Innovation needed, Must Banks Be Forced to Finance?

In today’s Netherlands financial daily, Het Financieele Dagblad, the headline is that banks avoid financing of eco (energy saving)  projects. Investments planned for offshore wind energy production and construction of a biofuels plant have been stalled due to banks refusing to finance.  Banks will not lend because they fear borrowers will not repay; businesses will not borrow because they do not have adequate markets for their goods and services; individuals cannot and will not borrow because they do not have enough reliable income to do so. Intuition tells that the opposite as what banks are doing now, is necessary. So joining the chorus of self-made economists and assuming no one will listen anyway, here are our thoughts. The prerogative of a blogger so to speak.

Hard needed innovation is at the basis of economic recovery. Banks should be forced to put their finance where we can expect recovery to happen first: in innovative solutions that strengthen productivity. Basic economics says that the lower the cost of a good, the more that good will be consumed. In the case of energy consumption, higher productivity by means of lower energy cost per unit will do the trick. Not for banks, as it seems.  More rather than less financing in enhancement of productivity is needed (e.g. by stimulating investments in the energy sector, cleaner cars, cheaper manufacturing, etc). As a sequel to these investments, patents should be more aggressively applied for and obtained in these sectors to as to maintain competitiveness on the longer term for those investments. Harvard economist Prof. Robert Barro criticizes Obama’s stimulus plan as it does too little to improve productivity and tells us that banks are the crucial part of recovery and that banks need to be stimulated for investments are needed in companies that improve productivity.  Access to money is not the problem. Billions of Euros have been pumped in the banking system. So how come Dutch banks (or is this also happening elsewhere in Europe?) do just the opposite and refrain from investing in innovative projects? The answer is given above: (perceived) self protection. So it is time to get over political, philosophical or economic hesitations to nationalize banks and financial institutions and put the steering wheel in the hands of governments – at least for the time it takes to recover.  The reason: markets act only in self interests and that is where it hurts: banks now need not to act in (economic and financial) self interest but in the public interest of stimulating innovation.