The trouble with banks is that they are extraordinarily pro-cyclical beasts.
During the good times they throw caution to the winds and lend with reckless abandon.
During the bad times they do the opposite; in rebuilding capital to pay for the bad debts of the boom, they become highly risk averse. The priority is to reduce credit, rather than expand it, so that solvency can be re-established.
This process is reinforced by regulators, who having been asleep on the job during the boom, then go violently into reverse and attempt to bullet proof the banks against all eventualities by insisting on much tougher capital and liquidity requirements.
Only last month, Britain's Financial Policy Committee identified a further £25bn shortfall in UK banking capital, a deficit likely to be met by further shrinkage in bank balance sheets.
A vicious cycle of credit destruction thus sets in.
The madness of this regulatory over reaction is there for all to see the latest Basel III capital adequacy rules, which bizarrely require banks to hold much higher capital against corporate loans than mortgages.
The inevitable consequence of such thinking is that the housing market is held up at silly valuations and the corporate market delevers even further. The impact on growth is terrible.The only way to end this negative reinforcing cycle is by making the banks provide ultra transparency and disclose on an ongoing basis their current global asset, liability and off-balane sheet exposure details.
With this information, market participants can assess and restrain bank risk taking.
As a result, we won't get the extremes on the upside in lending nor will we get the regulators kicking in policies that hurt lending on the downside.