Jimmy Stewart is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking |  | Author: Laurence J. Kotlikoff
Publisher: Wiley
Category: Book
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Media: Hardcover
Pages: 241
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Dimensions (in): 9.1 x 6.2 x 1.1
ISBN: 0470581557
Dewey Decimal Number: 332.0973
EAN: 9780470581551
ASIN: 0470581557
Publication Date: March 8, 2010
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Product Description
Discover how the global financial plague is poised to return, and what can be done to stop it This is not your father's financial system. Jimmy Stewart, the trustworthy, honest banker in the movie, It's a Wonderful Life, is dead. And so is his small-town bank, Bailey Savings & Loan. Instead, we're watching It's a Horrible Mess with Wall Street (aka the Vegas Strip) playing ever larger craps with our economy and our tax dollars. This book, written by one of the world's most respected economist, describes in lively, humorous, simple, but also deadly serious terms the big con underlying the big game-the web of interconnected financial, political, and regulatory malfeasance that culminated in financial meltdown and brought us to our economic knees. But is also proposes a solution-Limited Purpose Banking, a straightforward and easily implemented plan to make Wall Street safe for Main Street. - Outlines the first and only proposal to fundamentally fix our financial disaster for good
- Written by a leading economist whose insights on this topic are unparalleled
- Explains the tenets of the plan, such as the regained government control of the money supply and the new role of insurance companies
Jimmy Stewart Is Dead will fundamentally change the way you think about the economy, financial markets, and the government-sand even if you don't agree with Kotlikoff's conclusion, you'll find his analysis of the crisis and his simple solution a true economic eye-opener.
Amazon.com Review
Discover how the global financial plague is poised to return, and what can be done to stop it This is not your father's financial system. Jimmy Stewart, the trustworthy, honest banker in the movie, It's a Wonderful Life, is dead. And so is his small-town bank, Bailey Savings & Loan. Instead, we're watching It's a Horrible Mess with Wall Street (aka the Vegas Strip) playing ever larger craps with our economy and our tax dollars. This book, written by one of the world's most respected economist, describes in lively, humorous, simple, but also deadly serious terms the big con underlying the big game-the web of interconnected financial, political, and regulatory malfeasance that culminated in financial meltdown and brought us to our economic knees. But is also proposes a solution-Limited Purpose Banking, a straightforward and easily implemented plan to make Wall Street safe for Main Street. - Outlines the first and only proposal to fundamentally fix our financial disaster for good
- Written by a leading economist whose insights on this topic are unparalleled
- Explains the tenets of the plan, such as the regained government control of the money supply and the new role of insurance companies
Jimmy Stewart Is Dead will fundamentally change the way you think about the economy, financial markets, and the government-sand even if you don't agree with Kotlikoff's conclusion, you'll find his analysis of the crisis and his simple solution a true economic eye-opener. Amazon Exclusive: Q&A with Author Lawrence Kotlikoff
1. What is limited-purpose banking?
First I want to point out that Jimmy Stewart Is Dead is only partly about this proposal. It’s in large part a layman’s tour of the financial collapse conducted by an economist who can talk in plain English and is holds no bars. If you really want to understand what happened in fundamental economic terms, please read the book. And if you really want to know how to fix the problem, please read the book and then send it to your Senator or Congressman. Limited Purpose Banking puts takes the multifaceted fraud out of our financial system by turning all banks, insurance companies, hedge funds, etc. into fully transparent mutual fund companies. Limited Purpose Banking also abolishes over 115 federal and state regulatory authorities and replaces them with the Federal Financial Authority, which verifies, fully and immediately discloses, and independently rates and appraises all securities held by the mutual funds. In a nut shell, Limited Purpose Banking makes Wall Street safe for Main Street. Under Limited Purpose Banking we will never again experience financial collapse and contagion. The proposal is receiving significant attention by Mervyn King, Governor of the Bank of England, and other top policymakers throughout the world. 2. Another term that is mentioned a lot these days is narrow banking. What is the difference between narrow banking and LPB and why is LPB a better option?
