Thursday, September 01, 2011

Sure-Fire Solution to our Banking Woes

All of the government's efforts to force the banking industry to its knees will probably backfire. I have designed a perfect solution.

[Click on the image for a larger version.]

Basically, what I'm saying is:

Go back to something like Glass-Steagall and force separation of the commercial banking function and the investment banking function, and:


1. Allow commercial banks to accept savings for deposit, and/or offer checking accounts, and to create credit only for commercial-paper purposes, based 100% on bills of lading with maximum 90-day payoff.

2. Allow commercial banks to invest in other sound instruments and loans, but ONLY up to the amount of the savings on deposit plus bank capital and equity. No credit creation permitted.

3. Allow commercial banks to function on a 10-20% reserve requirement, whichever the system finally decides is best through trial and error.

4. Allow commercial banks to function under the FDIC's umbrella, and allow the Fed to issue money only in times of war or of serious disruption of the interbank lending system (which is unlikely to occur, because these banks are not playing Santa Claus with credit).

On the other hand:


1. Force investment banks to change their structure to a partnership, where the partners are 100% liable for losses. Change the laws so that poor investments mean personal wipe-out for the partners.

2. No FDIC, no bailouts.

3. Put a big sign on the front door that says, "Enter at your own risk."

How simple is that? Fits on one page, not 2,300 like Dodd-Frank.

I think this might go a long way to solving our problems in the future. Of course, we must eliminate all government-sponsored banking enterprises and all government participation in the banking industry.

There's nothing like failure to teach people a lesson. It's call Creative Destruction.

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