Friday, 5 April 2013

Adair Turner ponders regulating banks out of existence.

Adair Turner has just made an interesting speech at an INET conference. In reference to the 1930s Chicago school, he said (around 2.30),“Those economists came up with two really quite radical propositions. . . . The first was that the finance – and in particular banking – was subject to such potential instability that not only we should regulate banks tightly but that we should regulate banks out of existence. They didn’t believe that fractional reserve banks should exist.”

The phrase “regulating banks out of existence” is a good description of full reserve banking. That is, under full reserve depositors are made to choose between, first, having their money lodged in an entirely safe fashion (perhaps having their money lodged at the central bank). But that is clearly not “banking” as is normally understood which consists of accepting deposits and lending that money on to borrowers.
Depositors second option under full reserve is to let their bank lend their money on or invest it, but in doing so, depositors foot the bill if those loans or investments go wrong. Now that is essentially little different from buying shares in a corporation or mutual fund (unit trust in the UK). And that, again, is not banking as normally understood.
(Hat tip to Mike Norman and Positive Money).

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