Writing in The Observer, Will Hutton inveighs against "the fiction that deregulated banks and building societies competing in liberalised, global financial markets will promote their own efficiency and that of the wider economy".
As it's the field in which I make a living, I almost never write about finance (the exception being an article I once wrote for Prospect on the role and importance of hedge funds). But I have rarely agreed with Hutton's diagnoses.
Hutton's unlikely 1995 bestseller The State We're In proposed a German-type system whereby regional banks would demonstrate commitment to local industry by investing for the long term. From my observation, very few German bankers and not many German industrialists believe that the system of the mid-1990s was one to emulate. Tony Blair was briefly influenced by Hutton's book and particularly by the notion of "stakeholders" in industry, but the admiration between author and soon-to-be Prime Minister did not, apparently, endure.
I ought to acknowledge, then, that in his article today Hutton makes a case that I find difficult to gainsay. This is the crucial point:
It is true that competition tends to deliver efficiency and generalised economic benefits. But competition between banks is different. The reason is that, unlike other industries, the soundness of what any one bank or building society does depends on the behaviour of all the others.
Hutton advances his argument with reference to the precipitate declines in the UK housing market, but the problem he identifies is wider. Banks are expert in measuring risks among different types of financial instrument. But no one has found a way of hedging against liquidity risk - in this case, that home owners can't sell their properties even by slashing their selling prices, because the banks have severely tightened their criteria for lending. You want to know what the solution is? Don't ask me.