Joseph and the amazing technicalities

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: (and a former monetary policymaker at the Bank of England), suggests a way around it: monitoring whether the pace of loan growth or the rate of increase of asset prices was moving sharply above trend, and requiring banks to find more capital if the alarm sounds. Had such a rule been in place, the subprime-mortgage boom might not have been so explosive.

Of course, the devil would be in the detail. Regulators would need a breakdown of how bank lending was being directed to different geographical areas and asset classes. In good times, greedy bankers would have the incentive to cheat; for example, by making loans to offshore holding companies that would then pass on the money to Florida condo-buyers. Such rules would need to be international, to stop foreign banks from stealing market share from banks in countries that observed the regulations.

The regulators would also need to be careful about being too lax during the downturns. After all, it is at such times that banks are most likely to need capital to keep them afloat. Bank customers might be resentful if they felt regulators had been complicit in letting a bank go under (although deposit insurance should soothe them). But if banks are forced to raise more capital during the booms, their finances should be stronger during the busts.

Despite this, countercyclical regulations would not be popular with the bankers. Over a full cycle, such rules would probably require banks to have more capital than under the existing system (and given the rescue of Bear Stearns, the rules would need to apply to investment as well as commercial banks). Because money tied up in capital earns lower returns, that would mean lower profits.

But it is hard to feel much sympathy for bankers who rake in fortunes during the boom and require taxpayers to help them out in the bust (or make central banks jump through hoops for them, as the Bank of

England has done last week). An efficient financial sector is vital for a modern economy but trading securities has arguably achieved too much importance in the

Anglo-Saxon world. Winston Churchill once said that he would rather see finance less proud and industry more content. That is not a bad motto for those devising a new set of banking regulations.