I was unusually surprised by the reaction to my post on monetary cranks; I thought I was just expressing mainstream economic opinion. I should, then, say what I don't like about the 'positive money' scheme.

It proposes that banks be forbidden from creating money by making loans. Instead, only the Bank of England creates money. Bank lending, it says, should come only from the money banks can raise from stock markets, or from customers in the form of 'investment accounts' (current account deposits would not be lent on), or from loans from the Bank of England.

This plan reverses the order of lending and deposits. Now, lending creates deposits; if you take out a mortgage to buy my house, my bank deposits rise. Under PM, it is deposits that create lending.

This would cause a fall in lending, relative to the boom times. For example, in 2006, banks created ''191.7bn of money - that is M4 lending minus the rise in banks non-deposit liabilities. This was equivalent to 14.5% of the money stock, and was ''25bn (15%) more than the rise in bank deposits, M4. And because many of those deposits were in current accounts that PM thinks shouldn't be lent, the actual fall in lending would be greater. PM says:

This reform will reduce the amount of 'credit' ' or more accurately, lending ' available in the economy, from around 100% of the existing money supply to around 50-60%.

This is potentially deflationary. To remedy this, they propose that the Bank print money and lends to banks.

This leaves us with two possibilities. Either the Bank completely fills the gap, in which case nothing much changes in aggregate. Or it doesn't, in which case lending does fall.

Underpinning the thinking here is the notion that this would be no bad thing, as a lot of lending is speculative rather than productive.

But it's not clear that PM would lead to a squeeze on speculative lending. I fear the opposite would happen. If banks have only a limited amount to lend, they'd surely prefer mortgage lending, which has predictable cash flows which can more easily be matched to the maturity of investment accounts, over corporate lending which tends to be lumpier and less predictable. And they'd prefer to lend to well-collateralized older people buying second homes or buy-to-lets than young first-time buyers. Yes, first-time buyers and firms might get loans, but only at higher rates.

PM thinks this problem can be solved by the Bank of England directing that loans only go to productive activity. But this runs into the classic problem of central planning; why should a central planner (the Bank) know better than individuals what the proper volume and direction of lending is? One virtue of our present system is that it allows individuals who decide how much to borrow and for what and thus makes use of fragmentary, dispersed knowledge about the best amount and direction of lending.

It is not an adequate reply to this that the crisis shows that individuals' judgment is flawed. This crisis did not happen because individual borrowers borrowed too much; loan default rates and bankruptcies have been rather low (individual bankruptcies have risen, but this might reflect legal changes as much as individual distress). Instead, it happened because of poor decisions by individual banks; to be too dependent on wholesale funding in the case of Northern Rock or Bradford & Bingley, or to take over ABN Amro in the case of RBS. These failures, however, could (with hindsight!) have been prevented by policies short of a ban on banks' printing money.

And herein lies my problem with positive money. We just don't need such a radical and potentially dangerous reform. Our banking ills are remediable by other, safer policies:
- Banks tend to take on too much risk? Insist upon higher capital or liquidity requirements.
- There's too much 'speculative' mortgage lending? Impose quantitative limits.
- House prices are too high? Build more.
- Banks are socially irresponsible? Nationalize them, with democratic control.
- 'Productive' firms are starved of finance? Create a state investment bank.

In this sense, there's nothing that positive money cures that couldn't be cured more easily.

* Another thing. Anyone who is arrogant enough to claim there's a "simple solution" to the crisis, as PM does, is discrediting their case from the start.