Douglas Carswell is wrong about bank deposits

Yesterday Douglas Carswell, Conservative MP for Clacton, presented a Ten Minute Rule Bill in Parliament, as reported here by Paul Goodman on ConservativeHome.

His Financial Services (Regulation of Deposits and Lending) Bill proposes to eradicate the centuries old law that says banks are free to use (i.e. to lend) up to 97 per cent of the deposits that you make to them.  Mr Carswell cites an Ipsos MORI poll indicating that 70 per cent of people falsely believe that they own the money in their bank accounts.  Fine, but this is an indictment of people's lazy approach to understanding their finances, not a structural fault of the banking system.

Now, my initial reaction to the Bill, not being predisposed to praising high finance and the alchemical high jinks of bankers and financiers, was "why not"?  What would be so bad about ordinary hard-working Britons saying to their bank, "please look after this for me but I'd rather you don't slice it and dice it into a complicated security and wire it all over the world several times over"?

However, after more reasoned reflection, I concede that it is a daft suggestion for two princnipal reasons.

First, banks are allowed to use your deposits for money-making activity as a form of payment for taking care of your savings, instead of you having to rely on the less secure methods of hiding it under your mattress or in a piggy bank.  So if banks split deposits between "investment" and "storage" accounts, as Douglas Carswell proposes, I can envisage costs for depositors increasing across the board and at the very least an annual charge for the mere "storage" accounts.  Otherwise, what makes it worth the bank's while to look after your money?

Secondly, considering the low regard in which bankers and financiers are held, it wouldn't surprise me if a lot of people decide to retain ownership of their money and choose the "storage" accounts.  It would matter whether the distinction was administered by an "opt-in" or an "opt-out" procedure - similar to the psychology of organ donarship.  Were many depositors to opt for "storage" it would be counterproductive for them and the wider economy - British banks would not have the funds to lend to businesses or to homebuyers.

Granted, Western economies have been swept artificially along on a tide of excessive consumer, corporate and sovereign debt and we are suffering the consequences.  Yet the money supply is the facilitating oil in the wheels of the economy.  Rein in debt, of course, but this is a nonsensically populist policy that would threaten the normal functioning of business in this country.  Thank goodness it shall not go anywhere.