The Elephant in the Room

Ann Pettifor has written an excellent article on the now little talked about levels of leverage in the UK financial sector (http://www.leftfootforward.org/2012/03/all-the-signs-are-there-for-another-credit-crunch/) which I would recommend to everybody.  I can’t disagree with any of the comments that she makes, but I do think that it leaves one important issue answered – what and who will fill the void left by the banks deserting lending to the productive sectors of the economy as they focus on sorting out their own issues.

History teaches us that humans are adaptive, and when something fails, however disastrously, that alternative solutions are found and better ways are developed.  Tomorrow morning I am attending the launch of the “Next Generation Finance Consortium”, which brings together a number of alternative business finance providers, especially in the nascent area of peer-2-peer finance provision.  Banks are fundamentally involved in a process of intermediation – borrowing from people with excess capital (i.e. taking in deposits), and then lending to those people who need capital.  Historically people have needed banks to provide this function as this has enabled risk to be spread and managed, but is this function becoming increasingly redundant, both because the banks themselves have changed from being conservative custodians of our deposits into financial traders and because improvements in technology allow us to be our own intermediary?

More to follow after tomorrow’s event.

Nick

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