6 economists provide fixes for financial system

NYT profiles 6 economists who provide their fixes for the financial system (HT: Anna Lusardi’s Blog) on the topic.

  • Joseph Stiglitz: End Dollar Hegemony
  • Thomas Jackson: GIve bankruptcy a chance
  • Robert Pozen : Banks should issue subordinated debt
  • Anna Lusardi: Financial literacy should become part of high school course curriculum
  • Laurence Kotlikoff: Wants to dismantle banks and let all cash mutual funds take over
  • Andrew Lo: Set up a safety board to understand the lessons from the crisis

Laurence Kotlikoff fix is a radical one so needs to be posted in full:

Laurence J. Kotlikoff, a liberal economist at Boston University, wants to dismantle the banking system.

Instead of checking accounts, people would place money in all-cash mutual funds. Savings accounts would be replaced by short-term funds that make conservative investments. And people could also place money in more adventurous funds that made mortgage loans, or extended lines of credit or played the market in derivatives.

It is a system designed to reduce risk taking by preventing banks from gambling with other people’s money.

Depositors now relinquish control when they place money in a bank. The institution decides how to use the money and it keeps the profits — or suffers any losses. Most banks also borrow large sums of money from investors to increase their lending and profits.

Under Mr. Kotlikoff’s model, called “limited purpose banking,” banks would manage families of mutual funds. No more borrowing. No more gambling. Except for office space, computers and furniture, banks could not hold any assets.

“Banks would simply function as middlemen,” Mr. Kotlikoff writes in “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague With Limited Purpose Banking” (Wiley, 2010). “Hence, banks would never be in a position to fail because of ill-advised financial bets.”

I have heard versions of let there be limited banking, but not something like this where banks become mutual fund families.  Kotlikoff thinks on different lines. See his other research as well.

One Response to “6 economists provide fixes for financial system”

  1. Laurence Kotlikoff – An economist running for US Presidency « Mostly Economics Says:

    […] Laurence Kotlikoff of Boston University is running for US Presidency. He is a top economist famous for his work on fiscal maths and limited purpose banking. […]

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