Narrow Banking says that the monies invested in checking accounts and similar short-term deposits must be invested in very safe securities, like federal government Treasury bills. It lets the rest of the financial system do its own thing and tells that part of the system – “Boys and girls, you’re on your own.” If you borrow money to invest in fraudulent or simply risky securities and lose your shirts, we’re not going to bail you out. Well, this was tried in the case of Lehman’s failure and it blew up in the government’s face. Limited Purpose Banking includes cash mutual funds, which are held strictly in cash. So one element of LPB is narrow banking. But LPB is much broader. It precludes any financial intermediary of any kind, which is protected by limited liability, from doing anything but marketing mutual funds and the mutual funds are themselves never leveraged. So the entire financial piping system is made safe, not just a few pipes that weren’t at much risk to begin with. 3. What are the advantages of implementing a system like limited-purpose banking and how will it differ from our current banking system?
We’ll never have another financial collapse. We’ll never see a run on banks ever again. We’ll never see insurance companies insuring the uninsurable. We’ll get rid of all the con jobs underlying the current financial system. There will be no more insider rating deals, liar loans, director sweetheart deals, bonuses which amount to corporate theft, bribing of Congress, and the list goes on. The financial plague will be cured, once can for all. The biggest difference between what we now have and Limited Purpose Banking is we’ll have a financial system that’s honest and that we can trust. This will make all the difference in the world in getting the American economy back on its feet. 4. You’ve recently been referred to as Mervyn King’s (Bank of England) “Guru”. Do you anticipate that the UK might be more amenable to a proposal like LPB than the US? Why?
First, Mervyn King needs no guru, and I’m not his guru. He’s a brilliant economist and an outstanding public servant. I’ve learned a lot more from him over the years than he’s learned from me. Many of the ideas contained in Limited Purpose Banking were being independently conceived and considered by other economists at the time the book appeared. This includes Mervyn King and other superb economists at the Bank of England. Governor King, Alisdair Turner, and other top members of the British government are taking this plan very seriously. It’s very simple and if the UK adopts it, the U.S. is likely to follow. But the U.S. may move first. If you look at who endorsed the book – former Treasury Secretary and Secretary of State George Shultz, former Senator Bill Bradley, former Secretary of Labor, Robert Reich, two former CEA chairmen (Michael Boskin and Murrar Weidenbaum), two former chief economists of the IMF (Simon Johnson and Ken Rogoff), a former chief economist of the SEC, a former deputy Comptroller General of the Currency, and … not to mention FIVE Nobel Laureates in Economics, you see that there is extremely widespread support for this plan in U.S. policy circles and academia. The endorsements are coming from all sides and ends of the political aisle. 5. What do you anticipate as the reaction by the banking industry to LPB?
If the banking industry is smart, they will realize this is the best way to go. The American public is extremely angry and is not up for business as usual. 15,000,000 people are unemployed and many other millions are underemployed or have dropped out of the labor force. Wall Street has destroyed the economy and millions of innocent economic lives. Wall Street did this by engaging in fraud – left, right, and center and then turning to the tax payer to pay for the havoc it created. These problems continue to this day. They need to be fixed fundamentally. The status quo seems safe, but as the book shows, it’s extremely risky. And because it is so risky, Wall Street will either need to be baby sat in a manner it won’t like or it can operate honestly under LPB. These are its only two options.
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Showing reviews 1-5 of 6
 Forward by Jeffrey Sachs March 1, 2010
Jeffrey Sachs
23 out of 25 found this review helpful
Larry Kotlikoff is a worried man on an urgent mission. He knows that the financial crisis that hit us in 2008 can come back with a vengeance, because our government so far is treating the symptoms, but not the underlying disease. By the time you finish this book you will be worried too. With brilliance, wit, clarity, and bravery, Kotlikoff explains how our financial system is "virtually designed for hucksters." Yet even more importantly, he shows us how to fix it.
