In the long run, all the hullabaloo about the various global banking crises is just hot air.

The old establishment banks — the ones that have been bailed out this week in Spain, and in 2008 in America — are unnecessary middlemen. This is because of the ludicrous spreads from which they profit. They borrow from central banks and from depositors at absurdly low rates of interest (that’s what ZIRP is all about) and lend at vastly higher rates. What useful function does it serve? At one time, banks generated value by being wise lenders, lending to businesses that they determined would add value. Today they prefer gamble up even bigger profits in the zero-sum derivatives casino and shadow banking whorehouse, requiring frequent bailouts when such schemes go awry. They are dinosaurs that offer no real value to their shareholders, their customers, or to society.

And for all their claims of systemic importance, for all the bailouts, all the whining, all the pontification they are gradually being sidelined by other forms of intermediation, specifically peer-to-peer lending wherein lenders and borrowers are matched directly often via the internet. The lender gets interest, the borrower pays interest, but because there is no middleman taking a (huge) cut both rates are more favourable — the borrower pays less interest, the lender receives more interest.

The market for such lending has already grown to £250 million-a-year in the UK alone. The BBC reports:

Lending via three websites that link savers with borrowers – bypassing the banking system – has topped £250m. The “new age” finance carries no protection for deposits, but is being tipped as a serious threat to traditional banks. The peer-to-peer sites are led by Zopa, which has lent more than £200m since it started in 2005. Funding Circle, specialising in business loans, has topped £34m, and RateSetter has reached £24m. Last month the government said it would lend these sort of firms £100m to help expand their own lending to businesses.

Alas, the government could lend these firms ten times that (that would still be a tiny sliver of what they have channelled to the establishment banks in recent years) and the market would still be rigged in favour of the establishment banks.

That’s because of deposit insurance. Money lent peer-to-peer is not insured by the government, whereas money deposited in banks is. This is a heinous advantage that the dinosaur banks have been given by government fiat, and certainly a huge stumbling block to peer-to-peer lending forcing the dinosaur banking system to either massively cut their spreads, or go out of business.

Governments who want a fair free market banking system with the benefits of real competition should either extend some form of deposit insurance to peer-to-peer lending schemes, or should get rid of deposit insurance altogether. Everyone wins except the banks and large financial corporations — lenders get more interest for their money, borrowers pay lower rates, and the parasitic establishment banking system that has vampirised the taxpayer for trillions must either choose to drastically reform itself to compete against peer-to-peer lending, or go out of business.

In a free market without the unfair advantage of deposit insurance the banking dinosaurs profiting from huge spreads would be an endangered species. They are only surviving and prospering because the government has rigged the rules of the game for their favour. That cannot last forever.