The job of a bank, apart from looking after your money, is to finance business. The banks are not doing this. They were caught with their systems down, created a lot of toxic debt, got bailed out and have now clammed up. One major bank this week dismissed an investment on the grounds that it is a “start-up” and therefore ‘outside their lending scope at present’ – no suggestion that it was not a good investment. About 65% of the reasons for businesses needing money is start-ups. ‘No new start-ups’ equals stagnation.

It pays to take a quick look at the dedicated approach of Silicon Valley Bank offering various types of finance for different stages of development. Every country aspiring to support entrepreneurs should have its own version of this.

If we are not careful we shall end up with the worst of all worlds as a result of the recession still plaguing us. Printed money must be paid for; borrowed money must be paid back. If we do not have a system for dealing properly with these two phenomena we shall have serious inflation. If it becomes bad enough it could devalue all our currencies including the world’s most important currency, the US dollar. Short term fluctuations are to be expected but long-term the world needs a steady reserve currency. It does not have to be the US$ but if it changes too quickly the fallout will be frightening.
What are the signs so far?

There is uncertainty about where the world economy is heading. The experts disagree.

The superficial signs are that there is a trend towards recovery and certainly money has been made on the stock markets as they bumble their way up and down for temporary reasons. The underlying data suggest a different picture. Job losses are continuing and we cannot even assess the ‘hidden’ job loss equivalents of reduced wages and unpaid staff. A significant number of company directors coming to me for guidance are taking no pay in order to avoid losing their senior employees to competitors; but directors need to be paid too. The title itself infers only responsibility.

Credit taken by customers is extending way beyond prudent business into virtual theft. This is particularly true of the larger companies in their dealings with Small & Medium Enterprises (SMEs). It has even extended to some governments around the world delaying payments to their suppliers. The dangers of bankrupting smaller companies who provide a high proportion of total employment are self-evident.

Banks have downsized without rescheduling the workload; the smaller staffs are quite unable to cope. A major European bank told me this week that it was not their practice to inform a client when his relationship manager left the bank. Can you believe it?

When you don’t know where you are heading it is difficult to know what to do. However, we can learn the lessons of actions taken so far. Top of these is the folly of simply bailing out the banks.
Sure, they can then resume their inflated bonus payments, but for what? Not for lending, apparently.

When the pump runs dry you need to prime it. You do that by pouring water into the stem, not by handing a pail of it to administrators. Direct support for existing businesses and good loans to start-ups make more sense than putting the cash through banks or a long chain of inspectors.

Liquidity is the problem and serious efforts have to be made to increase it. Statutory control of payment terms is a pre-requisite to making the money move around faster. It is legitimate that those who have obtained goods or services should pay promptly for them. Without it many more companies are going under.
We need capital for new businesses. When the pump runs dry you prime it by pouring water into the stem. Direct support for existing businesses and decent loans to start-ups make more sense than putting the cash through banks or a long chain of intermediaries.

The conventional sources of finance are barely operating. We must look to research funds, specialised development funds and real risk-taking funds to supply the priming capital new businesses now need. And, above all, to individuals who have made their money and now want to give a start to the next generation of entrepreneurs.

It is one of the first rules of life that when you don’t know what to do you get help and work out what to do. If you don’t, you risk being one of the casualties, too.

There is one group of people coming out of the disaster with a big smile on its face – the bankers. The make Houdini look like an amateur. Not only have they got away with privatising the profits and socialising the losses, they are right now increasing their charges, reducing their service and continuing to pay themselves outrageous bonus monies. Four of them, under the watchful eye of the political equivalent of a Kalashnikov rifle, apologised – and immediately set about stealing more of their customers’ savings. And what did we do? Some hotheads broke a few bank windows and got arrested. Otherwise we sat back and took the fiscal rape with barely a murmur.

Apart from locking them all up for a very long time and throwing away the key, there are eight things we must now do to put the situation right and prevent a recurrence of the worst of the causes of global financial bankruptcy.

First, we must make 30-day payment of bills universally statutory with an excessively high monthly interest penalty on payments delayed beyond that deadline. I know it will not be easy to enforce but if a determined effort is made it will change the culture quite quickly, improve liquidity – at the root of our problems – and keep millions of small business going which otherwise will go bankrupt. It is unforgivable that one of the largest international food and soap companies in the world should be paying its small suppliers at 90 and 180 days. That is not business, it is theft.

Second, we must make it law that all bonus-type payments to “heavy earners” should be made in the form of “Attached Shares” in their businesses. These are not stock options. They are shares issued at the current (at time of issue) market price to the value of 85% of the payees’ income above US$250,000. The remaining 15% can still be paid as normal income. These shares will not be assessed for income tax when issued but when realised. They may not be sold for seven years except in the case of death of the shareholder or his confirmed diagnosis with a terminal dread disease. Dismissal and resignation will not entitle the holder to sell his shares. Heavy earners will thus be encouraged to consider carefully the future of their businesses. Their future bonus depends on it.

