Banks, eh? At the best of times most of us moan about them, but when the national mood has become anti bank, blaming them for our troubles is all too easy.

Now a survey from eBay has claimed to name and shame the worst banking offenders, saying these banks don’t lend enough to business.

According to the eBay survey, only business customers of Santander seem to be coming out okay, with just 19 per cent of the bank’s customers surveyed saying credit has been refused.

By contrast, 37 per cent of customers surveyed who bank with RBS and NatWest said they had been refused credit, while 58 per cent of Lloyds customers said their bank has become less helpful. And HSBC got slammed, too, with 41 per cent of its customers who were surveyed saying they had to rely on an overdraft and were unable to get a loan, compared to just 19 per cent of Santander customers.

So eBay and its customers are not impressed with the banks. But the British Bankers’ Association wasn’t impressed with the survey. It said: “Banks are currently approving around 85 per cent of credit applications from small businesses and several recent independent surveys have confirmed this, so we simply don’t recognize the numbers that eBay is quoting.

“Small businesses play a vital part in the economic recovery. Banks fully recognize this and have committed to offering every assistance they can, including credit for viable businesses with demonstrable repayment plans. It’s important that businesses are not discouraged from coming to banks for vital business support and we would always encourage them to talk their plans through with their bank as their thinking develops.”

Now, it may be worth pointing out at this stage that the eBay survey related solely to customers who use its service, typically small online retailers. Maybe this explains the discrepancy between the BBA and the eBay figures.

But the fact is, there is too much anecdotal evidence from businesses saying their banks are unwilling to lend. For its part, the banks say they are willing to lend, but that their customers are not interested. But that argument may miss the point too. It has often been said that the only time a bank will lend you money is when you don’t need it.

But the problem lies deeper than that. Bank lending to business was awful during the boom too. At that time it was often easier to get a loan to fund a holiday than to create wealth.

On a case by case basis, lending to an individual with a steady job, regardless of what the money being lent is spent on, is often safer than lending to a small business. But if that approach is applied across the country, it’s the other way round. In fact, on a macro scale, not lending to business is itself risky.

So, an economy made up of banks that are willing to lend to business flourishes, and banks in a flourishing economy make good profits. By contrast, an economy made up of banks that would rather lend to fund spending by those on steady incomes than to small businesses, ends up looking like a bubble.

In time, economic evolution should work such that banks become more business friendly. In reality, banks are bailed out every time there is a banking crisis, perhaps caused by their bubble-creating approach to lending, and financial evolution is quashed.

Investment and Business News is a succinct, erudite and informative roundup of today’s top news stories on business and the economy, with analysis thrown in. Sometimes amusing, frequently contrarian, often thought provoking, and always informative, Investment and Business News is free. To subscribe, click on the subscribe function at the top right hand corner of this page. By the way, did we say it’s free?

In fact, communiqués from the government relating to the plight of beleaguered small businesses seemed to be coming out of all official orifices yesterday.

First there was Small Business Minister Mark Prisk, who has been busy hosting a summit. He reckons he has come up with a plan to help small businesses, and has come up with ways of improving access to finance, making it easier to do business with the public sector; and for allowing social tenants to start up their business at home.

And then Housing Minister Grant Shapps spoke out. Apparently as many as 96 per cent of housing associations can require tenants to obtain written permission before being able to work from home. Alas, it seems many would-be home workers don’t bother to get permission, because they assume it won’t be granted. It also turns out that around 11 per cent of homeowners work mainly from home, but the figure can be as low as 5 per cent of council tenants. Furthermore, of the 200,000 small businesses operating from home, only 22,000 of these are in council or housing association properties.

Mind you, there is another explanation for the discrepancy between home workers who own their home and those in housing association property. If you own your own home and have a reasonable amount of equity tied up in it, it is easier to get funding for your business, and therefore, presumably, more homeowners are likely to want to work from home in the first place. Besides, if you own your home and have shared equity, you have a safety net should things go pear shaped for your business.

And that brings us to the next bit of the government’s ideas, improving access to funding. So, this is the plan:

To “continue the successful Enterprise Finance Guarantee (EFG) for the next four years, making around £2 billion available to viable small companies without a credit history or collateral. This will provide support to 6,000 SMEs a year.”

Then the government says it will commit a further £200m to Enterprise Capital Funds, supporting equity investments in the highest-growth potential businesses over four years. The first of the new funds should be investing early in the new year.

Then there’s business angels. The plan here is for the government’s Capital for Enterprise scheme to work hand in hand with business angels.

And finally, the government has got its new Business Finance Taskforce. This includes the £1.5 billion Business Growth Fund, mentoring, and a new lending code.

It is all very good and worthy stuff. Small and medium sized enterprises provide 60 per cent of jobs and half of GDP.

The snag with all this really is cultural. As this column has whinged before, back in the boom it was easier to get a loan for a holiday than for a small business. Banks have been failing businesses for years.

