This week, Businessweek has an article about Larry Kotlikoff, a Boston University economics professor and economic advisor to former Senator Mike Gravel during his 2008 presidential campaign. Among other things, the economist is a supporter of a national sales tax to replace the income tax, a position which Gravel adopted. Kotlikoff has a book coming out on February 22, called Jimmy Stewart is Dead, in which he advocates for a complete restructuring of financial regulations. Businesweek explains:
In Kotlikoff’s scenario, banks would be shorn of their risk-taking functions. A deposit would be pooled with other deposits in a new kind of mutual fund, equivalent to a stock mutual fund but with all the money held in plain old cash so there’s no chance of not getting it back (though it could still lose value to inflation). That eliminates any reason for a panicky bank run. 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. Kotlikoff says loans could work the same way: Mutual funds would pool investors’ money and use it to make loans to vetted borrowers. That would cut banks out of the picture, except as go-betweens. The advantage is that if certain borrowers didn’t repay, there would be no systemic, global-economy-threatening crisis, like the ones that can occur when one bank goes down and drags others with it. Instead, the worst that could happen is that investors who funded a particular loan would lose part or all of their investment. Insurers couldn’t go bust, either, because they would no longer be on the hook for paying claims. People who wanted insurance would simply pool their money for a certain period, and those with verified claims would divvy up whatever was in the pot at the period’s end.
One side benefit: Kotlikoff says 100-plus regulatory agencies could be disbanded because financial firms would no longer have other people’s money to play with. They would be replaced with a single Federal Financial Authority whose main job would be to verify data supplied by would-be borrowers, such as income statements and the value of collateral.
At this point in history, it is being described as an unlikely scenario. But there is hope for Kotlikoff’s vision.
Bank lobbyists, meanwhile, don’t even want to entertain the idea. The American Bankers Assn. declined multiple requests for interviews on the Kotlikoff plan. No member of Congress has taken up limited-purpose banking as a personal crusade.
Still, seemingly impossible schemes have become reality before. MIT’s Johnson likens now to around 1900, when the smart money said John D. Rockefeller’s immense Standard Oil trust was impregnable. Then came trust-busting President Theodore Roosevelt and muckraking journalist Ida Tarbell. By 1911 the Supreme Court had broken Standard Oil into 34 companies. Predicts Johnson, who has his own book on financial reform coming out soon: “The same thing is going to happen with regard to massive, too-big-to-fail banks.”