The democratic election of a non white president, son of Kenyan father and a Kansasian mother, is the realisation of the second glorious sentence in the Declaration of Independence:

“We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable rights, that among these are life, liberty and the pursuit of happiness.”

As for his view of the credit crunch, he did not pull his punches, and does not underestimate the scale of the challenges ahead. He could be talking about any Western nation…

Obama’s Analysis of the Problem

“Our economy is badly weakened, a consequence of greed and irresponsibility on the part of some, but also our collective failure to make hard choices and prepare the nation for a new age. Homes have been lost; jobs shed; businesses shuttered.”

Obama’s Solution

“The state of the economy calls for action, bold and swift, and we will act — not only to create new jobs, but to lay a new foundation for growth. We will build the roads and bridges, the electric grids and digital lines that feed our commerce and bind us together. We will restore science to its rightful place, and wield technology’s wonders to raise health care’s quality and lower its cost. We will harness the sun and the winds and the soil to fuel our cars and run our factories. And we will transform our schools and colleges and universities to meet the demands of a new age. All this we can do. And all this we will do.”

Balance of Power shifts towards a Benevolent State?

The relationship between the state and the individual will change, the ‘invisible hand’ of the market won’t be cuffed, but will be gloved (i.e. greater transparency), and the USA will aim to live up to the high principles of liberty and equality to which it has mostly only paid lip service. Very interesting times ahead!

However, we are not all going to buy into big government, high taxation, more regulation, more intervention and less personal power (unless things get better). Yet it might be the right solution right now. We will find out soon enough.

• Working Capital Scheme – cost £10bn – provides a 50% guarantee on £20 billion of short term loans to businesses with a turnover of less than £500m with banks having to register a portfolio of such loans through the BERR (Department for Business, Enterprise & Regulatory Reform). The BERR will charge a premium for the guarantee which will likely be passed on by the bank to the borrower
• Enterprise Finance Guarantee Scheme – cost £1.3 billion – provides a 75% funding on a scheme for new 10 year loans of between £1,000 and £1,000,000 to small to medium size companies with turnover less than £25 million. High street banks provide the other 25% of funding
• Capital for Enterprise Fund – cost £50 million – provides a 66.6% funding on a scheme where companies with up to £50 million turnover sell their debt for an equity stake of between £0.25 million and £2 million with the four main high street banks providing the 33.3% funding.

I guess the goal is to allow the banks to take another look at the loan requests that fell just outside their current strict lending criteria. With the guarantees in place the banks’ capital requirements are reduced and hence it can make more loans.

However, I can live with the first of these schemes but not the other two as I believe it is inadvisable for the government to put in more than a 50% guarantee or contribution. Any more than 50% really begins to prejudice the lending decision.

As typical with bureaucrats, we have three schemes with different entry criteria and qualifications and this will no doubt suffer from unintended consequences. [Please give me one rule that I can understand rather than three rules where I need a lawyer and an accountant to interpret them.]

Alternative Bank Loan Guarantee Scheme

I would propose a much simpler approach: one scheme rather than three.

• Its goal would be to address those viable businesses needing affordable loans that have only now fallen just outside of the banks’ tighter lending policies.
• a single scheme 
• open to companies up to £100 million revenues 
• loans up to £1 million 
• 30% government guarantee 
• total volume is £38 billion of loans. 
• total scheme cost is the same being around £11.4 billion. 

With my approach less bad loans would be made as the banks would look harder at the lending decision and therefore we can expect less defaults, and less cost to the taxpayer.

Rationalisation for Nationalisation

If the bank loan scheme fails, then what is the next step? Nationalisation?

(Futher) nationalisation of the banks is an interesting prospect. The analysis goes

In summary, the problem was ‘too much easy credit’, and the solution is ‘more easy credit’.

In this scenario, we would definitely need a very light touch on the supply of credit as soon as we look like coming out of recession. Otherwise we will be looking at very serious inflation. It is bit like driving up a steep hill in an old car where you floor the gas pedal but need get the power off quickly just before you hit the summit. Nationalised industries are not known for being ‘quick on their feet’ and ‘having a light touch’ faced with a rapidly changing marketplace. We would half down the hill, in the red, with no control over the steering by the time a nationalised bank realised an adjustment was needed. In other words, a recipe for disaster.

Nationalisation of the Banking System

If you are going to nationalise banking this would be my recipe:

And if I was feeling a bit like ‘Big Brother’:

Maybe it is just as well I am not in power.

The economic recession just got a bit more real for me, as my job was one of the ones to go as Barclays Global Investors reigned back their development activities in the UK. A couple of weeks ago I had been sure my job was safe but recent interactions at work meant that on the day itself it did not come as a surprise.

After some soul-searching, self recriminations and reflection, I really feel quite good about it. I have been given an opportunity to develop my on-line business ideas and expand my knowledge of internet marketing.

For the last few years my income has been almost exclusively all in the ‘E’ sector (employee); now is the time to start trying in earnest to replace it with ‘S’ (self-employed), ‘B’ (business) and I (investor) streams.

I have set myself a ’90 Day Challenge’ to put myself on a path to replacing my income within 12 months.