From The Economist review of Martin Wolf’s new book “The Shifts and the Shocks: What We’ve Learned–and Have Still to Learn–from the Financial Crisis”:
To make finance safer, Mr Wolf suggests replacing a fractional reserve banking system, which takes in deposits and lends most of them out in longer-term loans, with a system of “narrow banking”, where deposits must be backed by government bonds. To sustain demand without relying on dangerous asset bubbles, he proposes permanent “helicopter money”, where governments run deficits that are financed by the central bank. For a man of the mainstream, this is brave stuff.
Fractional reserve banking is inherently unstable and responsible for many of the problems in our economic system, but abandoning it completely in favor of “narrow banking”, where deposits are fully-backed by government bonds, seems unnecessary. Increasing Tier 1 capital requirements to 10 percent of total exposure, from the current 3 to 5 percent, should provide a sufficient buffer to withstand most financial shocks. Rapid expansion of credit during an asset bubble would be difficult, with high capital requirements forcing banks to be more selective in their lending. Even more so if supplemented by central bank monetary policy to counteract rapid deposit growth.
Read more at A Prominent Financial Columnist Is Calling For Radical Reforms To The Global Economy | Business Insider.
Hmm…I’m not entirely convinced everyone wants a safe and stable finance system – any more than wolves want a safe and stable deer herd. The GFC proved to the wolves that a panicked herd can be very, very rewarding.
Many Wall Street “wolves” got trampled in the panic. I don’t think they are hoping for a repeat.