But there is a practical problem here. The truth is, on a case by case basis, lending to business is risky, far more risky than lending to an individual with a steady job and good credit history.

But for the economy as a whole, lending to business is essential. If banks stop making risk lending to business, those steady jobs will start falling by the wayside, and the consumer loans won’t look so safe after all.

The truth is that for the UK, business lending is an example of an area where the markets are not efficient, and perhaps logical and reasonable behaviour determined by the markets can be catastrophic for the economy.

Investment and Business News is a succinct, erudite and informative roundup of today’s top news stories on business and the economy, with analysis thrown in. Sometimes amusing, frequently contrarian, often thought provoking, and always informative, Investment and Business News is free. To subscribe, click on the subscribe function at the top right hand corner of this page. By the way, did we say it’s free?

The latest move from the banks is encouraging. This may come as something of a shock to you, but it does rather appear that some banks are not all that popular at the moment. Well, it seems that the ladies and gentlemen who run the banks are a wise lot, and their perception is almost uncanny for it turns out the banks are aware of their lack of popularity.

And the criticism that stings the banks most is that they don’t do enough to help small businesses. Can’t think why the public should have this view, but there it is. And in response, the banks have set themselves to work proving us wrong. And to help them, they have set up a taskforce charged with the job of seeing how banks can do more to help business, and improve their image in the process.

Yesterday, the taskforce published its report, and a list of recommendations – 17 in all. Included in its list of ideas are plans to support a network of business mentors, support for the enterprise finance guarantee scheme, and a round table in which representatives of the banks and business community can meet up regularly.

One of the more interesting ideas is for the banks to signpost alternative sources of finance, in the unlikely event, that is, that the banks can’t help. Umm, that could be a popular signpost.

The big idea, however, is for a £1.5bn fund which will invest in business in exchange for equity. The size of this fund seems to have grown. A week or so ago the banks were talking about £1bn.

It’s a good idea. Regular readers will know why we think this; see: British Banks to contribute to new venture capital fund

Meanwhile, according to data from Companies House, a tad over 200,000 new firms were set up in the first six months of this year, the highest number in over a decade.

This rather promising piece of news follows a survey produced by Hiscox showing that no less than 40 per cent of students in London are either running their own business or are about to do so. See: Students opt for entrepreneur as career of choice

Of course this is how things are supposed to work. Recessions create a vacuum, and into this vacuum new ideas and then business can flow. People who are made redundant start looking at setting up their own business for their next career move.

Funnily enough, the fact that unemployment did not suffer as badly in the recession just gone, compared to those in the past, may count against entrepreneurism. After all, if you keep your job, you are less likely to look towards setting up a business.

But other factors may be driving up enthusiasm for setting up a business. TV programmes such as The Apprentice and Dragon’s Den have been slammed by top people in business, but they have had the effect of making business, and even venture capital, topics for discussion down the pub. This must surely be welcomed. The previous government, too, did much to try and encourage the entrepreneur via education.

But there is another point. Sure, banks are doing their best to show they are willing to lend to business, but actually, isn’t it quite shocking that this should have been necessary. For too long it has been easier to borrow money to spend on a holiday than to invest into your business. It’s good that £1.5bn has been earmarked for investment into SMEs, but it ain’t enough. If the figure was £15bn, then that really would be exciting, and could herald a key step towards turning Britain into a dynamic, enterprising economy. And that is why the Bank of England could do more. It should use its second wave of quantitative easing, sure to be kicked off soon, to buy billions of pounds’ worth of bonds in schemes designed to invest in business.

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Actually, old Al deserves much of the credit. When Alistair Darling was chancellor he frequently referred to plans to provide funding for business. He even alluded to it in his Budgets. In fact, in the last Budget from the previous government, this column expressed disappointment that more wasn’t made of plans to fund a new VC.

Talk is that the new fund will be in the mould of the old Industrial and Commercial Finance Corporation, which was funded jointly by commercial banks and the Bank of England. The corporation later changed its name to Investors in Industry, and later still to 3i.

Capitalism is supposed to work via a kind of economic evolution. Bad ideas get punished, good ideas propagate. For many years, maybe even decades, our banks have been letting us down. The real crime of the credit boom was not mortgage securitisation, or the myriad of risky investments we keep hearing about. No, the real crime was that it was easier to raise money to spend on a jolly than to support your business. But then, banks never have been punished for this mistake. Every time they messed up and risked failing, and in the process dragging the rest of us down with them, they were bailed out. Banks were never punished for their mistaken ways; as a result, economic evolution could not work.

There are two important issues here.

Firstly, lending money to fund an innovative entrepreneurial type business is seen as risky. Lending money to an individual who has a steady job and a steady flow of income, and owns a property with spare equity, is seen as safe. Looking at this on a deal by deal basis, this view is right. But on a macro basis, it is wrong. An economy that sees more lending to fund spending than to fund innovation is an economy that is built on very shaky foundations.

