why is UK productivity low lagging behind even close uh countries in in Europe and what to do about it well productivity is a function of technology and that's where the UK directly doesn't have a problem because there's lots of inventions plenty of patent Reg ations but that just makes it even more puzzling so why is productivity low well you need to implement the Technologies essentially in daily lives and for companies that means they need to implement the new technology so why is this not happening well the actual measurement of productivity is the value added produced
and we have measures such as GDP um and and we're really um comparing this to the number of people and the hours in particular they're actually working so people out of work are not part of the calculation so those who work how much value added are they producing the GDP um and okay so where do people actually work well the majority of people work for small firms small and medium-sized Enterprises as you abbreviated smmes they account for for almost all companies in the UK more than 90% um and they account for 2/3 of total employment
so really we have to look at small and mediumsized Enterprises and try to understand what's holding them back and therefore bringing down overall productivity now when a small firm realizes okay there's a new technology in our area we need it to upgrade um the next question is money how can we pay for this this in the UK there's five large Banks dominating banking accounting for close to 90% of deposits um and there's a problem with the size you see they're so big they're Global Giants there's a rule in banking big Banks want to do big
deals with big customers small firms not really attractive if you can lend to large private Equity Funds hedge funds as a banker you know spend your time with um a hedge fund private equity fund that can cut a check uh or wants to borrow from you and you can cut the check for a billion a piece billion pounds deals or small firms that want £20,000 50,000 there'd be millions of deals needed to make up for the sort of volume you get from dealing with the big speculative funds quickly look at another country why is productivity
so high in Germany relatively speaking and certainly higher um historically than in the UK well look at the same uh pieces of information what's the small firm sector doing there the small firms are quite fast in adopting new technology and essentially all they need to do is when they realize okay in our area there's there's a new technology that if we we don't get it we'll start to fall behind lose market share they go to their local bank they explain it they present their business plan the bank already knows the company has been dealing with
them has been lending to them and within 48 hours if things go well they have the money already and they can Implement te technology um these small Banks you see they have one rule they only lend locally and as a result they're in the same boat as their customers the big banks in any country you know if they're big they will pick and choose oh this is a prosperous area let's have more branches there oh that area well better close those branches and the result is well known so back to Germany so productivity is very
high and the small firms are doing well in fact they're doing extremely well to the extent that that's almost a puzzle to to some researchers if you look at this definition of hidden Champions hidden Champions are small and mediumsized Enterprises smmes um but they have top global market share in their Market Niche and you can do this research for any country but if you do a comparison Germany has come out in the past uh decades top Head and Shoulder above everyone else and the number of these hidden Champions small firms that have you know like
the Olympics gold silver bronze number one two or three market share in the world why is that it's because Germany has the largest number of small local banks if you look at the total number of banks of every country in Europe which one sticks out you don't even need to see uh the label it is Germany because most German banks 80% of German banks are small local banks that will only land locally Community Banks Cooperative Banks Savings Banks and that's of course why productivity has been very high in Germany sadly they have opponents usually Regulators
talk to the big Banks government listen to the big Banks and they've been whispering into their ear that oh these these small banks are a problem we need to reduce the numberers so it's actually official ECB policy to reduce the number of Banks and they've succeeded by killing 6,000 banks in Europe good thing Britain doesn't have to follow this and so can take different policies but we have to actually take those different policies otherwise might as well rejoin again now big Banks don't lend to small firms who lends to small firms it is small Banks
some some more examples of how this works well is the US 4,000 banks close to 5,000 Banks and the majority small local banks and they've got a lighter regulatory regime and they've been thriving and this is quite well known that's why the US econom is been quite resilient now China that's the real Clincher because you see an economy that started out as a Soviet style centrally planned economy a central planners dream and the central Bankers probably loved it because there's only one Bank in town it's them but as we know the Soviet system didn't really
work that well and productivity was not that great dening came to power in 1978 as a uh new leader and he immediately thought he wanted to increase economic performance and he wanted to work scientifically look at the evidence at the facts he traveled to Japan he asked the Japanese how do you produce 15% growth that's an economic Miracle he found out the secret is you have many banks and make sure the majority of small local banks lending only locally and that's what he did so he returned to China and created thousands of banks local banks
small Banks Village Banks Savings Banks Regional Banks provincial Banks um the whole lot Cooperative Banks 5,000 Banks now in China and of course if if we've got 5,000 Banks each has 50 branches with 20 loan officers each You've Got 5 million loan officers who now check who's getting money how much and for what whereas if you compare to the Soviet style system that preceded this with one Central Bank and maybe five people making the decision I mean which one is going to be more effective five people versus five million going across this huge country in
all the local different regions and making a decision based on the local evidence so China of course did spectacularly well producing 15% growth over 40 years lifting more people out of poverty than anywhere before in history so there's a simple relationship the more Banks you have the better your economy tends to do particularly if you have a high percentage of local banks that lend locally then you will get job creation economic growth tax revenues government should be happy and general prosperity and also less inequality a more egalitarian outcome actually why is that well economic growth
means we've got more transactions this year than last year but that means more money has been used for transactions this year than last year and that means in our system if you want to increase the money that's actually used for transactions well you need to increase the money supply so next question who creates the money now I've done some surveys and I think it will be the same result result here if we had more time um the majority of the population believes that most of the money is created by the government or the central bank
