Goodhart on narrow banking

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He’s correct in a world that doesn’t know how to use fiscal adjustments to sustain demand.

If we had had a full payroll tax holiday and per capita revenue sharing for the states introduced immediately after the real economy started experiencing the drop in demand associated with the Lehman failure and the Masters commodity liquidation, and all along had fed funded $8/hr jobs for anyone willing and able to work, the real economy would likely not have sustained anywhere near the damage it did. Unemployment may have risen a percent or so, and the economy would have quickly recovered.

And no one outside of investors caught with bad investments would have much cared about the financial crisis.

As long as the real economy is sustained, any financial crisis is far less of a concern- 1987, 1998, Enron, etc.

Narrow banking is not the answer

By Charles Goodhart

The proponents of narrow banking focus, almost entirely, on the liability side of banks’ balance sheets, and their concern relates to the need to protect retail depositors and the payments system. While this concern is entirely valid, it has been notable in the recent crisis that virtually no retail depositors lost anything, and the payment systems continued at all times to work perfectly. The crisis was not much about that, and policies served to protect these key elements satisfactorily.

The key problem that developed, and to some large extent remains, is that the fragility was experienced in the availability of credit to the real economy, companies and households. The modern economy cannot do without credit, and the need to maintain credit flows has been uppermost in the minds of the authorities.

Credit can be replace by income, and with income restored and sustained, credit quickly follows. Unfortunately, modern governments lack the understanding of their monetary systems to adjust incomes through counter cyclical fiscal policy.

The narrow banking proposal would shift virtually all such credit flows out of narrow banking into those parts of the financial system outside the narrow banking boundary, because the narrow banks would be required to invest in safe assets. So had a narrow banking system been in place, the crisis would have been even worse, with a virtually complete cessation of credit flows to the real economy.

Banks are public private partnerships implemented presumably to serve public purpose

‘Narrow banking’ can include bank lending for home mortgages, automobiles, credit cards, and any other assets deemed to suit public purpose to help isolate those sectors from lender related issues.


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