The article makes the assumption, which I've seen a hundred times before, that the deflationary effects of reduced lending resulting from more bank capital cannot be made good by bog standard stimulus. (Article title: "More bank capital could kill the economy.")
Put another way, the fall in the money supply which results from raising bank capital to which the authors rightly refer, can perfectly well be made good by simply having the central bank print more money and having government spend it (and/or cut taxes). As Keynes pointed out in the early 1930s, any government which issues its own currency can escape a recession, i.e. boost demand and raise GDP, simply by printing money and spending it. Obviously the AMOUNT OF printing cannot be excessive, else inflation ensues. But the right dose cures a recession without causing excess inflation.
The net effect of the above is of course a reduction in lending based activity (i.e. a reduction in debt) and a corresponding increase in non-lending based activity. So where is the big problem there?
It is widely accepted that debt is now excessive. Also the assets and liabilities of the UK bank industry have expanded TEN FOLD relative to GDP since the 1960s, and what have we got for that alleged benefit? Better economic growth? Nope: growth in the 1960s was very respectable. As for the 2007/8 bank crisis – that benefited everyone big time, didn’t it!!
As Adair Turner put it, much of what banks do is “socially useless”.
Conclusion: contrary to the claims of Tim Congden and Steve Hanke, a rise in bank capital with a corresponding decline in the overall size of the bank industry and decline in debts would probably do no harm at all.