Secondly, for truly innovative enterprises, bank lending does not make sense.

The truth is, most innovative new companies fail. They go bust. Their backers lose money. But the companies that succeed, often do so in a quite spectacular way. On aggregate, the few successes usually pay for the much larger number of failures.

But a bank which backs a company via a loan only gets a return based on the rate of interest. The profit it makes for lending to successful companies cannot possibly compensate it for the losses it will probably make. It only makes sense to back an innovative company if the backer enjoys a share of the upside, should things go well.

In other words, traditional bank loans are not appropriate for the real wealth creators. Venture capital is the only type of backing that makes sense.

So, at last, banks are clubbing together to fund a giant, new venture capital fund. It may not make sense to lend money to individual risk takers, but it may well be appropriate to lend to a VC that spreads its money across a wide range of companies in return for equity.

There is a degree of cultural resistance to venture capital in the UK, which is why TV programmes like Dragon’s Den are important. The show has its critics, and it clearly does not paint a true picture of business angels or venture capital investment. But it has helped to make entrepreneurism more popular and has helped to increase awareness of how it works. And for that reason, this TV programme is actually pretty important.

But in the way that the original Industrial and Commercial Finance Corporation was also backed by the Bank of England, it should be again. The UK’s central bank should also back this fund, using the instrument of quantitative easing, ie buying bonds in the fund.

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This is what Hiscox has found. A mere 1 per cent of graduates believe that qualifications are the most important factor when thinking about setting up a business. Rather, they reckon creative thinking (40 per cent), the ability to network (38 per cent) and risk-taking (28 per cent) are the key attributes of successful entrepreneurs. And it seems our ambitious young students admire entrepreneurs who have made it, rating Sir Richard Branson (24 per cent) and Lord Alan Sugar (20 per cent) as the most inspirational entrepreneurs globally.

Of course, not all graduates opt for the career choice marked entrepreneur. There are more budding entrepreneurs studying IT and computing than any other discipline. Next in the list of studies most likely to throw up entrepreneurs is business studies.

As for where, London is the region which boasts the higher number of actual or wannabe entrepreneurs. Hull is second, followed by Glasgow, Cardiff and then Newcastle.

If you are a regular reader here you will know this column is a fan of the entrepreneur, and believes this particular type of individual can lead the UK’s economy out of today’s fiscal and personal debt mess, and ultimately, via creating real wealth, can solve the problem of how to fund the retirement of the baby boomers. So, it is not really necessary to point out why we think the findings of this report are such good news.

But here are a few observations.

Firstly, the rise of the entrepreneur may be an example of what the economist Joseph Schumpeter called creative destruction. An economic downturn can lead to the devastation of industry, but this in turn can create a vacuum. Entrepreneurs may emerge in such times, because for the budding business people, there is no other choice. State spending can have a counter effect, because it can prop up industries or firms that would otherwise have gone under. It can in effect crowd out entrepreneurial activity.

It seems like a cliché, but necessity really is the mother of invention. The US is one of the most entrepreneurial nations on earth, because it was founded by people who fled their own countries out of necessity (the Irish potato famine, for example), and had no alternative but to create wealth from the sweat of their brow and via living off their wits.

It is generally hailed as good news that UK unemployment didn’t rise as much as feared during the recession, and bad news that US unemployment rose much higher. But, for encouraging entrepreneurial activity, it is possible that the relationship is the other way round.

Another factor for encouraging the rise of entrepreneurs lies with schools and universities. Schools have their young entrepreneur of the year award, and entrepreneur studies are becoming more popular as a choice of subject at university. To be honest, we had been a tad cynical about the idea of studying how to become an entrepreneur – is that a contradiction in terms? But maybe we are wrong. Maybe the fact that this subject is now available has played an important part in changing cultural attitudes.

Then there’s TV. Many grandees in the business world have pilloried programmes like Dragon’s Den and The Apprentice, but they are surely wrong. Both shows may provide a misleading impression of what it is really like, but they have helped make business, and those who are willing to go it alone in business, sexy.

But there are still problems. Students might be waking up to the appeal of entrepreneurs, but there is still cultural resistance to the idea in the UK. Attitudes to failure may be key. In the US, failure is often seen as an inevitable experience on the road to making it; in the UK it carries enormous stigma.

The housing boom of the noughties was a disaster for entrepreneurial activity, because the allure of buy-to-let investing effectively sucked out would-be entrepreneurs and turned them into property speculators who do virtually nothing towards creating wealth.

Drilling into the data, it is interesting, but not surprising, to see IT students as the ones most likely to go it alone. After all, from Bill Gates to Mark Zuckerberg and Dustin Moskovitz, founders of Facebook, not to mention the Google boys Brin and Page, in the world of technology the entrepreneur is king.

As for the rise of Hull as a hot spot for entrepreneurs, this is surely very good news indeed, and may be reflective of what we said above about necessity being the mother of invention.