As Kotlikoff makes clear, the litany of faulty incentives and opportunities for fraud in America's banking system is distressingly long: "limited liability, fractional reserves, off-balance-sheet bookkeeping, insider-rating, kickback accounting, sales-driven bonuses, non-disclosure, director sweetheart deals, pension benefit guarantees, and government bailouts." It's a system, in a word, in which bankers make promises they can't keep in order to collect outsized earnings unrelated to real productivity.
What a cast of characters we meet along the way! Kotlikoff is right to note that most bankers are "fine people doing their best by their clients," but he is also right on the mark to note that the top ranks of bankers "include a remarkably large number of fast-talking con artists, riverboat gamblers, and highway men." And why not? With regulatory loopholes a mile wide, the con artists found ways to abscond with tens, even hundreds of billions of dollars, before the entire economy went over the cliff.
I've taken my own special interest in the bankers' bonuses over the years, as I've witnessed up close how rather pedestrian Wall Street work on restructuring developing country debt could pull in millions of dollars in fees for the bankers. At the start of each calendar year, I've gone slack-jawed at a level of Wall Street year-end bonuses roughly equal to the total worldwide aid given to 800 million Africans.
At a recent dinner with bank executives to discuss African poverty, I surmised the depth of their concern with this heartbreaking issue as they steered the conversation to the relative size of their wine cellars, with several describing their collections as exceeding 30,000 bottles! The typical African could spend his whole life working and never afford a single one of those bottles.
These are signs not merely of moral decadence, but of regulatory collapse. Kotlikoff skillfully leads us through the various methods that the banking leaders have developed for taking their slice of the assets. Amazingly, none of the executives who we meet in these pages was technically equipped to understand the deeper risks in which they were placing their firms, and the world economy. But they were very well trained in cutting themselves extremely generous proportions of the action.
If Kotlikoff had stopped at explaining what just hit us, he would have performed a mighty service. Even with the many vivid and entertaining accounts of the great crash in 2008, of who said what to whom on the fateful weekend in September 2008 when Lehman, AIG, and Merrill hit the wall, no previous book comes remotely close to this one in offering a conceptual understanding of what has gone wrong. Through ingenious examples and stories, Kotlikoff gently instructs the readers in the core concepts of financial economics: coordination failures, moral hazard, intergenerational accounting, principal-agent problems, Ponzi schemes, and much more.
It is our great fortune, though, that Kotlikoff does not stop there, but proceeds boldly to lay out a novel, powerful, and ingenious set of remarkably simply reforms under the rubric of Limited Purpose Banking (LPB). As he explains, the motivation of LPB is to "limit banks to their legitimate purpose - connecting borrowers to lenders and savers to investors - and don't let them gamble." But Kotlikoff is no scold. He's not against gambling per se. He's only against others gambling with our money without our knowledge or permission.
This is the protection of LPB. If individuals want a completely safe bank account, their bank deposits will be matched 100 percent by money held by the bank. If they want something riskier, or some form of insurance, then appropriate mutual funds will be available to cater to distinct needs, and set up in ways to avoid systemic risk. In all cases, financial intermediaries will face not 115 different regulatory agencies asleep at the wheel, but a single Federal Financial Authority with a very limited assignment - to ensure that fund managers do not abscond with our assets and immediately, fully, and accurately disclose what each fund is holding. Imagine that - a financial market place in which we're actually told what we're buying!
Kotlikoff traces some of the origins of his ideas to proposals for Limited Banking that emerged in the wake of the Great Depression, and which have won the endorsement of leading economists over the decades. He does not shrink from pointing out continued controversies surrounding his ideas, so that the book provides an ideal jumping off point for further serious debate over the ideas.
There are lots of open questions and areas of doubt that require further discussion, notably around the issues of how fast, how far, and in what ways we would need to adopt LPB to reap its benefits. Still, the ideas are powerfully resonant and will find a growing group of adherents.
