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In Embrace

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  °_   ██   _*.   .*./ ♥  \ .˛* .˛   .˛.*. ★ * **   *** ★  *˛ (´ã ã)   */ ♫ . ♫  \*˛.* ˛_Π_____. ♥  ****   ♥  ˛* ˛*.° .  .  ˛°./ ' ♫  ' \.˛*./______/~   *. ˛*.   ˛* ˛.*   *...''..  *˛.  ╬╬╬╬  ˛°. |田   田   |門|  ╬╬╬╬╬  *˚ * ♥♫♫♥ *\'.......... Merry Chri!#$......* ♥  ♦♫  ♥ *' %&re# #+,!#--eri- ! !he re&e Europe’s troubled banks and brokegovernments are in a dangerous embraceIT HAD seemed a simple enough wheeze.Give banks unlimited access to ! ear#unding #rom the European $entral %ank and it wouldn’t take much more than anudge and a wink #or them to bu thebonds o# Europe’s troubled peripheralcountries instead o# having the E$% do the &ob itsel#. 'or those too dull to readbetween the lines( )icolas *arkoz ( 'rance’spresident( spelled it out+ ,each state canturn to its banks( which will have li-uidit attheir disposal. The wheeze( however( seems to have beentoo clever b hal#. Hours a#ter /r *arkoz was urging banks to bail out governments(the European %anking Authorit 0E%A1released the results o# its updated stresstests showing that European banks need toraise 2334 billion 05367 billion1 in e8tracapital( mainl to o##set a #all in the value o# their e8isting holdings o# government bondsissued b troubled peripheral Europeancountries.The banks with the biggest capital short#allsare those #rom *pain( Greece and Ital .*everal ma have to tap government bail!out #unds to raise the capital( creating thecircular prospect o# governments bailing outtheir banks that are in turn supposed to bailout the government. Italian banks( #orinstance( will need 234 billion in additionalcapital9 among them is :ni$redit( Ital ’sbiggest bank b assets( which holds some 26; billion in Italian government debt andneeds to raise almost 2< billion in capital.*panish banks need 2=> billion. Europe’score has not been spared either. %anks inGerman ( the euro area’s biggest creditorcountr ( need additional capital and$ommerzbank( German ’s second!largestbank( ma also #ind itsel# asking #orgovernment help to #ill a 24. billion hole inits balance!sheet. A #ew months ago( banks in peripheralcountries were onl too happ to #ill theirvaults with bonds issued b their owngovernments. The #eeling at the time wasthat the banks would live or die along withtheir home countries so there was littlepoint in tr ing to mitigate the risks./oreover( most peripheral banks have seentheir #unding costs soar. The had littlechoice but to bu government bonds withsimilarl high ields. ,?hat else can I do(   said the boss o# a big Italian bank( inrelation to its large holdings o# Italiangovernment bonds.That ardour has cooled since the end o# @ctober( when the E%A #irst asked banks toset aside e8tra capital against the possibilit o# losses on euro!area government bonds.*ome bankers now #ret that theiraccountants ma #orce them regularl to ,mark to market their holdings and setaside capital i# bond prices #all. That wouldprevent even the most troubled banks #romgambling #or redemption b taking big betson bonds.%anks #rom richer countries will be evenless inclined to help out. ,'oreign bankshave been prepared to take large chargesto sell to8ic’ #oreign sovereign debt( so theidea that the would reload seems #anci#ul( sa s Bon Ceace( an anal st at )omura.Governments hoping #or a helping hand inbond markets will have to look #arther a#ieldthan their own tottering banks. i- #0 1e2er3hy 1#r-e 4ir #re 4!e rei2e!i2e !h# #11 e *@/E people sa it is neither big nor cleverto drink. iz( a %ritish comic( settled thatdebate with a letter #rom a reader who said+ ,I drink 34 pints a da ( I’m > #oot  inchestall and a pro#essor o# theoretical ph sics. However( another -uestion about size andcleverness has et to be resolved. Are bigcompanies the best catal sts o# innovation(or are small ones betterBoseph *chumpeter( a#ter whom thiscolumn is named( argued both sides o# thecase. In 37;7 he said that small companieswere more inventive. In 376= he reversedhimsel#. %ig #irms have more incentive toinvest in new products( he decided( becausethe can sell them to more people and reapgreater rewards more -uickl . In acompetitive market( inventions are -uickl imitated( so a small inventor’s investmento#ten #ails to pa o##.These da s the second *chumpeter is out o# #ashion+ people assume that little start!upsare creative and big #irms are slow andbureaucratic. %ut that is a grossoversimpli#ication( sa s /ichael /andel o# the Crogressive Colic Institute( a think!tank. In a new report on ,scale andinnovation( he concludes that toda ’seconom #avours big companies over smallones. %ig is back( as this newspaper hasargued. And big is clever( #or three reasons.'irst( sa s /r /andel( economic growth isincreasingl driven b big ecos stems suchas the ones that cluster around Apple’siChone or Google’s Android operatings stem. These ecos stems need to bemanaged b a core compan that has thescale and skills to provide technologicalleadership.