Crowdfunding has wide appeal.  For libertarians on the political right it demonstrates the power of individual action, free from the constraints of institutions and regulation.  For geeks, it is a demonstration of the vitality of the internet.  Much of the public welcomes the sidelining of traditional financial institutions.

And even cautious policy makers are inclined to offer a guarded welcome.  They are concerned about the availability of funds to small and medium enterprises, and in Europe in particular they have cause for concern.  The problem is not that there is a shortage of savings – far from it.  The flow of intermediation is blocked by the debris of bank failures, and just as dammed water finds new channels of escape crowdfunding appears a means of bypassing the log jam.

But regulators are more cautious.  The SEC has been dragging its feet over implementation of Title 3 of America’s JOBS Act, which would allow companies to sell their shares directly to investors via the internet.  Britain’s Financial Conduct Authority recently issued proposals for the regulation of crowdfunding sites.  The regulators are concerned to restrict access only to sophisticated investors, or for a small part of a household’s assets, and to ensure that people who raise money in this way have some sort of serious business.

Such hesitation attracts the wrath of the enthusiasts.  Barry Jones of the Crowdfunding Center, wondered aloud ‘whether our FCA is the worst regulator in the western world.  The words that spring first to mind are inflexible, stubborn and unimaginative’.

By chance, I have just been reading a history of the disastrous experiment of Individual Learning Accounts.  This was a scheme to promote adult education;  individuals who invested a modest amount of their own savings in training would qualify for government subsidies to meet the full cost.  The idea was to bypass the fusty old further education colleges which had failed to cater for disadvantaged students or stimulate new forms of learning:  the market, and the newly empowered consumers, would judge the quality of training, not bureaucratic inspectors.  By the time the plan was scrapped, at least one third of the money spent under the scheme had been creamed by fraudsters.

And naiveté is as much of a problem as criminality.  Most business plans read persuasively.  It is only when you have read a few – and seen that even the best conceived and executed of them rarely work out as planned – that you begin to learn how to judge them critically.  It is not often sensible to invest in early stage businesses – or perhaps mature businesses – without some personal knowledge of the key individuals involved.  Providing equity or loan capital to small and medium-sized businesses requires skill, expertise, experience and a good deal of cynicism. Such cynicism is precisely the quality the enthusiasts for crowd funding do not have.

There is too much financial intermediation and for many financial intermediaries, and the costs of financial intermediation are excessive. But dispensing with knowledgeable intermediation completely is not , for most people, a good idea either.   Crowdfunding makes some  sense for the zany projects of which there are many on Kickstarter.  People who share the’ enthusiasm of the originators of some creative idea can provide support without real expectation of further reward.  But that is very different from regarding peer to peer lending as a substitute for a deposit account, or facilitating sat tempts to get rich quick by subscribing for shares through an internet offering.

There is a seeming inevitability about how this debate will evolve.  Over the next few years, there will be a series of scandals. Some will be  the result of blatant fraud, others will represent the triumph of hope over experience of reality.  The regulators who are today denounced for their intervention will then be castigated for their neglect, and governments will come under pressure to compensate the losers, either directly or through the various compensation schemes.  New regulations will be introduced that will impose controls similar to those imposed on the rest of the financial services industry.  Some of the new peer to peer lending and equity crowdfunding services will survive, operating in a more closely regulated environment and developing their own skills in vetting projects and assessing their suitability for their investors.  Of course, such institutions once existed.  They were called banks.