America is passing through a very difficult economic juncture, with high unemployment and even higher anxieties. Millions of people have seen their financial security lost in the Wall Street tsunami. We feel adrift, with a large majority sensing, correctly, that the country is headed in the wrong direction. Faith in the economic system, the lifeblood of the economy itself, has been badly broken. Kotlikoff knows that each of us bears a responsibility and has a role to play to help repair the damage. With characteristic directness and integrity, he says that every economist has "an obligation . . . to focus on this economic emergency." Let us thank Kotlikoff for a clear, convincing, and highly original call to action. With this book, he has surely fulfilled his obligation, and much more, to help the world reset its sights on a more stable, fair, and prosperous economy.
Jeffrey D. Sachs is Director of The Earth Institute, Quetelet Professor of Sustainable Development, and Professor of Health Policy and Management at Columbia University
Jimmy Stewart is Dead
Review in U.S. News and World Report by Philip Moeller March 13, 2010
Deli (Portland, OR, US)
8 out of 9 found this review helpful
In his latest book, "Jimmy Stewart Is Dead," Boston University economist Laurence Kotlikoff says the fundamental soundness of our financial system is so compromised that nothing short of revolutionary fixes will save this patient, and set our economy on a healthier trajectory. Harking back to Jimmy Stewart's movie role as small-town banker George Bailey in "It's a Wonderful Life," Kotlikoff says the era of responsible banking has been replaced by the highly leveraged and morally bankrupt system whose crash brought on the worst downturn since the Great Depression.
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Remember the classic science experiment? A frog immersed in warm water will adjust so well as the temperature is gradually increased that it will allow itself to be cooked alive without jumping out of the water. Well, Kotlikoff says, we are the frogs in a financial experiment that's gone terribly wrong:
Jimmy Stewart, the honest, warm, kind, and trusting soul is not your local banker. Jimmy Stewart is dead. Your local banker is some underpaid clerk who's been in place for six months and knows nothing about you, your family, or your business, and frankly could care less. His job is not to apply personal knowledge in deciding to lend you money or call your loan. His task is to plug your credit rating, income, loan request, appraisals, and other data into a computer and tell you what the computer tells him, namely how much you can borrow and at what rate.
Our bankers are desperately attached to the current system for good reason. It lets them socialize risks and privatize profits. Socializing risk means having the public take the hit when things go south. Privatizing profits means earning big fees in normal times.
These thoughts are not original. But Kotlikoff (disclosure: I know Larry and have written about him before) provides a particularly chilling review of the problems that brought on the crash and how they are part of a larger series of calamitous economic trends. Washington, in his view, may well be the last place we should look for a solution. Its policies enabled and encouraged the reckless behavior of our financial institutions. Its proposed remedies fall far short of solving our problems. And there has been little progress in the past 18 months in enacting even these limited cures. "Nothing short of economic open-heart surgery will save the American dream," he writes.
If the Tea Party folks haven't discovered this book, they should. Larry says what's on his mind, is not particularly concerned with making friends in government or business, and has solid credentials to back up his conclusions. In reviewing our meltdown, he doesn't spare himself or his colleagues from criticism, either. "With rare exceptions, those of us manning the watch -- the economists hired by the government and the business world -- missed what was coming, were shocked when it happened, exacerbated the public's fear, and are now helping resurrect the system that failed so miserably."
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Such behavior, Kotlikoff says, is part of a broader pattern of financial malfeasance. The federal government is able to print money and spend its way out of jams. Unable to resist the allure of the next election, our leaders have literally promised Americans they will spend upwards of $80 trillion on future benefits that the government simply has no way of obtaining. Short of hyper-inflating the money supply with devalued currency, we will not meet those promises. We are, in Kotlikoff's less than humble opinion, bankrupt. Yet our leaders find it easier to look the other way or engage in political brinkmanship than get down to work.
