Naked Capitalism: Backstopped Banking Must Be Boring

WEDNESDAY, JANUARY 4, 2012

Amar Bhide: Backstopped Banking Must Be Boring

Amar Bhide, a former McKinsey colleague, one-time proprietary trader, and now professor at the Fletcher School, takes a position in the New York Times today that goes well beyond Volcker Rule restrictions. He argues that all financial deposits need to be guaranteed, and as a result, what is done with those deposits needs to be restricted severely.

I could not have said this better myself:

Relying on the Fed and other central banks to counter panics is dangerous brinkmanship. A lender of last resort ought not to be a first line of defense. Rather, we need to take away the reason for any depositor to fear losing money through an explicit, comprehensive government guarantee. The government stands behind all paper currency regardless of whose wallet, till or safe it sits in. Why not also make all short-term deposits, which function much like currency, the explicit liability of the government?

Guaranteeing all bank accounts would pave the way for reinstating interest-rate caps, ending the competition for fickle yield-chasers that helps set off credit booms and busts…

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