This is the most important proposal I have yet seen in the mainstream press to reform the financial system. Unlike the other plans I've seen, it would actually work, for it would end the fractional reserve banking system, while preserving the function of banks, which is to serve as a conduit for savings to flow to investment. Kotlikoff and Leamer call it "Limited Purpose Banking".
Everyone who is concerned about the financial crisis should read this article. I hope that policymakers and my fellow economists take heed.
There is one further step I'd suggest to protect the financial stability of the banking sector: tie the value of the dollar to a commodity. In an earlier post, I outlined a plan to do this. A commodity basis is necessary for the dollar to serve its function in the long term, which is to provide a stable store of value to facilitate trade and investment. Because the Federal government seems to run on deficit spending, it has tended to escape the discipline that commodity money imposes. But an escape from that discipline is only found in inflating the money supply, which cannot work in the long term.
3 comments:
A website devoted to making banking more stable is safebankcentral.com. It is a subscription site, but it has some useful info for free.
Well, it sounds good. But the truth is, any money activities, there will be a crook down the line, which LBP is not 100% crook proof either.
When the banking system is stabilized, fraud becomes marginal rather than central to its operation, just as it is in most legitimate businesses. There may be fraud in consumer electronics, for example, but most of that industry is honest, for the simple reason that it is competitive and frauds are revealed sooner or later.
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