Looking the other way also explains why financial firms were allowed to become too big to fail and put our money at risk and not theirs. They adopted and then over-dosed on highly leveraged financial instruments. These securities are still not fully understood by even sophisticated financial experts, and certainly not by the politicians who are supposed to fashion remedies. While tougher regulations are being sought in Washington, Kotlikoff notes that there are roughly 115 financial regulatory agencies already. The problem is not that banking is under-regulated; it's that the regulators looked the other way instead of doing their jobs.
Kotlikoff's antidote to what ails us would be very bitter medicine for financial firms to swallow. First, he wants to forbid them from putting our money at risk. Second, he wants to replace those 115 regulators with a single agency. Its major job would not be just to police the banks but to become, in effect, the information marketplace and traffic cop for a new kind of banking that he calls limited purpose banking.
In this system, banks wouldn't be able to take any risks themselves, so they could never put depositor or taxpayer money at risk. Every business transaction involving a financial firm would be treated as if it were a mutual-fund holding. For example. if you wanted to borrow money to buy a home, your demand for loan funds would be matched up with an investor interested in buying your loan on mutually known and acceptable terms. The bank would receive some fees as an intermediary but the home loan would never be on its books.
By settling up special mutual funds for all sorts of economic activities, borrowers and lender-investors could be brought together for literally any reason. Kotlikoff's single regulator would make sure borrowers and investors met certain standards. Transparency would be king in his world. Nothing would limit people from taking extraordinary risks, which Kotlikoff recognizes come with the territory in a market-based economy. But under limited purpose banking, those risks would never sit on a bank's books and thus would never come back to bite the public in the form of bailing out a failed institution. Even your bank deposits would be placed in such a fund. And because deposits would be fully backed, dollar for dollar, we would no longer need deposit insurance.
"Jimmy Stewart Is Dead" makes for provocative reading. We certainly have squandered much of America's business and economic strength in the pursuit of personal gain and huge if not obscene bonuses. Yet the odds of such a system reset as limited purpose banking are slim. One can only shudder at how much worse things would have to become to consider such extreme changes. It might just be easier to find another Jimmy Stewart. I'd call him Mr. Smith. And I'd ask him to go to Washington.
Accurate Diagnosis, Comprehensive Treatment ! April 28, 2010
Rudi Schadt (Sea Cliff, New York)
2 out of 2 found this review helpful
Boston University economics professor Laurence Kotlikoff (NBER associate) has been presenting a very compelling reform proposal (first in the FT Economists Forum, and now in this new book) that would definitely solve any 'Too big to Fail' problems for Large Financial Firms and other moral hazard issues - under the name "Limited Purpose Banking". The long list of economists, politicians and finance experts favorably commenting on his proposal is spanning the whole spectrum of political views: from Nobel Prize winners Akerlof, Fogel, Lucas, Phelps and Prescott to British central banker King, Steve Ross and Cato Institute's Niskanen (even though Niskanen disagrees with having a central regulator for approving financial products). Outspoken and written for a general public, he highlights how to avoid a financial system gambling with public money as the current one.
I fully agree with his analysis of the issues, including the blunt language. His Limited Purpose Banking Proposal is a radical reform, which illustrates what would be needed to eliminate any incentives for executives of shareholder-owned banks to gamble with customers' and taxpayers' money given the implicit safety guarentees offered to banks and now also to the so-called shadow banking system by the government. So, whether you agree with Kotlikoff's vision for a safe financial system or not, you will be hard-pressed to formulate a comprehensive reform that addresses all the major incentive problems of deposit insurance, too-big-to fail guarantees and the lack of transparency on financial firm's balance sheets and activities.
innovative and structural reforms to world's fragile economies July 5, 2010
Hazel Henderson (St. Augustine, FL)
Author-economist Laurence J. Kotlikoff has concerned himself with the state of the world's fragile, debt-laden economies for many years. In Jimmy Stewart is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking, he lays out innovative and structural reforms. He rightly focuses on banking and how the world's financial sectors spun out of control with unsustainable levels of risk-taking, crooked leverage deals with rating agencies, ballooning credit default swaps and other unregulated derivatives, high-frequency proprietary trading and all the ills that led to the financial collapse of 2008-2009. The "reform" legislation passed by the US Congress in 2010 has done little to reduce these risks, allowing the "too-big-to-fail" banks to get bigger. This may yet lead to the next financial crises in our still weak financial casinos.
