Fundiflora: Sketch of a Post-Bank Financial System

The engines at the heart of the post-bank financial system will be a whole new ecology of daily quoted money market mutual funds. These would be the principle way you saved, and would be the principle source of money for those wanting to borrow.

What's so great about money market mutuals? Let's say first of all what they are. Money market mutual funds are open-ended investment funds which invest in debt securities and the price of which is quoted every day. So if you buy a unit of a money market mutual fund at 100p on day one, and the fund receives interest of 1p during that same day, it'll be quoted at 101p the next day. Since it's an open-ended fund, there's no room for 'speculators' to manipulate the price, since it is re-priced every day at the net asset value of the unit. When you want to get back some of your savings, you simply sell the unit.

What does the money market mutual fund do with your savings? It lends them out, of course, by buying bills and/or bonds.

Why would a system of money market mutual funds be so much better for saver and borrower than the current ecology of commercial banks?

The first benefit is that by being a mutual fund, any money they earn goes back to you, the saver, not the 'banker'. I pointed out in The Sheer Cost of Opacity that at the moment average deposit rates are 0.31% whilst the average interest rate on personal loans is 13.38% - that's one potato for the saver, 25 for the banker. In a money market mutual fund, you get all the potatoes, except the scraps you're prepared to throw to the menial drudge who manages the fund for you. How much you choose to throw to the manager is up to you - after all, he's just advising on the administration of your fund.

If one stipulates that the fund must always provide its owners with a detailed breakdown of its holdings, then a second benefit emerges: we get an extra layer of transparency which should help to improve credit decisions.

The third reason is that such clarity and transparency will encourage a wildly diversified 'fundiflora'. Some people (many probably) will want the absolute security of return which forms the bedrock of the bad deals depositors make with commercial banks. For these people, there will be money market mutuals which invest only in government bills and bonds. True, the interest they receive on these bonds won't be great - but it won't be nothing, because, after all, 10yr gilts are yielding about 4% a year. But the fund will only every go up, not down (provided the government doesn't default).

Then there'll be people who want a higher rate on their savings are are prepared to accept more risk in doing so - perhaps by investing in commercial paper and corporate bonds. There's be some people who go the whole hog, and want to risk a portion of their savings in high-risk paper. They'll have to accept that at some point, their usually rapidly-rising fund will take a fall.

And there'll also be funds for people who have strong views about where their savings should end up. Why not have a money market mutual fund for people wanting to fund micro-credit schemes in developing nations (or Hartlepool for that matter?). Money market mutuals for people who want to make sure their savings don't finance the arms trade, or ciggies/booze trade, for example. Money market mutual funds, in other words, for those who want to put their money where their mouths and consciences are. Our current financial system blithely incorporates the assumption that 'homo economicus' is a simple creature motivated solely by profit. We all know people have vastly more complicated motivations than that.

Those are just the benefits for you the saver. But there are benefits to the borrower too: removing the opacities of the deal between saver and borrower will close the 'banking spread.' Will some borrowers object to their borrowing becoming public information? Oh, perhaps - but they've learned to live with it in the bond markets, and they'll learn to live with it in 'banking' markets, provided their terms improve. If they really want secrecy, they'll have to pay extra for it.

And, of course, if the terms for both savers and borrowers improve, then capital allocation improves and so, in the medium-term, does the performance of the economy lucky enough to be serviced by such a financial system.

But it's not just a better deal for savers and borrowers, and the economy, it's a better deal for the financial system itself, since money market mutuals are incomparably more stable than commercial banks. Though it's not absolutely impossible for a money market mutual fund to go bust, their transparency makes them many magnitudes safer than commercial banks. Quite simply, they can't be brought down by either sub-prime defaults, or by the collapse of the CDS market - if only because the flow of cash into those markets would be cut off as the problems appeared.

Finally, though the death-throes of the commercial banks in such a system would be appropriately dinosauric (flailing, lots of noise, teeth and cannibalism), developing such a system now, and in London, would reinvent the City for the 21st century. I've previously described commercial banks as a pretty decent compromise for 17th century problems. The new fundiflora I envisage is above all a response to the key conditions of the 21st century - the collapse of the price of information distribution and the associated death of credentialism.

You can be quite sure that such a system will emerge somewhere in the world, and with it a new set of industries servicing it: administrators, IT guys, loans-sourcers and packagers, credit-assessors, ethical counsellors - the full gamut. Properly handled, it'll just outperform the commercial banking system out of existence.

So if not London, where? And if not now, when?