But there are ways in which the UK must do better.

Did you know there are courses in California, where theses and research papers from students are automatically sent to venture capital firms. Seed capital is vital for entrepreneurial Britain to emerge from the promise the Hiscox report alludes too. And this is one area where things are simply not good enough. Kids may be more entrepreneurial, but the next generation up, the one with the money, don’t have the same cultural attitude. The government must do more. This column has argued many times before, and we will repeat it now, that quantitative easing must entail some level of purchasing of venture capital bonds. Bank of England Governor Mervyn King has said it is not the bank’s job to pick and choose where the money it creates goes. But he is wrong. Commercial banks are woefully failing entrepreneurs, so the Bank of England must do more.

And then there’s demand. Here lies the dilemma with government efforts to stimulate the economy. Government stimulus packages can crowd out dynamic new businesses, but at the same time, without sufficient demand, new businesses cannot get going. This is a particular issue in Hull, where high unemployment means little local demand for the products entrepreneurs may want to create. Somehow, the government needs both to create this demand, but without crowding out entrepreneurs. It’s a tough one.

And finally, maybe, in part at least, the rise in would-be entrepreneurs is a legacy of New Labour. After all, it was on the last governments’ watch that the Young Entrepreneur scheme took off.

This is how it used to work. Mr and Mrs Saver put their money in their bank for safekeeping. Rather than letting the money sit idle, the bank lent it out to business. Because it was lending out to lots of businesses, it could aggregate risk. If the loan went bad it didn’t matter, providing the rate of interest on all the loans carried an appropriate risk premium. Then the banks were able to incentivise Mr and Mrs Saver who saved their money with them, by giving them a share in the proceeds of the interest they charged on the loans. Weren’t those days simple?

But while banks have been able to access money in all kinds of ways, and the spread between what they pay their savers and what they charge their debtors has grown, the basic model has largely stayed intact. Businesses broadly still go to their bank for loans, and the banks lend money drawn from their depositors’ funds. Although, obviously, securitisation has made the web of the money flow far more complex.

But banks are not lending to business. According to Bank of England data out last week, lending from all UK-resident banks and building societies contracted by £3.5 billion in June, and measured on an annual basis, lending contracted by 8.1 per cent for the second month in a row. (In 2010 Q2, the stock of lending contracted across all the main sectors of the economy for the fifth consecutive quarter.) Lending to real estate companies made the largest negative contribution to quarterly net lending flows in 2010 Q2, but since the start of 2008 the stock of real estate lending has contracted more slowly than for the rest of the corporate sector. As for SMEs, the Bank of England said that the “bank’s network of Agents noted that credit conditions for smaller businesses remained tighter than for larger corporates.”

Of course, the banks say the problem is not so much that they won’t lend, but that no one wants to borrow. And on this theme the Bank of England said: “In recent discussions, some major UK lenders reported that while demand for finance from SMEs had picked up in 2010 Q1, it had fallen back somewhat in the second quarter of the year. Looking forward, some major UK lenders expected demand from SMEs to remain muted in the coming months.”

With the unveiling of the recent inflation report, Mervyn King pointed out that some larger firms have superior credit ratings to the banks and that it makes more sense for them to borrow directly from the markets.

According to this morning’s FT, private placement deals in which companies borrow directly from investors are on course for providing one of the best years ever. The pink ’un said: “Companies tapped the market for $27.4bn in the first half of the year, just shy of the $28.5bn raised in the whole of 2009.”

At the other end of the scale, there has been lots of anecdotal evidence pointing to a return to prominence for business angel investors.

But one quite brilliant scheme – or at least brilliant if it can be pulled off – comes courtesy of the entrepreneur Serge Bueno. His idea is this: put investors, companies looking for funding, and consumers together via the Internet. Bueno refers to the resulting network as the Tribe. Using an eBay, potential interest in a product can be calculated, and investors can decide whether they want to back certain products. The Bueno model does depend, however, on securing a sufficient number of registered users for the Tribe system. Bueno told the Guardian: “The idea for the Tribe is very simple. I think our world is simply dying, as capitalism is coming to an end. I think we are trapped. The other problem is most jobs are created by small companies and there are less and less of those.”

The Bueno scheme does have a somewhat hair-brained feel about it, but what is clear is that the Internet could prove to be the most powerful mechanism yet for introducing entrepreneurs to investors. And as they shun banks, and instead look towards tapping a market entrepreneurs may feel is more sympathetic to their needs, banks themselves may find they have to adjust.

After all, if you can access a huge pool of investors directly, and if banks are offering such an impersonal service to their customers, in the end, who needs banks?

And so the saint and the boy continue their unlikely double act. Saint Vince said: “I’ve heard the problems businesses are facing in getting bank loans up and down the country. They need innovative ways to access finance from other sources to grow our firms and economy. That’s why this green paper is so important as we look to help viable firms get the money they need.”

