Taming

Of the Credit Cycle?

Mish’s Six Recommendations:

1.)  Separate lending banks from deposit banks 

2.)  Eliminate the Fed’s ability to do QE

3.)  Eliminate the Fed’s ability to monetize the debt

4.)  Eliminate Fed’s ability to pay interest on reserves

5.)  Audit the Fed

6.)  Balanced Budget Constitutional Amendment requiring 2/3 vote in both houses to temporarily override

Separate Lending Banks from Deposit Banks

If we separated lending banks from deposit banks and mandated 100 percent reserves on deposits, there would be no Silicon Valley style blowups.

Note that 100 percent reserves on deposits would not stop lending because deposits play no role in lending up to the point there is a run on a bank causing capital impairment.

The reason to split banks into two pieces is to remove all risk from one of the banks. Lending banks can go under by making bad loans.

FDIC is unneeded (or unlimited) at deposit banks because there is always 100 percent reserves.

Deposit banks would have a small fee for safekeeping, handling checking accounts, wire transfers, etc. The more services offered by the bank, the higher the fee.

The 100 percent reserve proposal is not new. Economist Irving Fisher Proposed 100% Reserves in 1935.  Click HERE for those who desire an in depth article for a savings only bank.

DYI:  Over the past couple of months I was thinking the same way for a savings only bank.  What I envisioned is a savings only bank along with a trust department plus CPA’s and law firm.  A one stop, shop for all of your savings and basic financial needs.

This would not end the credit cycle however it would go a long way to taming the beast.