Yesterday Alistair Darling was arguing on the Radio that Northern Rock and Bradford and Bingley did not have investment banking arms and they both went bust, so separating investment banking was not all is was cracked up to be. This reveals an area which has not been talked about of late and which now needs an airing.
At the turn of the millenium the UK banks had their lending books more or less in balance. That is to say they led 1x the value of their deposits. When they crashed they had lent up to 20x the value of those deposits. To add to the problem of speculative trading they were also over borrowed. Northern Rock and others were not proprietary traders, but they borrowed massively to lend to people who could not pay, secured on assets worth much less than was supposed. This practice must stop and mostly has. It cannot start up again.
If lending and depositing are kept in balance, so is the economy. Growth is driven by saving which funds more growth. If huge funds are sucked in from overseas by institutional borrowing and not invested in industrial expansion, but in property, the value of which inflates to the point where the only way for consumers to spend is by more borrowing (equity release- what drivel), the outcome for this vicious circle is bust. Just follow the numbers, they can go nowhere else.
Whatever the ICB finally recommends, the Bank of England with its MPC, FPC and enhanced regulatory role, must not allow this vicious spiral to recur. As a nation we have to accept that if we borrow money we pay it back. Allowing asset inflation to create wealth is an illusion we cannot afford to repeat.