it's failure to clean up mortgage lending became so embarrassing it lead to the creation of the FSA's 'high street firms' division). Even now, lending to the 4.3m small businesses in the UK is pretty much unregulated and banks are getting away with all the old tricks in that market. Yet improving SME access to affordable working capital must be a top priority if we are to grow our way out recession.

So these things should all receive the same regulatory sunlight as the mis-selling of endowments, mortgages and payment protection insurance. Limiting bank margins to appropriate levels in the 'forgotten' markets would encourage competition from simple low cost products distributed by 'thin' intermediaries. Again, this would result in a more inclusive financial system and cheaper working capital for small business.

Spend Now, Cut Later - But Stop Wasting Money

Leading economist, Paul Krugman, continues to argue forcefully that Governments of economies in recession should spend now to support economic recovery and repair their giant budget deficits when the recovery has taken hold. If governments engage in "penny-pinching" now, he argues, economic recovery will take so long that the unemployed will become unemployable, and there won't be enough tax revenue generated to ever get the deficit under control.

This does seem wise, but also seems to assume that all government spending supports economic recovery. But surely idiotic schemes that employ few people and merely generate further cost are not going to aid recovery. Similarly, investing in ways to remove structural inefficiency would seem a better re-allocation of existing resources than simply waiting to fix the inefficiencies when the good times roll. Presumably this would mean re-assigning the management consultants who were tasked with dreaming up New Labour policy nonsense to improving public sector efficiency instead.

Or does Mr Krugman want us to keep wasting money at the same rate?

Image from Look Up Fellowship

We're Going On A Bear Hunt

While the fiscal bears are rampaging across Europe, devouring costs wherever they can be found, the old bulls bellow that the planned austerity measures are dooming us to a vicious spiral of debt deflation:

"Leading the criticism is Nobel-winning economist Joseph Stiglitz, a former chief economist at the World Bank who now advises several governments and has warned against what he terms the "deficit fetishism" of the cost-cutters.

In an interview with French newspaper Le Monde this month, Stiglitz said that Europe "is facing disaster if it continues along this path.""

But disaster has already struck, let's face it. And the fiscal bulls borrowed and spent til there was no alternative but to reign in and restructure. With apologies to Michael Rosen:

We can’t go over it.

We can’t go under it.

We've gotta go through it!

Squelch, squelch, squelch

Image from Natureandkind.com

New Labour Died Penniless

Well the news was characteristically left in a drawer for someone else to find, but it's official: New Labour died penniless.

I'm amazed any of them had the temerity to turn up in the Commons today. It's little wonder they won't find a leader until September.

EU: Papering Over The Cracks

The EuroZerozone is in all kinds of trouble now, having staked its whole economy on the ability of the Greeks, Portuguese, Spanish, Italian and Irish to reduce unemployment, public spending and public borrowing under IMF-style conditions.

More ominous still, the US Federal Reserve has had to step in and co-ordinate global central bank co-operation to "prevent the spread of strains to other markets and financial centers." It added that "Central banks will continue to work together closely as needed to address pressures in funding markets."

But as we've seen from the subsequent unabashed self-indulgence amongst bailed-out banks and bankers: the pressure is off once you know that no one will let you fail.

Stay long on riot shields ;-)

Image: The Rival Bill Posters

Zerozone? Short Banks, Long Riot Shields

After last month's gory detail on the UK's financial vulnerability, another barrage of charts from Zero Hedge illustrates why the fasten seat belt sign remains switched on.

The charts show the vast quantity of government debt issued by Portugal, Ireland (and/or Italy), Greece and Spain (now called the "GIPS", to be politically correct) due to be repaid ("mature") simultaneously.

"So what?" you may ask, if you've been distracted by the UK elections.

The charts also reveal high unemployment, budget deficits and public borrowing. So these countries will struggle to pay investors to extend the due dates ("maturities") on existing loans - “amend and extend” in callous market jargon. Investors will cut their losses and/or refuse to lend at less than credit card rates. Bail-out bodies, like the International Monetary Fund (IMF) will only help if the country concerned can implement 'austerity measures' to cut its deficit and get its economy under control.

The results of suddenly imposing such measures on citizens who hadn't realised how bad things were - or why - can be seen on Greek streets:

Not great for tourism, one of Greece's only growth areas.

In fact, Zero Hedge is tipping "the inevitable disintegration of the eurozone and the upcoming eventual debt payment moratorium." Which means there's a lot more mayhem to come for the European financial system. And even the EuroZerozone" countries with the deepest pockets - like Germany and France - could need to rein-in substantially.

So, if the UK is to reverse its trade deficit, it must find new export markets pretty fast. Here's how Economics Weekly thought 2010 would play out on the export front as at 1 March (i.e. before the Greek bail-out):

Given the speed of deterioration in the Greek scenario during April, the demand from EU countries may well be over-stated. And the debt maturity charts suggest 2011 could be worse.

A good time to go long Chinese riot shields?