Boy George said: “As the economy recovers, it is crucial to ensure that the supply of finance supports rather than constrains demand and business confidence. If businesses are to play their part in promoting economic recovery it is important that they are able to access a diverse range of finance choices in a stable macroeconomic environment.”

The official communiqué said: “The paper explores every major finance option, including more use of equity and encouraging venture capital and ‘business angels’ to invest in a wider range of businesses, and a responsible return to securitisation. The paper sets out options for the industry, such as an insolvency moratorium on companies restructuring their debt, increasing transparency in bank loan applications and fostering competition between banks and finance institutions.”

And then, with his halo shining above his head, Dr Cable said: “There are an awful lot of successful medium-sized businesses that can’t even get into the London Stock Exchange because it is very expensive to list. They even find it hard to get on to Aim, which is supposed to be for growth companies.” Vince’s big idea is to bring back regional stock exchanges, perhaps with exchanges in Edinburgh and Manchester, and maybe Birmingham.

In some ways the idea of regional exchanges seems odd. After all, these were the mechanisms many businesses used to raise funding back in Victorian times and in the early decades of the 20^th century. The Birmingham stock exchange was formed in 1845, for example, and was absorbed into the London exchange in 1971. In this modern day Internet era, in which global communication is breaking down international barriers, there is something quite quaint about the idea of getting local investors to invest in local companies.

But there is more to the idea than that.

In the post credit crunch world, equity investment is respectable and leverage has become a dirty word.

“Why, you no good son of a leveraged banker” may not be an insult in common parlance, but then again language, changes and evolves.

Nicholas Taleb, the man who penned The Black Swan, and introduced the idea of high impact–low frequency events – or the impact of the highly improbable, has now been promoted to the rank of high priest of the ‘told you so’ economic writers/commentators. So high is Taleb’s stock that even David Cameron worships at his altar. Even saints such as Vince himself play second fiddle to Taleb.

And the author of The Black Swan is an arch critic of debt and a fan of equity.

So, when dotcoms crashed, to be followed by a wider stock market crash at the beginning of the last decade, the global economy carried on, suffering no more than a handful of mild recessions scattered around. But, says Taleb, when we get a crisis of leverage, the result is a global recession.

For our liking, Taleb is a tad too cocksure. It is actually quite easy to say, “I don’t know, but it might happen,” which is essentially what Taleb says. Debt is not always a bad thing, With every crisis we tend to overreact and over-compensate for past errors, and in the process sow the seeds for the next crisis. We saw a debt bubble burst; this is not the same thing as saying all debt is bad, as Taleb maintains.

But for truly innovative and entrepreneurial businesses, debt finance makes no sense. And if we want our banks to take less risk in future, then they too should shun funding the businesses with the greatest potential.

After all, high risk and high potential normally go hand in hand. For every Google that made it big, there are dozens, nay hundreds, of companies with similar-type plans that went bust. The trouble with bank funding is that the most the backer can hope for is a return based on the rate of interest, but the risk of outright default is always present.

It only makes sense to invest in high-potential companies if the investors get a share of the upside. In other words, if we want a truly innovative entrepreneurial economy, we need a lot more equity investment, while bank loans to individual businesses should be seen as what they are, an irrelevance in promoting enterprise.

On the other hand, bank loans to companies which in turn invest in lots of enterprising businesses, do make sense.

Here is an idea: what about business investment securitisation? Each time an investor puts money into a start up, the investment is chopped up into little bits and sold on the market. What name could we have for these securities? How about CSOs – collateralised share obligations?

Of course, we all know that derivatives are weapons of mass destruction, and securitising equity investment brings back far too many memories of the noughties boom.

But that’s the point. Not everything about the noughties bubble was bad. Securitisation is not always a bad thing. Maybe this is what was meant in the Cable–Osborne paper by the phrase: “a responsible return to securitisation”.

As for Vince’s idea of regional exchanges, will it work? To be honest, probably not. But then again, we can’t know for sure, and maybe this is one of those occasions when it is worth a punt.

Because there is one thing that can be said for sure; when it comes to investing in entrepreneurs, for the economy as a whole it is far too risky not to.

Research out this week may have found new evidence to support the ‘recession can create opportunity’ idea. It concerns school leavers, and the growing popularity of being an entrepreneur as a career choice.

We all agree that crises are not good, or at any rate not in the short run. Most of us, with just a few exceptions, don’t much like pain, either. But pain is essential. Pain is our body’s way of telling us something is a bad idea. So, for example, we know picking up a red-hot poker will hurt, so we don’t do it. If by a quirk of evolution, nature threw up a species that enjoyed picking up red-hot pokers, then that species would soon fall extinct.

Maybe it is a bit like that with recessions. They are not pleasant things, but recessions teach lessons, and it is the learning of these lessons that can drive progress.

Recessions can have another positive effect, too. The hardship they create can force people to start reconsidering their career and what they should do with life. Mass unemployment can lead to dynamic entrepreneurs.

