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Banbury Cross

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Post details: The Case for Dual Banking System

The Case for Dual Banking System

Imagine you have a solid and trustworthy family car - say a Volvo - which you need to cover your basic transportation needs. You go to work in it, you drive your kids to school with it, your wife uses it to bring groceries home, you need it to drive grandpa to the hospital occasionally. But then one day your crazy younger brother borrows the Volvo to make some extra money in a car race and in the process inflicts serious damage to its vital components. After all, sturdy sedans - while reliable - are not well suited to zip along narrow mountain roads at breakneck speeds. But that's not all - to add insult to injury, now your little bro asks you to chip in for the repair costs.

You would not be very happy about it, would you? Well, that is pretty much what happened to our financial system.

We used to have a reliable, if boring, banking system which served us well for several decades since the Great Depression. It extended credit to farmers and producers, it kept our deposits safe, it provided a flow of blood for the real economy. But then one day our crazy younger brothers - the financial wizards of Wall Street - asked us if they could borrow the family car for a generously sponsored rallye.

Our beloved Masters of the Universe figured out they could make tons of extra money if only we'd loan them our car for a risky race through high financial mountains. And for a while they did. Things were rolling smoothly, markets were climbing like Reinhold Messner on steroids, fees and profits reached obscene levels and our old beaten car was suddenly worth much more than a boring trip to the office and back. But then something went terribly wrong, our reliable Volvo - or its financial equivalent - went into a skid and it makes lots of funny noises ever since.

The business of banking is based on loans. That provides a steady stream of predictable income. But being merely rich is never the option on Wall Street and so over the years we have got all kinds of insurance vehicles, foreign exchange swaps, leveraged hedge instruments and other exotic contrivances. No one really understands how they work, but who cares. As long as you hear that magic "cha-ching", all is well. Until one day you wake up in the pool of tears. And the worst part is we are the ones who have to mop up the mess this speculative spree created. "Privatize the gains and socialize the losses" - that's how this cookie crumbles. In other words, they kept all the prize money they won when the going was good, but now that the car no longer works, we have to drive it to the garage and pay for fixing it. What a great deal. If you are a high financier that is.

We clearly need two cars. One safe and boring for the family use and one sporty and spiffy for our wild younger brother. The first one will represent the old fashioned banking as we know it and it will be fully covered by our central bank, which effectively means by all taxpayers. The other one will be all theirs - engine, hood and blinker. Chase away boys. Do as you wish. If you can find a great opportunity and get a few extra percent of return, go right ahead. If you get tons of private investors plowing their money into your well thought out charades - good for you. Just don't come crying back to us when the roulette wheel does not turn your way.

Why? Because we need a stable monetary environment for education, for sickness, for infrastructure, for research and for actual investing. We can't commit that money to your Ponzi schemes and high stakes gambling just because you like to live in the fast lane.

We used to have such protection. It was called the Glass Steagall Act. But thanks to Alan Greenspan, Robert Rubin, Larry Summers and other high priests of deregulation, it was dismantled at the end of the last millenium. All in the name of brighter future and prosperity. Well, that bright future lost its way somewhere so I guess it's time to reinstate this wall and make it stronger than ever. The wall that will split our garage into two separate booths, just to make sure that our younger brother won't mistakenly trash the old family car.


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