It is human nature that some of the most red-blooded capitalists, who during the good times used to froth at the mouth at the thought of any kind of public expenditure, are among those now shouting loudest for help from the taxpayer. The most vociferous criticism of Lord Mandelson’s plan to guarantee loans for small businesses revolves around the assertion that it does not go far enough, promising £20 billion worth of capital compared with a similar, £50 billion scheme proposed by the Conservatives last month. There has been rather less complaint about the principle of bailing out private businesses and what it means for the future of enterprise.
We broadly welcome an emergency scheme which will help otherwise sound businesses survive the current constriction on credit. Businesses, especially small businesses, have been treated appallingly by the banks since the credit crunch began. It is one thing when businesses fail because they cannot afford the interest repayments on their debts; it is quite another when banks condemn businesses to bankruptcy by calling in debts even when repayments are being met. If a bank is prepared to advance a loan, it is wrong that it should then call in that loan on the basis that the assets on which it is secured have fallen in value. If the banks demanded instant repayment of mortgages from homeowners who were still meeting their repayments but whose house is now worth less than their loan, there would be outrage; yet this is the situation in which many businesses find themselves.
In the longer term, it may be necessary to legislate against unfair contracts in business loans. In the meantime, we believe it right that the state should step in as an emergency banker of last resort, even if it does mean exposing the taxpayer to £10 billion of debts. With so many businesses under threat of going under, it would be foolish to adopt an ultra-purist, Darwinian attitude towards business failure.
That said, we do not trust the Department for Business, Enterprise and Regulatory Reform (BERR) to make the decision as to which businesses should be granted help and which should not. Lord Mandelson this week announced two separate schemes to help small businesses. The first involves making £10 billion available to underwrite bank loans to businesses. Banks applying for the money would have to match the government funding with a further £10 billion. So long as the banks continue to take risks and are responsible for deciding which businesses receive the loans, this scheme should be insulated from political interference.
We have more of a problem with a separate, £75 million ‘Capital for Enterprise Fund’, in which the government would invest in small businesses in need of capital — the taxpayer effectively buying shares in the chosen businesses. It is all too easy to imagine what this could mean in practice: the government stepping in to prop up failing businesses in marginal constituencies. It would be utterly wrong if money were to be channelled for political advantage — in the same way as government cash has been doled out so many times in the past.
BERR’s announcement of the scheme does not make it clear how long the government intends to remain a shareholder in the chosen businesses. But do we really want a situation in which, say, a privately owned bakery has to compete against one which is partially sheltered from economic forces through state ownership? There is a real danger that local economies in poorer areas could become Sovietised, destroying the enterprise economy which has developed over the past 30 years.
There is a very delicate balance to be struck between temporary measures to allay the credit crunch and measures which could reconfigure the economy in the longer term. The first is vital, the second could lead to disaster. The problem with public spending is that it is so hard to stop once a government gets started. If the government buys £75 million worth of shares in small businesses, what does it do when more businesses come forward saying that they, too, would like some cash? A small scheme could all too easily mushroom into something bigger and uglier.
Although there are unquestionably a large number of businesses in trouble through lack of credit, many victims of circumstances which few economists saw coming, we should not forget that it isn’t every business that binged on credit during the good times. It is essential that any measures taken to help indebted businesses do not create unfair competition for those with a more conservative attitude towards borrowing. Even during the good times, large numbers of businesses collapse because their business models are hopelessly flawed. This is a perfectly healthy process, which ensures that owners of businesses learn through experience. No measures should be proposed now which seek to undermine that process.
Sadly, the government, like the banks, has done much to encourage excessive risk-taking over the past few years. The bankruptcy laws have been weakened to allow bankrupts to be released from their status within a few months. Insolvency laws have been changed to allow rogues to continue trading, while wiping out most of their debts — leaving honest, solid suppliers nursing the losses. Bankruptcies were soaring even during the boom years; it was inevitable that the situation would grow dire when the bad times arrived. There is no point in granting emergency help to businesses now if, in the longer term, insolvency laws are not reformed to strengthen the position of the honest tradesman and to weaken that of the shyster.
Comments