What’s the best way to prevent banks from taking reckless risks with customers’ money?
Do away with savings and checking accounts, says Boston University economist Laurence Kotlikoff.
In his new book, “Jimmy Stewart Is Dead: Ending the World’s Ongoing Financial Plague With Limited Purpose Banking,” Kotlikoff says checking accounts should be replaced with
all-cash mutual funds.
And savings accounts should be supplanted by mutual funds making short-term, conservative investments.
People who want to take more risk could invest in funds that offer mortgage loans, extend lines of credit, trade derivatives etc.
The problem now, Kotlikoff says, is that once depositors turn over their money to banks, the institutions can use those funds in any way they see fit.
And that doesn’t always work out so well, as the recent financial crisis proved.
Kotlikoff proposes a system he calls “limited purpose banking,” in which banks would merely manage mutual funds. They would no longer lend or make proprietary investments.
“Banks would simply function as middlemen,” he writes. “Hence, banks would never be in a position to fail because of ill-advised financial bets.”
MIT Economist Simon Johnson says the solution is to keep the country’s banks small.
"Do not allow financial institutions to become too big to fail and break up the ones that are," he writes in his new book, “13 Bankers: The Wall Street Takeover and the Next Financial Meltdown.”
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