*econd( globalisation puts more o# apremium on size than ever be#ore. Tocapture the #ruits o# innovation it is nolonger enough to be a big compan b  American standards. Fou need to be able tostand up to emerging!world giants( man o# which are backed b something evenbigger+ the state.Third( man o# the most importantchallenges #or innovators involve vasts stems( such as education and health care(or giant problems( such as global warming.To make a serious change to a comple8s stem( ou usuall have to be big.I# true( this argument has pro#oundimplications #or polic makers 0though /r/andel does not spell them out1. ?estern  governments are obsessed with promotingsmall businesses and #ostering creativeecos stems. %ut i# large companies are theke to innovation( wh not concentrateinstead on creating national champions Anti!trust regulators have strained ever muscle to thwart the creation o# monopolies0#or e8ample( b preventing ATT( atelecoms #irm( #rom taking over the American arm o# T!/obile1. %ut i# onebehemoth is likel to be more innovativethan two smaller companies( wh not allowthe merger to take place?hat should we make o# /r /andel’sargument He is right that the old ,small isinnovative argument is looking dated.*everal o# the champions o# the neweconom are #irms that were once hailed aspluck little start!ups but have long sincegrown huge( such as Apple( Google and'acebook. 0In August Apple was the world’slargest listed compan b marketcapitalisation.1 American #irms with 4(;;; ormore people spend more than twice asmuch per worker on research anddevelopment as those with 3;;!4;;. Thelikes o# Google and 'acebook reap colossalrewards #rom being market!makers ratherthan market!takers.%ig companies have a big advantage inrecruiting toda ’s most valuable resource+talent. 0Graduates have debts( and man pre#er the certaint o# a salar to the lotter o# stock in a start!up.1 arge #irms aregetting better at avoiding bureaucraticstagnation+ the are #lattening theirhierarchies and opening themselves up toideas #rom elsewhere. Crocter  Gamble( aconsumer!goods giant( gets most o# itsideas #rom outside its walls. *ir George%uckle ( the boss o# /( a big #irm with a3;7! ear histor o# innovation( argues thatcompanies like his can combine the virtueso# creativit and scale. / likes to conductlots o# small e8periments( &ust like a start!up. %ut it can also mi8 technologies #rom awide range o# areas and( i# an idea catches#ire( summon up vast resources to #eed the#lames.However( there are two ob&ections to /r/andel’s argument. The #irst is that(although big companies o#ten e8cel atincremental innovation 0ie( adding morebells and whistles to e8isting products1(the are less com#ortable with disruptiveinnovationthe kind that changes the ruleso# the game. The big companies that thesrcinal *chumpeter celebrated o#ten buriednew ideas that threatened establishedbusiness lines( as ATT did with automaticdialling. /r /andel sa s it will take bigcompanies to solve America’s most pressingproblems in health care and education. %utsometimes the best ideas start small(spread widel and then trans#orm entires stems. 'acebook began as a wa #orstudents at a single universit to keep intouch. )ow it has <;;m users.The second is that what matters is not somuch whether companies are big or small(but whether the grow. Crogress tends tocome #rom high!growth companies. Thebest ones can take a good idea and use itto trans#orm themselves #rom embr os intogiants in a #ew ears( as Amazon andGoogle have. *uch high!growth #irms createa lot o# &obs+ in America &ust 3J o# companies generate roughl 6;J o# new &obs.et small #irms grow bigColiticians should certainl stop demonisingbig #irms and sentimentalising small ones+an econom needs both. %ut the shouldnot allow their new!#ound appreciation o# big companies to degenerate into a taste#or picking national champions. *uch #irmst picall gobble subsidies and crowd out  smaller( more creative #irms. )or shouldthe start tolerating monopolies. The ke topromoting innovation 0and productivit ingeneral1 lies in allowing vigorous newcompanies to grow big( and ine##icient oldones to die. @n that( *chumpeter neverchanged his mind.
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