Is A Banking Ban The Answer?: OK, a genuinely interesting debate on financial reform is taking place. I’m not even sure where I stand. But it’s certainly worth talking about.
Atif Mian and Amir Sufi draw our attention to proposals to either mandate or create strong incentives for 100-percent reserve banking, coming from Martin Wolf and, more surprisingly, John Cochrane. Equally surprising — at least to me — is that Cochrane seems more aware of the difficulties of the issue. ... So, three thoughts.
First, Wolf’s omission is a big one. If we impose 100% reserve requirements on depository institutions, but stop there, we’ll just drive even more finance into shadow banking, and make the system even riskier.
Second, Cochrane’s proposal calls for a remarkable amount of government intervention in finance; it makes liberal proposals for a transactions tax look like minor nuisances. Cochrane insists that we can easily run our economy without dangerous short-term private debt — that we can easily set things up so that the manager of your index fund sells a tiny piece of your stock portfolio every time you use a debit card at 7-11. Is this right?
Third, and on a quite different note: Are we really sure that banking problems are the whole story about what went wrong? I’ve made this point before, but look at any measure of financial stress: what you see is a huge peak in 2008 that quickly went down:
Yet ... we’re still depressed and many advanced countries are now on the edge of deflation, more than five years later. This strongly suggests that while bank runs may have brought things to a head, the problems ran deeper; in particular, I’m strongly of the view (based in part on Mian and Sufi’s work) that broader issues of excess leverage, and the resulting balance-sheet problems of many households, are key. And neither 100% reserves nor a repo tax would have addressed that kind of leverage. ...