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Leveragers are out of time - and caused the problem in the first place

By John Clancy on Nov 18, 12 01:53 PM in

This is the Blog version of my Birmingham Post print column from last month.

If you hear or read the word 'leverage' in any investment or economic growth document or policy now, I reckon you should ignore it or throw it in the bin.

The problem is, almost every such policy or document seems to include the L-word.

You will read it in 'Funding for Lending' (FFL) schemes from the government.

You will read it, or something exactly like it, in Enterprise Zone policies, in LEP emerging strategy policies across the land and, especially, here in Birmingham.

If anything, it was Leverage that got us into the mess in the first place. It sure as hell won't get us out of it.

Money follows money, is the theory.

The investment leverage idea is that we start from a base of 'real' investment money; and the very existence of the base will enable other borrowed 'sort-of-real' funding to flood in to 'match' it; then that itself will be built on by further leveraged, undefined money, often massively bigger that the base: a tottering , wildly wobbling, inverted pyramid.

The big danger is that people who think we can go back to funding things through leveraged finance, matching and growing from here, there and everywhere, are showing they didn't understand how the collapse happened last time.

They are also showing they do not understand the consequent, cruel financial realities of today.

This putative, leveraged money simply isn't there. These kinds of streams of finance don't actually exist now and are unlikely to for a long time yet, if ever again. The idea of them is a pocketful of mumbles, and no more.

Leveragers are desperate to magic up money that doesn't exist. If we build it, the money will come. It won't.

It is a field of dreams, I'm afraid. And we need to wake up. We have to base the future on real money.

I believe that the Funding for Lending scheme will be another waste of time, long-term.

I believe the Enterprise Zones and the Greater Birmingham and Solihull Local Enterprise Partnership will ultimately fail to do what their best intentions for jobs and growth are as well, if they base their models on accessing finance from leveraged La-La land.

Yes, the FFL will probably get some money into businesses and consumers, but nowhere near enough to make any real difference.

The Enterprise Zones and LEPs will get some seed investment in, but the output in terms of growth and jobs on the current models will actually be very modest and far from their promises. They are two small pieces of a jigsaw, but they are too often presented as the entire puzzle solved.

Take 'Funding For Lending': this is what is designed to get money into businesses and families.

The plan is that £1Billion in real government money (from you and me as taxpayers) will be put into the scheme. The government 'expects' this to be 'matched' by 'the banks', making a wider base. The £2billion would then be enough to 'leverage' another £8Billion from other 'financial institutions', making a £10Billion future fund.

I assume 'the banks' will have to be strong-armed into reluctantly taking part. And the assets they put in, we mainly own or guarantee as taxpayers, anyway, of course. Where will they find this money?

But where in the world (literally) is the other £8Billion going to be conjured from?

The world's financial pathways are completely dry. The European banking, financial and currency systems are in lockdown.

The best hope (and not a great one) from Europe might (just) be the new bazooka firepower of the ESM (if Germany lets it happen).

This money will go into the web of interdependent bust banks across the continent just so they can remain barely liquid and not collapse. The rest of the firepower will buy up sovereign debts of Spain and Italy, so that the contagion of any Greek exit can be contained.

European and UK banks and financial institutions are hardly likely to start piling in to UK leveraged funds (whether for FFL, LEPs or EZs) any time soon.

The drastic slowdown in the European economy itself is clearly preventing the financial pathways from flooding into life.

In turn, the Chinese economy, a previous driver of both growth (and significant provider of finance to the world) is in reverse, relatively speaking, and also much more money is staying at home. It also turns out that they and their money were a bit more dependent on growth in the USA and Europe than we all thought.

Their money and influence is much more likely in future to go into the (often) bilateral state-capitalist relationships with emerging economies in Africa, Asia and South America. Along now with the USA, we are, once more, the Old World.

American money, too, is going into domestic on-shoring of its industry and infrastructure. Or it will even hit the 'fiscal cliff' in January which could further threaten growth and investment money everywhere.

The cupboard is bare.

Then there is the wobbling inverted pyramid (on top of another one) of projecting-income-from-the-future-and-borrowing-against-it leverager's method.

Once we have the whole leveraged deal sorted, we can estimate what the income from it will be and further borrow against that future income now!

In other words, we Field Dream that 'If we build it, they will come', then assume they will provide us with further income, which we borrow against to spend now. Future Financing is crackers.

I am afraid this entire edifice rings several dangerous recent bells; and bells of doom if we carry on.

The danger is that the borrowing on these schemes starts with the public sector in the expectation of the private sector later lining up, but that private sector train never arrives.

So let's stop the financial dreaming.

There is enough wealth and human capital in this economy to be harnessed into investment and growth. It has, though, to be based on real money and wealth, not projections of it, or finding money from an irredeemably broken world financial system.

I make no apologies for repeating that the UK Pension fund assets of £1.3Trillion (massively public sector pension funds) are the best place to start with real money. We know it's there; it's not some shimmering mirage in the future.

This real money has to be massively repatriated into and throughout our own real economy, through real Regional Investment Banks.

My advice for the Leveragers: don't believe in the future too much, or the past will catch up with you.

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