It is often said that the two characters that together make up the Chinese word for crisis mean, when separated, danger and opportunity. There is some doubt over whether this is actually true, but the idea that the Chinese word for crisis comprises danger and opportunity is so poetic that it is often quoted as fact.

Maybe it is a coincidence, but it appears students are becoming more entrepreneurial.

According to research from Hiscox, almost one-third of those surveyed already have a business idea and are making plans to become entrepreneurs in the near future. Retail and IT lead the sectors they hope to succeed in, with three in five opting for ‘bricks and mortar’ businesses over pure online enterprises.

Hiscox said: “Enterprising students are responding to a quiet post-recession job market with plans to go it alone.”

Apparently, nearly one in five started their courses intending to be self-employed at some stage. Almost a quarter have been running money-making enterprises while studying or are in the process of setting up now. One in ten won’t go into running their own business straight after graduation, but do intend to work for themselves in the future. Just over a quarter of the would-be entrepreneurs plan to be running their own business by the age of 25, while a third say they’ll be their own boss by the age of 30.
Of course it may not be just the recession and economic crisis that have created this idea amongst kids. TV programmes such as ‘The Apprentice’ and ‘Dragons’ Den’ may also be making entrepreneurism fashionable.

But the UK is at a disadvantage against the US. In the US, not only is becoming an entrepreneur a popular career choice, financial markets are much better geared towards this kind of risk investing. Some universities even have direct links to venture capitalist (VC) firms, and in some case theses are automatically sent to VCs.

So if UK students decide en masse they want to take up entrepreneurial roles, unless this change is matched by a similar change in the investment culture, much of this opportunity will go to waste. That’s why this column is a fan of state backed schemes to fund VC investment.

PS As an aside, and returning to the pain gene and why evolution throws out destructive behaviour, there are occasions when evolution can throw up surprisingly inappropriate characteristics. Sometimes evolution can throw up a trait that is not good for our survival, but it evolves nonetheless. A good example is the peacock. The male of this species may have the most flamboyant posterior in nature, but its colourful tail does rather draw the attention of predators. Scientists believe that the female of this species finds colourful tails attractive, and therefore, despite the drawbacks to all that colour, males with tails that they can fluff up are more successful at attracting mates. Evolution can then throw up a kind of positive feedback loop, in which the gene for finding colourful tails attractive amongst females and the gene for developing large tails amongst males, are passed on in ever increasing proportions. A similar evolutionary process could explain why some people have the desire to take huge, daredevil type risks. You would have thought the daredevil gene would have been squeezed out by evolution, but not after you take into account the peculiar characteristics of sexual selection. Take this idea forward to the next step and you can see how an entrepreneur gene might develop, and as a side consequence throw up all kinds of long-term benefits which normal evolutionary processes would not create. But this could also explain how it is we get economic bubbles.

Mr Osborne wants to hit welfare, at least that is what he is saying . At the G20 in Canada, he told the press: “Some of these benefits individually are very much larger than most government departments … Housing benefit is one of the largest; in its own right it would be treated as one of the largest government departments. Incapacity benefit and ESA is also a very large benefit.”

Maybe he is right, but he must be careful.

This column absolutely signs up to the view that there are insufficient incentives to come off benefit and find work. Solve this problem, and the UK will be on the road to growth, and the fiscal deficit problem will be over.

But dealing with the incentives to work is a bit like a cat’s exterior. It can be skinned in more than one way. Mr Osborne is going for the stick approach. Beat those who don’t work by removing benefit. But, if you remove benefit, demand collapses in areas of high unemployment, and no one wants to recruit. If you try to save money by cutting benefit, you may end up starving the Exchequer of even more tax receipts, and in the process risk going down in history as the man who punished the poor when it was rich bankers who caused the problem.

The other method is called carrot. Maintain benefit, even for those who find work; reduce tax at the low end of the income scale, then demand will be boosted, jobs created and a willing labour force will snap up the opportunities.

Mind you, if entrepreneurs are to create jobs, they need access to funding. And Luke Johnson, the boss at Risk Capital Partners, the private equity people, reckons changes to capital gains tax are going to cause business angels to take flight.

To benefit from entrepreneurs relief, which limits capital gains tax to just 10 per cent on capital gains of up to £5m, you have to be able to tick two boxes. Firstly, you have to have a bigger than 5 per cent stake. Secondly, you must be actively involved in a business. So, that puts some business angels off.

The result, says Mr Johnson, is that business angels will want to be more actively involved in the businesses they invest in, and will insist on higher stakes. Of course, many business angels will have already passed the £5m lifetime limit for entrepreneurs relief anyway.

Does this matter?

Investment in small companies is risky, and yet the small minority of successes can be so successful that investors, entrepreneurs, the labour market and the exchequer, via higher tax receipts, all benefit.

