Yet another ignorant move from Labour

Following the leaked news that Cash ISAs will be restricted in the hope of attracting investors to the stock market, I am beginning to wonder if the Treasury and the Chancellor have any idea how the economy works.

This proposal seems to ignore the whole purpose of banking and assumes that regulatory pushes will improve the economy, as opposed to the supply side reforms that are actually required.

Banking, as with insurance, pools risk. It intermediates between the lender and the borrower and prices accordingly. Thus, the low-risk investor places a deposit of up to £85,000 in a bank, building society or credit union in the knowledge that it is protected by the Financial Services Compensation Scheme. There is no risk unless the whole nation collapses.

This money is then lent on to a riskier proposition where the bank knows that it may lose some or all of its asset. Interest rates then do the work of pricing risk; low for mortgages, well secured on property, much higher for credit card borrowing or for start-up businesses.

Borrowers who need money for their business have a choice between loans and equity. They can decide to sell shares, reducing their ownership but also lowering their risk, or they can decide to keep all the shares and borrow. There are obvious constraints on this, as there needs to be willing buyers of the shares, or lenders, which will be determined by the proposed return and the prospect of success.

Banks and building societies cannot, unlike the Bank of England, create money. To lend, they have to receive deposits or borrow in the money markets. In 2008, Northern Rock went out of business because it was dependent on the money markets, which withdrew their funding, leaving it unable to meet the demands of depositors who, hearing rumours of the bank's discomfort, wanted to remove their cash.