'Credit ...is the economy', says Lanchester

Whoops! Why Everyone Owes Everyone and No One Can Pay'.  The Sunday Times (31 Jan 2010) carries an article by this book's author John Lanchester. A phrase in his article hit my eye. 

'Banks create credit, and credit makes the economy work. In a sense, credit isn’t just an aspect of the economy, it is the economy — the seamless, ceaseless, frictionless ebb and flow and circulation of credit. When it works, this process is a wonder of the world. When the banks go wrong, everything goes wrong...' .
Credit is an amazing 'wonder' - currently banks are the creators of most of it. But the economic system has crashed through excesses of these credit creators. Lanchester says they tried to master the downside risks, of which, he says Keynes observed: ' there is nothing so disastrous as a rational policy in an irrational world' . 

Given the above what sort of system do we now need for creating and allocating credit?  The Times (1 Feb 2010) ' Which Capitalism?' says that the recent  World Economic Forum in Davos saw the advocates of  'nationalist authoritarian capitalism ' (the Chinese model) more bullish than those of the traditional 'liberal democratic capitalism'.  Are we moving in the Chinese direction? 

The Southampton Centre for Banking Finance and Sustainable Development has issued a press release  (28 Jan 2010):

‘Impose direct restrictions on credit—learn from China’

Lord Adair Turner, Chairman of the Financial Services Authority, has said at the World Economic Forum in Davos that direct controls on bank lending were needed to prevent asset bubbles and banking crises. The controls would be similar to those imposed by the Chinese central bank, according to Lord Turner. Professor Richard Werner, Director of the Centre for Banking, Finance and Sustainable Development, and a known expert on direct controls on bank lending, welcomed Lord Turner’s new proposals...

(contact Southampton University for more details)  

Werner's book New Paradigm in Macroeconomics (Palgrave Macmillan) is a must-read for anyone wanting information on the new direction for economics. But note that Professor Werner is a banking expert who believes in the democratic control of credit creation and not in the old undemocratic, banker control of credit creation. Talk of merely improving banking  regulation would take us back to that. No thanks. 

For a succinct video summary (8 min) of the new economic paradigm (banking and more)  see  YouTube Renegade Economist   James Robertson - It's Our Money Anyway