But the truth is, the only way you are really going to encourage business angels to throw their money at small companies is by having rock bottom capital gains tax with no limit. And that does smack of being a tad unfair.

If it wasn’t so sad, it would be funny. Markets are outdoing themselves with their ineptitude. Politicians are, if anything, proving even better at spilling a far worse pollutant than oil, and now company directors seem to have taken up playing the fiddle while all around them the great oil slick called economic mismanagement burns.

The last few days have seen news that directors’ pay is shooting up, and US house prices are shooting down. News on UK employment was about as ambiguous as you can get.

While directors enjoy more pay, it seems wages for most of us are rising at a mere snail’s pace.

Pity the French, they have got to work until they drop, or to be more precise, their retirement age has been pushed up to the grand old age of 62. How will they manage?

Then there’s the new King. Or King King, as you could call him. The FSA is gone, and good riddance too, you might say, and the new emperor is Mervyn King.

Read on for more

Markets defy logic, and BP goes where others would tread but for the grace of God

While they have not been booming exactly, markets have being doing well over the last couple of weeks. After falling at the beginning of the month to its lowest level since autumn of last year, the Dow has since surged by 500 points, or around 5 per cent. And yesterday, news that BP would have to park a mere $20bn into escrow, that it has chosen to stop paying dividends this year and that it is to sell $10bn worth of assets, was met with glee. Shares in the company surged, although BP’s stock is still well down on where it was a few weeks ago.

It is difficult to understand why. You can accept that some might say BP is a good contrarian bet, as indeed many said Northern Rock was after its share price collapsed. But there is still enormous uncertainty over what will happen next. The $20bn the company is setting aside may not be enough. Barack Dubya Bush, sorry, Barack Hussein Obama, has warned that the money the company is putting into escrow will not be a cap on costs it will have to bear. We are ‘going to smoke those folks at BP down from the hills,’ said Mr Obama, or at least he might as well have said that, after comparing the BP oil spillage, which by the way is nowhere near the worst spillage in history, with 9/11.

Predicting where this will end is like predicting the end of the euro crisis. Barely a day goes by without some report contradicting the last one. One day Spain and/or Greece are set to go the way of Argentina, the next day they are going to be rescued. One day China is terrified of pumping more money into Western debt, the next it finds Greek bonds irresistible. And markets boom and crash like a yo-yo on speed.

BP’s catalogue of PR errors is embarrassing, from “get my life back” to yesterday’s “care about the small people”. It is enough to wish for a return of Peter Mandelson. It seems the company needs a spin doctor without peer.

But then again, paying out dividends was always a bad idea. The fact that until yesterday the company had stuck to its line that dividends would be paid as normal indicated how the company didn’t get it.

Not that Mr Obama gets it. Or maybe he does, but the political groundswell is such that he dare not own up to the truth. But, as told here earlier this week, the US House Energy Committee has slated Exxon Mobil Corp., ConocoPhillips, Chevron Corp. and Royal Dutch Shell Plc, saying their plans to deal with any future oil leak are virtually the same as those prepared at BP. See it this way, the oil industry is beset with one big problem; oil is becoming harder to get at. The new oil finds off the coast of Brazil lurk far deeper than BP’s Gulf of Mexico oil well. To put it in terms of the World Cup: the ball is odd, which is making life difficult for all teams except for Germany, where the World Cup ball was used for domestic matches during the last six months. Goalkeeper errors are inevitable, it is just that the England goalie was first. In a way, BP is like Robert Green.

There are also parallels with the banks. They didn’t get it either, and were paying out dividends and massive salaries right in the face of public anger.

Goodbye FSA

But at least the regulator has been reformed. Well, not so much reformed as torn apart. If you are one of our IFA readers, you will no doubt agree with the sentiment that the FSA was like a Rottweiler while dealing with little companies trying their best to navigate the absurdly stormy waters of financial regulation, and yet when it came to the things that mattered it was little more than a mildly discontented puppy.

The FSA engendered paranoia with some IFAs, leaving them terrified to say anything without running it past the compliance officer first. So the statement ‘two plus two equals four’ would need to be changed to ‘some analysts believe two plus two equals four, and here is a page of disclaimers.’ Yet while it was busy snarling at the little people, banks pretty much did what they liked. So goodbye FSA, but don’t expect our thanks.

Don’t get us wrong. We are not saying tighter regulation would have stopped the financial crisis. Doctor King, the Bank of England governor, or King King, whatever you want to call him, is now one of the most powerful central bankers in the world. He did a better job than some in warning of dangers ahead, and the Bank of England even made subtle noises about mortgage securitisation posing threats, but he has no magic wand, and it seems likely that even if King had ruled the roost throughout the noughties, we would still have suffered the deep sea banking spillage.

Osborne’s idea to have mortgages capped to a certain ratio of a property’s value is good, and it is most gladdening to see the new government trying to introduce ideas for ensuring we don’t get another property bubble. You may recall, Boy George has already asked Mervyn King to look at including house prices within his inflation target.

