One of the references below outlines a proposal for reforming our banking system along the lines of a truly public institution. The proposal comes from William F. Hummel. It would separate the depository function of banking from the profit seeking aspects of it. Under this plan all demand deposits (i.e. checking accounts) would be 100% backed, fully backed, by reserves: base money. The fractional reserve system works well when it’s used to make loans in support of productive activities, such as building businesses. But this power to credit deposits, create money, can be abused for speculative gain. The sub prime mortgage crisis clearly shows big banks abusing their privilege of issuing credit. A fully backed depository system would fix a lot of the problems that politicians are grappling with at this very moment. Please see Treasury Press Release TG-175. Instead of creating more regulatory red tape and government bureaucracy, there’s a better way to protect the public, and at the same time fully secure the deposits of everyone, thereby eliminating the need for government insurance, such as what’s being provided by the FDIC. A National Bank, a single national depository, fully backed by reserves would be just this solution. Lenders could still engage in profit seeking ventures, but they would no longer be called banks, but rather, financial intermediaries. Under this proposal, banks would necessarily morph into non-bank financial intermediaries because they wouldn’t be able to accept deposits, nor create deposits through lending. They would no longer be able to increase the money supply as they can under the fractional reserve system. As financial intermediaries, their loanable funds would come from two sources: 1) Money borrowed at a penalty rate from the National Bank; 2) Money from investors who are looking to lend in the hope of making a buck or two. People shouldn’t think that eliminating fractional reserve lending will injure our credit markets as banks currently account for less than 20% of the total credit market debt in the U.S. Most of the lending is already done by financial intermediaries such as mortgage companies, insurance companies, pension funds, investment banks, etc.
There are a lot of advantages to William’s proposal. Nationalizing the depository base would diminish the unhealthy influence that banking interests currently exert in our political system. I could list more reasons, but perhaps I’ll end it here with two very good reasons that tie into Taleb’s advice on how to live in a Fourth Quadrant world: 1) A National Bank would be simple, it would just act as a single national depository administered by the Federal Reserve. The logistical complexities and transaction costs associated with moving money around between banks would be eliminated. There would be only one bank. Balances would be instantly verifiable, and payments could happen without delay. A simple system is easy to understand and manage. 2) A single, fully backed depository would, by its very nature, be safer than the current fractional reserve system. No government insurance on deposits would be necessary. All deposits would be risk free. Banks would no longer be able to jeopardize the deposit base through risky lending.
In the Fourth Quadrant, this proposal is a step in the right direction.
Nassim Taleb’s Edge Essay: http://www.edge.org/3rd_culture/taleb08/taleb08_index.html
A Fully-Backed Depository System: http://wfhummel.cnchost.com/reformplan.html
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