but actually the governments don't create money anymore and central banks only create a small fraction of the money supply 3% 5% that's usually it so who creates the majority 95 97% of the money supply that's been a bit of a puzzle in economics um because the textbooks have been saying well banks are just Financial intermediaries to gather existing money deposits do their analysis and then lend out but that's actually factually wrong and I did empirical tests and I could establish that banks are special they do have a license to create new money so when you
get a bank loan the bank will newly create the money and add it to the money supply um and so in this first empirical test of all the different theories of banking that's the one that survived the credit creation Theory that's what the process is called so banks are extremely special and are really The crucial Catalyst in the economy um and of course the bank has also this decision-making power it's not just existing money that's newly channeled somewhere no it's the creation of new money and whenever you create new money it will have economic consequences
expenses so that's why banks are so important they are actually the ones that create the money supply and you know just think back of the Chinese uh case before under the Soviet system five central Bankers creating allocating the whole money supply versus 5 million loan officers on the ground talking to the small firms checking their loan applications and making a decision where the money is most productively used and and sensibly used so this decision-making power has actually been delegated to the banking system that's why it's so important to have the right type of banking system
do you want one that consists of five Mega banks that don't care about small firms and lend mostly to private Equity Funds and hedge funds for financial speculation or do you want one where you've got mostly small local banks like in Germany Community Banks that lend to the local small firms make sure they always have enough supply of money well as I um ask you this question there's some more information to make a decision what system you might prefer there's actually macroeconomic massive consequences there's three possibilities of what can happen when Banks lend for different
uh uses of money the one that's most um dominant in the UK and other um similar economies is when Banks lend for somebody to purchase assets property real estate houses Apartments Flats um or indeed Financial assets um what that happens is because the loan is money creation you're creating new money adding to the money supply and pumping it into that particular market so what's going to happen when the banks increase property lending and they usually move in lock step usually encouraged by the regulator or the central bank and so when they increase property lending suddenly
there's a new money creation injected in the property Market property prices go up in fact this in many countries has been done to such an extent that you get asset inflation a property bubble and this can go on for a long time it will stop the moment Banks stop lending for property speculation because that's what's been fueling it the new money creation and at that moment uh property prices won't rise anymore but the late-coming speculators they need further Rises they go bankrupt you start to get nonperforming loans the banks start to get more risk Avers
to reduce lending even further you move into the opposite direction a downward spiral of Contracting credit collapsing property values and of course a banking crisis because Bank Equity is small 10% usually or less even for big Banks smaller Banks usually better capitalize um and if asset price has been pushed up by two 300% and they drop only 15% from the peak you have a bust banking system as a result and that's why we've had the recurring banking crisis you could of course get out of this very quickly if you take the right Central Bank policies
I proposed in 1995 in Japan to introduce a new policy which I called quantitative easing if done correctly sadly that's where we have seen a lot of problems not correctly implemented if you do it correctly you don't actually have to have a banking crisis and also no burden on the taxpayer but anyway this is the first of three scenarios if banks create credit for consumption because it's money creation Now consumers have more purching power they demand more for consumers spending what's going to to Consumer prices they go up that's what happened from March 2020 uh
the central banks adopted a policy through which you can force Banks to create more money um my the second version of my quantitative easing that I proposed in Japan I proposed this for deflationary situation with the economy Contracting uh but they implemented it for um situation where um we had Supply constraints and there was already expanding Bank credit so totally wrong and therefore it had to result in inflation 18 months later I want about that that's exactly what we had that's why we have this inflation it's the wrong use of bank credit uh in this
case by the Central Bank forcing it but we have a third scenario and that's the redeeming feature of banking if banks create credit by lending to small firms for productive business investment to implement new technologies new ideas increasing productivity adding value then you get economic growth job creation prosperity and all without inflation and without crisis you get high stable sustainable growth that's what you need to do and that's of course what China achieved for four decades Japan for two decades as long as you make sure Bank credit goes to small firms and the really the
only way to do that is to make sure you've got many small Banks central banks have done the opposite in in recent decades they've forced bigger Banks to swallow small Banks they concentrate the banking system because you know bureaucracy want more power concentrated system is nice for the central planners but not for the rest of us because Bank lending to small firms for productive business investment actually has declined in many countries and that's of course also the biggest problem for the UK so um it's time to do just what China did after 1978 who's the
Deng ping of the UK we need to create let's say hundreds of small local banks so I'm proposing government policy the government helped establish 30 new commercial Banks across the country there are local banks only lent in their local area to small firms 50% of the ownership should be with the local charity and that's the model I've also proposed for Hampshire so help me support me in building up the Hampshire Business Bank get in touch Professor warner. org for instance adopt a simplified regulatory regime that's my academic side with all my academic publication adopt a
simplified regulatory regime for small Banks below balance sheet of 1.5 billion say and then they should have much simpler regulation small banks at the moment in Europe and the UK have to meet the same high standards as the United States um is demanding of the big Banks only in America the small Banks don't have to meet those but in Europe they're saying no the smallest banks with 10 employees 20 employees they have to have the same systems compliance like Barclay's Bank Deutsche Bank it doesn't make sense does it and thirdly simplify the regime for Bank
authorization by switching to process of registration there's a list of things that you need to have that should be objectively easily verifiable and then if you've got that and evidence you automatically get your license um and that should be objectively assessed so there can't be fussing about who gets a banking license and who doesn't um there was a time when you could register a new bank by going to the post office and get your registration um so obviously probably you need a bit more money than in the past uh but it can be done and
that's the way to have another economic Miracle um we can do it the UK has all the ingredients and as we started out saying the technology the patterns the knowhow is there um but the implementation is missing the missing piece is small local banks thank you very much