Third, the law of limited liability must be changed. Designed to encourage entrepreneurs to invest in money-making ventures, it has become used as a shield for reckless financial advisers to gamble with their clients’ money on a ‘heads-I-win-tails-you-lose’ basis. It was not intended for that; we should remove this improper use of it.

Fourth, we must publish the terms and conditions of everyone employed. Current talk about transparency is poppycock. Nobody has the slightest intention of being transparent if they can possibly avoid it. People will not immediately warm to the idea of true transparency. Within a year of it being introduced 95% of the population will welcome it. The other 5% will either earn their wages or quit.

Fifth, we must reduce (yes, reduce) the regulations governing financial dealing. They have been shown to be worse than useless, and they always will be. We must substitute the law of Criminal Breach of Trust (CBT) for the current nit-picking regulations that inhibit the lawful from dealing smoothly with their finances but still allow the thief to get away with it. Criminal Breach of Trust will say that there is a line of honest, transparent dealing that we all know but that is not defined in detail. Cross it and you go to prison. Where is it? You find out – and stay behind it. The courts will decide if you have crossed it. They are perfectly capable of doing so. The line is, in any case, always shifting as investors get more educated. Defining it would only mean that it gets out of date very quickly. If you don’t think this will work, have a word with me. It already works extremely effectively in a different sphere.

Sixth, we will not take back bonus and other payments from those who have earned them. We connived at the scam, we must contribute towards its solution. We won’t take the money back – provided all those I described earlier as ‘heavy earners’ make a full and complete disclosure of their take for the last ten years, for publication. Anyone found falling short of total honesty will have ten years in a cell in which to contemplate the virtues of transparency. A quality thesis written on the subject while inside could contribute to a small remission of some of the sentence.

Seventh, each public company will be required to support a Shareholders Union which will represent not only the institutional investors but the small private investor as well. Labour unions transformed the lot of the working man over approximately fifty years; Shareholder unions can transform the lot of the investor in less than five.

Eighth, we will ask all those whose assets exceed a certain amount to contribute 10% of them to the Raising Fund (to distinguish it from a Sinking Fund). The amount will vary with certain criteria such as age and responsibilities. Their names and contributions will be published and they will be awarded a special medal. The Raising Fund will be administered by a Trust and used to support businesses legitimately hard hit by the recession and where the demise of the business would cause unsupportable hardship.

Tough? True love always is. So how can these eight ideas be made politically acceptable?

I’d welcome your suggestions.

This is the time for your very best – and most difficult – forecasting. Don’t worry that your forecasts do not always come true. A thoughtful forecast is always more reliable than an arbitrary or random decision.

First consideration is what or who makes the most money for you. You need to assess for each of your big profit earners:

1. How is the downturn going to affect the profitability of this important sector?
2. Is the decline inevitable or can we do something to at least reduce the impact? If, in your opinion, the decline in sales is a foregone conclusion whatever you do, don’t waste money trying to prop them up. Cut costs to reduce the losses.
3. If the record of a market is that it responds quickly to promotion or advertising, don’t chop that budget – maybe even increase it. Sales may decline but it is likely that products or services seen to be giving the best value for money, while themselves prospering, will continue to be patronised by the consumer. Value spending is as important to a company as it is to a distressed consumer – that is when the TESCO tag-line “every little helps” comes into its own. While on the subject of TESCO, isn’t it interesting that the company’s real break-through with the consumer came when it upgraded its original ‘pile it high and sell it cheap’ policy to ‘Mrs Housewife wants a more comfortable environment in which to shop’?
4. The strong profit earners need all the attention you can give them now. If they have any weak management, weed it out and put in the best talent you can. Your flagship earners have to be kept going at all costs. The companies that fare best in hard times are those that are perceived to be trustworthy and give consistently good value for money.
5. Review your assets, especially the people. Two of the companies I am privileged to help have suddenly found a new source of ideas both for expansion and for cost savings by the simple expedient of asking their staff. Not rocket science but often forgotten.

Where will the cuts be made? Obviously the under-performers will go. So will those not producing the life-blood of the business. Some of the investment in staff development may be deferred, at least for a while. Ambitious plans for development of the business will have to be re-scheduled to a time when sources of funds are easier and return can be seen to be faster.

Do not assume that only big cuts matter. Many small savings can also amount to something sizeable. Beware of cutting out those who supply the essential information on which your survival decisions depend. I have seen attempts made to reduce already sparsely populated accounts and IT operations, with disastrous results. If anything, quicker and more accurate information is the order of the day, not less or outdated or non-existent data.

Over the last few years many businesses have flourished and been extended almost beyond their capacity. This has sometimes meant that training and development has been left behind in the rush to get the work done. Normal or sub-normal working will now be more likely and this presents an opportunity to catch up with missed opportunities to prepare for new products and services.

