With lingering unemployment, massive Wall Street bonuses, and an angry electorate, the Administration is devising new "reforms." The list includes taxing big banks, limiting bonuses, paying bankers in stock, prohibiting commercial banks from proprietary trading as well as running hedge and private equity funds, limiting leverage, establishing a systemic risk overseer, and forcing investment-banks to preplan their funerals.
Let's get real. Bonuses will be called salary, taxes will be shifted to the public, bankers will hedge stock losses, proprietary trading will become "client service," banks will invest indirectly in proscribed funds, leverage limits will induce riskier investing, and regulators will keep working for their next bosses - the ones on Wall Street.
And the problem was not how fast financial behemoths were interred or resurrected. It's what killed them. Their actual or near-death experiences showed us that our financial middlemen aren't to be trusted. And the specter of their demise flipped economic expectations. Suddenly, households and firms expected bad times and acted individually to ensure that collective outcome.
So let's consider an alternative financial system, which is remarkably simple to implement. It's called Limited Purpose Banking because it limits banks, insurers, and all other financial corporations to one job and one job only - financial intermediation. It also calls for a single regulatory body that will independently verify, rate, disclose, and custody financial securities.
In my just released book, Jimmy Stewart Is Dead, I discuss the interconnected financial, regulatory, and political malfeasance that infests our financial system and show, from an economists' perspective, that our current financial status quo is extremely risky. I also discuss Limited Purpose Banking.
This proposal was referenced three times by Bank of England Governor Mervyn King in recent testimony to Parliament. And the book/plan has been very strongly endorsed by Jeff Sachs, George Shutz, Bill Bradley, Robert Reich, five Nobel laureates in economics (Akerlof, Lucas, Prescott, Fogel, and Phelps), Simon Johnson, Niall Ferguson, Kevin Hasset, Ken Rogoff, Jagdish Bagwati, and many other prominent economists and policy makers.
Limited Purpose Banking would put a definitive end to financial failures, and its implementation would flip the economy from its depressed state to a healthy, confident position.
Senator Dodd's "friend of Anthony" reform is not the answer. It does nothing to address the fundamental problem of the crisis -- financial fraud -- left, right, and center. This problem can't be addressed by hiring more Keystone Cops or adding super regulators. We already have over 115 regulatory bodies who can't shoot straight. We need a system that is fool proof, check that, fraudster-proof. That's Limited Purpose Banking. It recognizes that Jimmy Stewart - the trustworthy banker in It's a Wonderful Life is dead and that we can't pretend that the folks at the top in Wall Street have our best interests at heart. They don't. So we need a system that make Wall Street safe for Main Street. And we need to implement that new system not tomorrow, but today.
Laurence Kotlikoff is a professor of economics at Boston University, President of Economic Security Planning, Inc. (see www.esplanner.com), and the author of Jimmy Stewart is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking.
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