Of Credit Easing, SMEs And New Regulatory Models

Growth in Lending
Source: Bank of England

Good news that the Treasury is exploring the potential for using the London Stock Exchange's "Order book for Retail Bonds" or "ORB" as a platform for issuing bonds in small and medium sized businesses as a tactic in the government's credit easing strategy. But let's hope this is part of a wider solution that creates a broad 'safe harbour' for a range of instruments and platforms, rather than a nice cosy exclusive for the LSE and its member firms.

Euro Withers While Rome Turns

Giuseppe Lami/Ansa/REUTERS Hat tip: National Post

Too good a headline to miss - Italian politicians turn on each other on the eve of EU summit aimed at resolving the Euro crisis. The Euro slid against the dollar by the end of the day.

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."

Delegation: The Pyle Principle

The Peter Principle is the name given to the notion that "in a hierarchy every employee tends to rise to the level of his incompetence." In turn, Peter's Corollary holds that: 

""in time, every post tends to be occupied by an employee who is incompetent to carry out their duties" and adds that "work is accomplished by those employees who have not yet reached their level of incompetence". "Managing upward" is the concept of a subordinate finding ways to subtly "manage" superiors in order to limit the damage that they end up doing."

But the suggestion that "work is accomplished" in such an organisation implies successful delegation by management, itself a sign of management competence. That can't be true of an organisation governed by the Peter Principle, since surely it is incompetent from the top down. In such an organisation, therefore, it is more likely that issues are delegated to the level of incompetence and less and less is accomplished. Accordingly, either we should re-define Peter's Corollary or (acknowledging that delegation to the incompetent could be a tactic employed in otherwise sound organisations, e.g. to kill an unpopular project) we should proclaim a fresh principle. 

How about the Pyle Principle?

Does Occupation Work?

Much is being written about Occupy Wall Street and similar expressions of mass dissatisfaction about our financial system. In particular, many are giving advice on more practical alternatives to occupation, which misses the point:

"Occupy Wall Street is [a] leaderless resistance movement with people of many colors, genders and political persuasions. The one thing we all have in common is that We Are The 99% that will no longer tolerate the greed and corruption of the 1%. We are using the revolutionary Arab Spring tactic to achieve our ends and encourage the use of nonviolence to maximize the safety of all participants."

In other words, this is what people do when their faith in all the immediately practical alternatives is exhausted. 

But why? Does mass occupation 'work'? I mean, is Egypt now a better place? Wouldn't it be better to withdraw completely and assume the foetal position under your duvet? 

 

While I don't believe these protests have any causal connection with the changes that are democratising the financial markets, they are critical insofar as they represent a peak in our society's dissatisfaction with its financial institutions. I mean, this is not intended to shock or wake people up, like a strike or a noisy protest march, or an attempt to get the attention of law-makers outside Parliament. Quite the reverse: pitching your tent in the beating heart of a giant city is a sign of utter confidence that every rushing passerby, every person who reads the paper or watches the evening news will understand exactly why you're there.

For this reason, such occupations are a sign that the majority of us have rounded the change curve. It means we've moved beyond 'shock' at how broken things are, through 'denial' and beyond 'anger and blame' - even though that appears to be what all the signs are about. Those people wouldn't be there if they instinctively sense that we all understand the world has changed for the worse. That something has to be done. In fact, the reason they're gathering is to figure out what is to be done.

Ironically enough, these occupations mean we're moving on.