Most important of all in the current crisis is the ability to be creative. New needs, changing markets, additional opportunities, ingenious use of senior or home workers, smart sharing of jobs and an open mind to different ways of doing what we have always been doing are all possible contributors to survival and future growth. A moment’s thought is often worth an hour’s sweat.

How soon do you have to take action? You should have already started.

Here’s how to turn adversity into sanity:
What goes down must come up – even if we don’t know when. If the earnings of companies you might invest in are not as susceptible to recession as most shares, buy them. You may have to sit tight for a couple of years but they will come up again.

If your job is threatened – or lost – consider what you’d really like to do. We succeed best when we enjoy what we are doing. A look at your career, past and future, is something you can profitably do now. This may also be a good time to start a business. You will find it difficult to get finance from the bank, but that in itself is a good discipline. If you cannot persuade them to believe in your project ask yourself harder questions before starting.

What is the opportunity for capitalism now? The old model has failed but it wasn’t all bad. It financed the world we live in with its high-tech, high mobility, high quality medicine and high education. Many have benefitted from this. Can we re-stimulate the economic cycle, omitting the faults and making it work better for everyone, not just for the few?

What can we learn from the Grameen Bank? Muhammad Yunus started it to micro-finance the very poor. What about a version of it higher up on the financial ladder to provide capital and loans for new and developing entrepreneurs? Every society needs to encourage its young. There is no reason why governments shouldn’t be involved in this on behalf of their citizens. If you think Governments should not be involved in business study what has just happened in the money markets.

Look beyond public money for this pump priming, too. Business has a life cycle; why should it not finance the early stages of the next cycle? Corporate Social Responsibility (CSR) could have no greater aspiration than to see future generations flourish. Why shouldn’t you and I invest, too, perhaps with some modest level of safeguard and guidance?

Above all, why shouldn’t the people who have been hit hardest by the financial scandal determine the regulatory process for the future? If we put discipline back into the hands of the regulators who landed us in the mess they will do so again. Fresh thinkers won’t be perfect but at least they will see the wood for the trees, something the present lot failed to do.

There are pitfalls to be avoided. By merging banks we create an even bigger cartel than we already had. We must prevent the power that is being put into the hands of very few bankers from becoming another weapon of mass destruction.

Regulation must not become so overwhelming that business grinds to a halt. A bank with whom I have banked in credit for over ten years wants me to present myself, my passport and my NRIC in person at their counter to open a new account. No wonder trillions went missing; they were probably stolen while bank managers were examining the dental records of established customers. Let’s not fall straight back into that

Can we prevent it? Can we cure it when it happens? How can we cope with it?

Societies wake up to threats quite suddenly, having long ignored the warning signs. Those who predicted problems were castigated as pessimists, ignored, mentally pilloried. “Optimism will solve our problems. Let’s be positive.” Yes, indeed, but let’s be realistic first.

The planet is not short of food or energy. It can support more people if we conserve a responsible amount of the natural habitat and don’t pollute ourselves to death. But many populations are more short of money today than they were ten years ago. Can that be right – by any standard?

Inflation used to be localized; it is now international. The big demands of rapid growth, fuelled by expectations of people who know how the other half lives and want a slice of it for themselves, mean the market mechanisms draw speculators into hoarding against the expected price rises. As I write this article available oil freighter tonnage is in short supply because so many tankers are being sailed deliberately slowly across the oceans anticipating better pickings when they arrive.

Are the speculators to blame for inflation? No they are not. They are fulfilling a function the market demands, although we should examine whether the controls on them are adequate to prevent informal cartels from artificially raising the costs. After all, hedge finds and derivatives were doing a job for the market, too. Their sordid demise led to much suffering and quite a lot of the world inflation now beginning.

Finding guilty parties is not going to solve the problem. Indeed, most of us are partly guilty. Our natural greed, whether motivated by the desire to secure others’ futures or simply to demonstrate our ability to win, is at the root of the problem. A competitive society demands competition and that means winners and losers.

As long as the law of supply and demand operates – forever – there will be inflation when something vital to human existence is scarce. Energy, food, water, air, medicine are all going to be in short supply in the future. When two or three shortages occur together horrendous inflation follows. We can only use our resources as prudently as possible to mitigate it.

If we work hard at transparency in business dealings we will solve some of the problems. Being open will discourage speculative hoarding, especially if there are rules against it, and corrupt marketing can be reduced. The world is aware of the need for transparency but is not yet committed to achieving it.

We must now do two things to cope with inflation.

Price increases must be lower than cost increases. That will reduce dividends but will make the value of those dividends greater in the medium term. One of the worst accelerators of inflation is the desire to profit in an inflationary market – and the ease of doing so.

We must also borrow more sensibly. Borrowing to invest is wise. Borrowing to indulge is foolish. When we learn that tomorrow really does come we will prepare for it properly.

Until then we shall have what we are about to see and experience – serious inflation.