Small Banking From Boston

"The publishing world is too slow for Laurence J. Kotlikoff. On a frigid January day, the 58-year-old Boston University economist is pecking away at his computer keyboard in his office overlooking the Charles River. ... 'We have miscreants running the financial system left, right and center,' says Kotlikoff. 'Nobody is calling the [Obama] Adminsitration to task and saying, "You guys are putting a Band-Aid on cancer".' ... Instead of taking deposits and making loans, banks would connect borrowers and depositors with ultrasafe mutual funds created for those purposes. ... Kotlikoff sounds so unrealistic that, like George Bailey, he could use a guardian angel to set him straight. But he's beginning to catch the attention of powerful policymakers and the economists who have their ears. ... In the US, Kotlikoff's limited-purpose banking' idea is finding support among economists across the political spectrum, including University of Chicago Nobel Laureate Robert Lucas on the right and Columbia University's Jeffrey Sachs on the left. ... 'The problem,' he writes in his book, 'is the leveraging of the taxpayer by people with no formal training in finance or economics, no personal downside, an assortment of Napoleonic complexes, the money to buy ratings in New York and policy in Washington, and the ability to run circles around regulators.' ... In Kotlikoff's scenario, banks would be shorn of their risk-taking functions. ... Mutual funds would supply loans, too. Already, companies raise money by issuing bonds, which are bought by fixed-income mutual funds on behalf of investors. ... The advantage is that if certain borrowers didn't repay, there would be no systemic, global-economy-threatening crisis, liek the ones that can occur when one bank goes down and drags other with it. Instead, the worst that could happen is that investors who funded a particular loan would lose part or all of their investment. One side benefit: Kotlikoff says 100-plus regulatory agencies could be disbaded because financial firms would no longer have other people's money to play with", Peter Coy at Businessweek, 15 February 2010: http://www.businessweek.com/magazine/content/10_07/b4166042289206.htm.

Go Kotlikoff! I've favored "small banking" for decades. Frank Graham suggested 100% reserve banking in 1936, my 24 December 2007 post: http://skepticaltexascpa.blogspot.com/2007/12/fed-and-four-letter-word-gold.html.