Commercial banks are essentially 17th century commercial structures tooled up with 21st century technology and 19th century commercial law, and have access to pretty much any and every asset market in the world.

Yet time and again, they prove themselves unequal to the task. And, worst of all, every time they get themselves into trouble, you get the same response - someone (the central bank) must bail them out. It seems the only lesson learned from the Great Depression was that banks are too important to go bust. So we get the near-equivalent of a government guarantee, with predictably disastrous results for commercial behaviour.

Perhaps instead we should ask whether commercial banks still have a useful function to perform, and start to imagine how one could safely wind them down. Does a world in which information distribution costs are effectively zero still need to bear the costs and dangers of commercial banks who claim they have some special insight or expertise to agglomerate and allocate savings. What would Hayek say?

Here are two possible reforms. First, the next time a French commercial bank (German landesbank etc) gets itself into trouble, perhaps the response should be to liquidate it, and distribute the assets to the depositors in listed money market mutual paper (ie, so it can’t go bust).

Second, since it is clearly the case that in some of these organisations, some employees are paid very large sums indeed to throw around the banks’ balance sheet, we might consider whether they should also accept some capital liability as de factor owners of the business. For example, the bonuses could be legally seen as bank capital for a set period - so if irresponsible traders lose depositors’ money, they too are exposed; or perhaps the bonuses could be seen as a dividend from assumed capital, leaving them legally liable up to the full extent of the assumed capital. Sounds drastic, but common sense, and repeated experience tells us the current divorce between reward and personal risk within these institutions encourages recklessness and/or managerial incompetence.

Third, given that interbank market rates are now higher than straight money-market rates (yup, check it on BBG), perhaps one might consider establishing a London extra-bank market, in which commercial banks are specifically not allowed to trade. Might bring down risk premia!

Reply: Certainly the owners of banks that go wrong should lose money from the experience, and they would be wise to make sure their senior executives also took a financial hit from failure.

reply: I do not think so. The important thing is to watch wage pressures. If the economy were overheating we would see upward movements in wage settlements. Instead, this year the government is at last getting public sector wage settlements down - they have been the most inflationary in recent years. We see strikes and threatened strikes as a result, but no evidence that HMG is going to back down. meanwhile, private sector wages remain under good control.