Start your own bank !

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Adam Posen, new member of the Bank of England monetary policy committee, has written a paper claiming that the UK stimulus cannot be withdrawn till UK banks are fixed. He also claims the UK relies too heavily on a small number of large banks and that the latter do not serve small and medium enterprises well when these banks are in trouble.

This is a thoughtful, “plain English” and easy to read paper. But I disagree on two points.

One point missing, as far as I can see, from his paper is that the dominant position of large banks will be reduced automatically, as long as government abstains from giving these banks more than the bare minimum needed to prevent them collapsing: no special intervention from the authorities is required to bring into existence an increased number of small quasi-banks.

There has been evidence over the last year of an increase in the extent to which non bank firms have been lending direct to each other, rather than using banks as middle men. If the middle men are incompetent, why bother with them?

Also there is evidence of more wealthy individuals taking an interest in firms in their immediate neighbourhood, rather than putting money into City of London or Wall Street institutions possibly hundreds of miles where these individuals live. Some point applies: if those working on Wall Street and in the City are Madoffs, “inside traders” and sharks - why bother with them?

Private individuals and non bank firms cannot create money in the same way as the commercial banking system does. If more financing is to be done by the former, rather than by the latter, a bigger monetary base is required, which is what quantitative easing has produced. Thus Posen’s claim that the stimulus will be withdrawn at some point could be wrong: possibly the increased monetary base, or some of it, should remain.

Taxpayer support given to banks should NOT be whatever is required to get them back to where they were pre-crunch. It should be just enough to make sure the country’s money transfer system does not collapse. Having done that, the question as to whether banking activity is conducted by large banks or, at the other extreme, by butchers, bakers and candlestick makers should be left to market forces. Unfortunately this is not what seems to happening in the US: that is, the large institutions seem to be getting preferential treatment.

As to Europe: much the same story.