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The financial crisis showed that bankers have the British public over a barrel. When banks do well, the bankers are awarded huge bonuses. When they do badly, the taxpayer has to step in and save them or face the consequences of systemic collapse of the payment system. Bankers can just 'make the money and run', leaving the government to pick up the pieces when things go wrong. The Vickers Commission was meant to put a stop to this by safeguarding ordinary retail banks from the gambling of investment banks. Laurence J. Kotlikoff shows that the Vickers proposals fail to do this. Even banks deemed 'good' can turn bad, since no one can predict which 'safe' assets will actually be safe in the future. Moreover, 'bad' banks are still left too big and too powerful. If they fail, they will drag ordinary banks down with them, freezing the payment system and creating a recession in the wider economy. Kotlikoff's alternative, Limited Purpose Banking (LPB), replaces the current system of 'trust-me' banking with the more transparent 'show-me' banking. LPB bans banks from holding anything except mutual funds. Mutual funds hold no debt, so they cannot individually, or systemically, fail. The payment system would use on-demand deposits that are backed pound-for-pound by actual cash. Bankers would not be allowed to lend out their customers' money without explicit permission and full disclosure of the risks. Large private losses could still take place within the financial system but without endangering the rest of the economy or burdening taxpayers. In short, Kotlikoff's proposal stops bankers from being able to gamble with other people's money.
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About the Author:
Laurence J. Kotlikoff is a William Fairfield Warren Professor at Boston University, a Professor of Economics at Boston University, a Fellow of the American Academy of Arts and Sciences, a Fellow of the Econometric Society, a Research Associate of the National Bureau of Economic Research, President of Economic Security Planning, Inc., a company specialising in financial planning software, a columnist for Bloomberg, a columnist for Forbes and a blogger for The Economist. Professor Kotlikoff received his BA in Economics from the University of Pennsylvania in 1973 and his PhD in Economics from Harvard University in 1977. His most recent books are Jimmy Stewart Is Dead; Spend 'Til the End, co-authored with Scott Burns; The Healthcare Fix; and The Clash of Generations, co-authored with Scott Burns.
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