Hello bonuses for directors – goodbye wage inflation for the rest

But what is not a good idea is big pay rises for bosses while the small people down the pay ladder have to make do with a good deal less. According to the ONS, average earnings growth including bonuses decreased in the year to April 2010, from the March rate of 4.3 per cent to 4.2. Growth in average earnings excluding bonuses (regular pay) also decreased from the March 2010 rate of 2.0 per cent to 1.9 per cent in April 2010.

With wage inflation that low, it really is difficult to see how price inflation will take off as some fear. You need to bear in mind that interest rates as a tool for fighting inflation are meant to tweak demand. Right now, with wage inflation so modest, unemployment so high and taxes set to rise, there is no pressure on demand. Oil, food, VAT reversal, and the falls in the pound, that now appeared to be reversing, are what caused the recent hikes in inflation. And higher interest rates, or less quantitative easing, will have a negligible effect on these one-off factors. (The pound being a possible exception, but then the UK needs a cheap pound right now.)

As for jobs, the latest data is all over the place. The employment rate fell 0.1 per cent to 72.1 per cent,the number of full-time workers fell by 56,000 over the quarter but the number of part-time workers increased by 61,000. And while employment fell, unemployment got worse too, rising from 7.8 to 7.9 per cent.

Yet while we brace ourselves for austerity, salaries for bosses have surged. According to IDS, bonus payments to directors of FTSE 100 companies rose 22.5 per cent in the last six months, rising from an average of £456,000 to £558,000. Basic salaries increased by 7 per cent.

Forever blowing bubbles

Now, we have no philosophical problem with high wages for bosses, but we do have an economic problem with it. Surging salaries and bonuses for those at the top is a symptom of rising corporate profits. In the US during Q1, annualised profits expanded by 24 per cent.

The rise of corporate profits while wage increases remain modest is part of a worldwide problem. Okay, we accept that in some countries such as Greece and Spain there is the necessity for the agony of falling wages.

But worldwide, the real problem of the noughties was that wage growth was being outstripped by the growth in productivity for workers everywhere.

As a result, spending that was not backed by debt lagged behind production. Under different circumstances recession would have been the result. Instead, money saved bounced around the financial system, until eventually it found property. German money pumped up Greek and Spanish property prices. Chinese, Japanese and corporate savings pumped up house prices everywhere.

When that bubble finally burst, investors looked for a new home for their money, and that home was government bonds. And so the government took up the baton and maintained the economy (up to a point), because consumers could no longer afford to do so.

This is creating a new bubble, this time in government bonds.

Some say this time it is different, because the money has to go somewhere and there is nowhere safer than government bonds. To which others will reply ‘Ah ah,’ and add ‘this time it never is different, not really.’

So where will investors go if bonds crash? Gold, maybe, in turn fuelling another bubble.

The argument that governments will inflate their way out of debt has one thing going against it. At the moment debt is doing no more than ensuring aggregate demand is matching capacity.

The only way we will get inflation is if governments print money, and at the same time savers decide they have had enough of saving and start spending it.

If, instead, savers’ money was invested in business, and helped to increase productivity, or better still fund entrepreneurs, the result would be sustainable economic growth.

That is why the latest idea from Japan’s central bank to pump money into business is interesting. See Japan – central bank finds the plan that UK needs

Talking of bubbles, in the US, housing starts are down. They dropped no less than 10 per cent in May. Yes, that’s right, 10 per cent. That’s not annualised, it is month on month. Last year the US government ran a tax credit designed to boost the market. These schemes are over now, and crash, down will fall house prices. In the UK, the end of HIPs may have a similar impact.

So let’s put it all together

The underlying causes that led to the credit bubble of the noughties have not gone away. Overreaction has begat more overreaction, and now we are told we all need to save more. Wages must go down to improve productivity. David Cameron and Co. want to see debt levels fall.

That’s fine, providing the austerity drive is being accompanied by investment. Saving is dreadful for the economy, unless the money being saved is invested into business.

During the noughties you could borrow money to spend on a jolly, but if you wanted your bank to lend to your business, then that was a non starter. Your only hope was to lie on the application form, and instead of saying you wanted the money to create wealth, say you wanted it to boost the tourist industries of other countries. Then the bank would have given you the money.

Still, the French are worse off. Apparently they have got to get used to the idea that retirement at 60 is too young. The retirement age is being pushed all the way up to 62.

As regular readers here will know, the demographic challenge facing the developed world is enormous. Workers across the world have got to retire at an older age. Upping the retirement age from 60 to 62 its analogous to BP apologising and saying how sorry it is to have let down the “small people”. See The demographic time bomb

The truth is, the way out of economic Armageddon lies with the so-called small people becoming more engaged with wealth creation, and until the government starts introducing policies that support this, the chances become greater that the economic spill of the last couple of years will just carry on.