Mervyn King has written a fantastic book that diagnoses the problem with our banks. The cheap shot response would be to ask why he didn't take action when he had the power. But I don't think that's right. The important thing is that here is a central bank bureaucrat admitting, for the first time, that the big issue is fractional reserve banking.
King doesn't just point out that fractional reserve banking causes financial instability. What's really refreshing about his book is that he describes malinvestment – the excess creation of credit – in clear, easy-to-understand terms.
Whereas the great Austrian School economists, like Oskar Morgenstern, talked about Auflockerung – 'unlocking' – King coins the term 'unwinding.' He explains that to fix the financial system, we need to flush the candy floss credit out of the system.
There has been a surfeit of books about the banking crisis. What makes King's different is that he identifies the actual causes. Unlike Adair Turner's book, which claims regulators like him need more regulatory powers, King shows that fundamental change is required.
King proposes reining in the worst excesses of fractional reserve banking through a system of insurance liabilities. I still think my proposal – a legal distinction between deposit accounts and loan accounts (see After Osbrown, page 38ff.) - is a neater answer.
Whatever the best solution, one thing is clear: the fight against unrestrained fractional reserve banking is now mainstream.
"A revolutionary text ... right up there with the Communist manifesto" - Dominic Lawson, Sunday Times
Printed by Douglas Carswell of 61 Station Road, Clacton-on-Sea, Essex