By Professor Nick Bosanquet
The recession is a product crunch – it confirms and intensifies the end of a twenty year product cycle. In the past decade a number of US icons have seen a fall in shareholder value. Microsoft, Pfizer and Merck, not just GM, are all trading at least 50 per cent down on their peaks.
The product cycle was about new products in IT and in pharma and about new consumers. The car market was driven by the dynamics of price lowering in car manufacturers’ hunt for market share and by cheap fuel, which drove the number of cars per household to saturation point. The pharmaceutical industry developed statins and anti-depressants – blockbuster drugs which have led to massive benefits in survival and quality of life. The internet has allowed a whole range of new services to arise and made it possible to speed up global transactions in financial services.
The falling returns to the old leaders – the “nifty fifty” which could not lose – helped to drive the search for higher returns, without much concern for steeply rising risk. The product cycle was one of the key influences on the speeding up and hotting up of the economy which has led to the blow out.
For recovery we need to unleash the power of competition. The Government bailout of the banks shows that temporary stability can be bought – but at a huge cost in immediate credit and longer term growth. The Government-controlled banks now have liquidity but this is not the same as credit. They now lack the confidence and independence which are essential to successful banking.
The positive moves are coming from those banks which are still independent. HSBC is increasing mortgage lending; Santander aims to increase retail deposits by offering better terms. If all banks had become Government-controlled the UK economy would be set for an even longer period of stagnation. Only financial innovation by confident and independent banks is going to restore the credit support for small firms. Cartels may solve one short term problem, but at a very high price in lost opportunities. Rather than the merger of HBOS and Lloyds compelled by the Government Godfather there should have been an open tendering process for new entrants.
The recession brings costs – but it also brings opportunities for people and business to switch from past routines to high value activities which and help to create the new enterprise of the future. There will be a new product cycle as new markets emerge. In Marshall’s phrase: it is not wants that create activities but activities that create wants. We need to direct support, public and private, to the search and acquisition of information which will be key to new capability and new wealth.
Nick Bosanquet is Professor of Health Policy at Imperial College London and Consultant Director of the independent think tank Reform
