What to do about the City’s “Lazy Funds”

By Guest Contributor
November 8, 2010

BRITAIN/By Andrew Kakabadse

–Andrew Kakabadse (www.kakabadse.com) is Professor of  International Management Development at Cranfield School of Management. The opinions expressed are his own.–

Over the last 18 months I have interviewed a number of high-level city executives, including chairmen and CEOs, for a research paper to be published in the Journal of Strategic Review early next year. What was surprising was the general consensus that there is £450 billion in ‘Lazy Funds’ waiting to be invested in the City. That is more than twice the upper estimates of national debt. This enormous figure is not being invested because managers cannot see clear opportunities for realising gains.

Many of the respondents also expected another economic crisis of even greater severity than the present in 9-10 years’ time. The prediction is a stark reminder that the root cause of the economic crisis has yet to be resolved. Many respondents made clear that they see this as a political issue, and not one for the financial services industry to remedy. While no other instruments exist for the bankers to do their job, they will continue to use the system that we now know is flawed. The creation of new instruments, which would prevent another economic crisis, is a matter for the government.

The measures that have been introduced by the coalition government to tackle the current economic crisis are not sufficient. The government’s plans privatise gain, rather than socialise capital. Financial institutions continue to have their losses covered by the public, however those same institutions are not sharing the substantial profits that they are now reaping. The levy on banks that was introduced in the comprehensive spending review was an attempt to rectify this. Yet the sums that it will raise represent a miniscule amount when compared with the profits that banks are now making.

What is required is a change in philosophy in how money is invested. At present we live in an economy that privatises gain but socialises debt. However, we should be socialising capital, especially since we now know that a significant untapped amount is available. That was one solution to the economic troubles in 1929 with the foundation of the National Grid. Then, energy was the commodity that needed to be harnessed. Today, that commodity is water. We already know that sufficient clean water will be a challenge in coming years as climate change causes both drought and floods across Europe. A model similar to the National Grid for water would not only safeguard our water supplies, but create jobs and foster entrepreneurship.

This is a line of thought that the coalition government does not appear to have considered. According to the Institute for Fiscal Studies, the recent cuts proposed in the comprehensive spending review will affect the poorest in society the most.  This is when the UK is already 20th out of a list of 21 developed countries, which UNICEF monitors for child poverty. The current political situation represents a return to laissez faire politics, where the individual had no recourse to the state for their basic needs. Vulnerability has also been privatised. However if we are to repair the economy in the long term – not just for the next decade, then we need to have a close look at our attitudes to investing money. Relying on the banks may not be the best solution and social initiatives might be part of the answer, just as the National Grid was in 1929. New financial instruments is another.

Comments

The available funds is not sufficient for the scale of challenges that needs serious investment. You highlighted potential water shortage as a fallout of climate change,a broader spectrum of opportunities exists in transitioning to a low carbon global economy. Yet concerted effort to progress matters on this front has so far been disappointing. The reason, a lack of confidence in policy.

Political Leadership!

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