Kotlikoff boldly strikes out in a fresh direction. He believes, as many others have come to recognize, that banking has a social function, tasked with efficiently channeling the savings and earning of businesses and households in the real "Main St." economies. Many Wall Street financiers believe that they provide capital, rather than function as the intermediaries they are in reality. No wonder there are many private investors, like myself, who now bypass Wall Street looking for smaller local companies where they can determine their fundamentals more directly. We know that small companies provide most of our jobs in the USA, and we seek to support ecologically-sustainable, homegrown economies, as described in Small Is Beautiful by my late friend E. F .Schumacher in 1975!
I agree with Kotlikoff, that banks should be "public utilities" (like electricity and water companies) and banking should return to the dull "plain vanilla" services of taking retail and business deposits and lending them to deserving companies and households - preferably in their local markets. Kotlikoff lays out his ideas in great detail with his deep professional knowledge of how restructuring can be achieved through his Limited Purpose Bank (LPB) proposals. While appearing quite startling at first, he explains how these changes can be gradually introduced, using many existing tools and financial vehicles.
I urge all those really serious about curbing banks and the threat they still pose to the global economy to read this book carefully. Kotlikoff has already gained a distinguished following - from Jeffrey Sachs in his foreword to such luminaries as George Akerlof, Robert W. Fogel, Edward Prescott, Edward Phelps (all winners of the Bank of Sweden Prize in Memory of Alfred Nobel), as well as George Shultz, former Senator Bill Bradley, Simon Johnson, author of 13 Bankers, and Naill Ferguson, economic historian.
This scholarly work covers a broad area of needed reforms, including insurance, healthcare, Social Security - yet in a lively, clear style. When the G-20 and the Basel Committee realize that banking reform must go further, wider and deeper, and soon, if we are to avoid another meltdown, Kotlikoff's book will be the best place to look for answers.
--- Hazel Henderson, author of Ethical Markets: Growing the Green Economy and Building a Win-Win World
 Irreperably absurdly bad June 25, 2010
Alberto Dominguez
2 out of 4 found this review helpful
I loved the author's _The Coming Generational Storm_, so I was really looking forward to reading this. I was sadly disappointed. Perhaps Professor Kotlikoff suffered blunt trauma to his head in the intervening years? Because I cannot believe that the insightful author of Generational Storm could produce this nonsense. This is the kind of ivory tower, pie-in-the-sky, impractical, oversimplified tripe that gives academics a bad name.
Where to start? Another reviewer has already pointed out that the scheme outlined in this book provides no replacement for the fractional reserve system, so our real economy would essentially be reduced by 97%. In light of a failure so abysmal, perhaps it's not necessary to say anything else, but the other flaws in his system while perhaps not as catastrophic do illustrate how little thought he's given this conception.
* Without risk-taking banks can only make a profit through the fees they charge on the pass-through products he proposes. Many of them would be completely unworkable. As the most obvious example: who would PAY to have a bank hold their cash? DUH!
* His idea that people would buy pass-through products that would replicate credit default swaps and life insurance would require everybody to be a PhD quant.
* Finally, our system failed because of human's intrinsic nature to find and take advantage of the misincentives and flaws that are endemic to any human enterprise. The idea that smart guys won't find the holes in his system and exploit them just like the current parade of criminals did with our existing system is naive to say the least.
Showing reviews 1-5 of 6
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