The CBI’s top man, Richard Lambert, used to be a member of the Bank of England Monetary Policy Committee. So it seems reasonable to assume he knows a thing or two about our central bank. Yesterday he launched a scathing attack on the government, the FSA and Bank of England.

Why didn’t the Bank of England move faster? He said, “Other financial institutions around the world have been buffeted around in this rough weather. Few of them have been holed.”

Mr Lambert also said the run on Northern Rock made the UK seem more like a “banana republic” and our reputation has been “tarnished.”

Talking at the CBI Northeast annual dinner, the CBI chief said, “The crisis has not been well handled by those responsible: the government and the City authorities.”

But perhaps the most significant thing Mr Lambert said was this. He disagreed with Alistair Darling’s call for return to old-fashioned banking. Instead he wants “good old-fashioned banking supervision…a world where you know beyond doubt who is in charge when trouble hits, and where that person has the power to do whatever is necessary, however brutal, to nail down trouble before it gets out of hand.”

We are not into the blame game and feel the Bank of England has been blamed unfairly, but, in calling for more supervision and in rejecting a return to old fashioned banking, Mr Lambert is right.

It’s the move away from good old-fashioned banking that has been a major factor behind the global economic boom of the last ten years. Debt per se is not necessarily a bad thing. In fact it can be a very good thing, but not for the reasons many are saying.

Gordon Brown and others say debt is manageable because our assets are worth more than our debt. This is a flawed argument because asset values can go down as well as up.

But, in order for the global economy to expand, in order for consumption to grow, demand must be sufficient to encourage growth. In effect, demand must be greater than supply or else there would be no incentive to increase supply. Debt is the engine of this growth. We acquire debt to stimulate growth by borrowing from future income streams to pay for economic expansion, which in turn creates even greater income streams.

A return to traditional banking would kill this growth, leaving it dead in its tracks, and the world suffering like it once did in the 1930s.

What we need is the right kind of debt. That does require supervision. If you like this article, why not register for our daily newsletter? Or if you already receive the newsletter, then start spreading the news and tell your friends and colleagues. To register visit this link

Copyright #169; 1996-2007 Limited. All rights reserved

© Investment & Business News 2013