I throughly enjoyed my last interview with Larry Kotlikoff about his book “The Coming Generational Story“, so we decided to do this interview about his new book entitled ” Jimmy Stuart is Dead-Ending the World’s Ongoing Financial Plague with Limited Purpose Banking“. You will also be treated to another interview about his book entitled ” Spend til The End” in another future podcast.
I think that most people are aware of the movie “It’s A Wonderful Life” with the trustworthy banker George Bailey played by Jimmy Stuart saying he was going to guarantee his depositors money. The correlation between Larry’s book and the movie, is that there no guarantees even in the banking business. As a matter of fact the current economic mess is due to the fact that our banking industry invested in unsecured mortgage backed securities, which we all know completely collapsed.
In my interview with author Larry Kotlikoff he proposes a strategy that he believes would solve many of these problems moving forward. Larry refers to the system as “Limited Purpose Banking”. So just what is “Limited Purpose Banking”? As Larry states “It’s a simple and very low-cost change to our financial system, which limits banks to their legitimate purpose, namely connecting borrowers and lenders and savers and investors. In my interview Larry refers to mutual funds as an example to explain how it works. Mutual Funds have been around for a half century, they only invest the money they collect from investors and do not borrow or leverage the dollars deposited by investor. While they are subject to the risk associated with the underlying investment in stocks etc, they are not leveraged so the mutual fund has limited risk.
Under limited purpose banking, all banks-all financial and insurance companies with limited liability that are engaged in financial intermediation–would operate as pass-through collectors of securities. That is, the banks would simply function as middleman. They would never themselves own financial assets or borrow to invest in anything except those specified assets, such as computers, office furniture, and buildings, needed to run their mutual funds operations. Hence, banks would never be in a position to fail because of ill-advised financial bets.
If you think about what author Larry Kotlikoff is proposing it makes lots of sense, it also would prevent from another collapse like we have just experienced in the banking industry. If you are at all interested in reading about some of the malfeasance that lead to our current financial collapse, and want to know what one very bright economist is proposing to help regulate our banking industry moving forward then I highly recommend that you read “Jimmy Stewart is Dead”.
Please enjoy this great interview, and visit Larry’s website for more information.