PARTICIPANTS
George Shultz, John Shoven, Myron Scholes, Robert Hall, John Taylor, John Gunn, Anat Admati, John Cogan, Michael Boskin, Johannes Stroebel, Paul Pfleiderer, and Charles Johnson
ISSUES DISCUSSED
Professor Kotlikoff presented the group with his views on “limited purpose banking,” which he has outlined in more detail in his book “Jimmy Stewart is dead – Ending the world’s ongoing financial plague with Limited Purpose Banking.” Kotlikoff began by identifying some of the key problems contributing to the recent financial crisis, including fraud, insider trading, regulatory capture, corporate governance problems and moral hazard. He argued that leverage, securitization and derivatives should not be considered as proximate causes of the crisis. Rather, in his view, the crisis was caused by the systematic production and sale of trillions of dollars in ‘fraudulent’ securities. In addition, there was a lack of disclosure that made it difficult for investors to determine the precise exposure of institutions – this made the institutions susceptible to runs.
Kotlikoff proposed “limited purpose banking” as a possible solution to the problem. Under this system, financial institutions with unlimited personal liability of the owners would be allowed to continue operating as before. However, all limited liability financial corporations would act as pass-through mutual fund companies. These would not be allowed to borrow to invest in risky assets, but, instead, allow the public to directly choose what risks it wishes to bear by purchasing more or less risky mutual funds. In addition, Kotlikoff advocated the creation of a single regulatory body for financial services, a “Federal Financial Authority.” This agency would be tasked with verifying the statements of financial securities, and thus increasing the degree of disclosure. Kotlikoff concluded by outlining a number of key steps towards the implementation of these ideas.
