The Bankwatch

Tracking the consumer evolution of financial services

“James Stewart is Dead” | New book proposes alternative bank model

The proposal to replace banks with non levered Mutual Funds was floated last December (noted on the blog here) and now here is the book.  This fits with the view of this blog for utility or limited purpose banking providing basic banking and payments services much along the lines of water and electricity.  Reliability over concern for safety.

BU economist: U.S. must rethink banks | Boston Herald

The basic premise of limited purpose banking, which is beginning to win over some academic adherents, is that banks should be run like mutual-fund companies, such as Boston’s Fidelity Investments, acting merely as pass-through institutions – middlemen between those who want to save and those who want to invest.

Banks would be effectively banned from leveraging other people’s assets on big financial bets, reducing the risk of systemic bank failures that can bring entire economies to their knees, Kotlikoff says.

Relevance to Bankwatch:

I am almost done with This Time is Different and will be doing a post shortly.  The nice thing about that book is that its not an opinion.  It is a detailed review and analysis of economic and banking crises, mostly since 1800, and with other examples going back to 1340. 

The clear unequivocal lesson, and hence the ironic title, is that it is never different.  There are a set of core fundamentals (excessive debt, dramatic shifts in capital movements, inflation) that always beget crises, not sometimes, but always. 

Banks continue to have excessive leverage especially when the off-balance sheet liabilities are included.  No amount of regulation tweaking will resolve that basic fact, so at least the Kotlikoff proposal is a refreshing alternative.

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Written by Colin Henderson

March 14, 2010 at 09:59

Posted in Uncategorized

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