There are many reforms to the banking sector that I would make – and I outline some of them in the following blogs – Operational design arising from modern monetary theory and Asset bubbles and the conduct of banks.
But in the light of the research on concentration a more reliable way to reduce damaging variability in private investment is to deal with the problem of bank shocks in the first place in a highly concentrated sector.
In lieu of outright nationalisation, an effective governmental intervention would be to create a public bank, which would introduce competition into the banking sector and have the resources (courtesy of the currency monopoly) to provide constant bank loan alternatives to firms who deal with other large banks that encounter shocks to their capacity to lend.
The Financial Instability Hypothesis, Hyman Minsky
The Bubble and Beyond Michael Hudson
Note that the current practice is that loans create deposits. Clearly, under a 100-percent reserve system, all credit granting institutions would have to acquire the funds in advance of their lending. There would be the equivalent of a gold standard imposed on private banking which could invoke harsh deflationary forces. Further, the 100-percent reserve banking system does not eliminate credit risk so that crises could still occur if there were significant defaults under the “fixed-term” variation.
My specific proposals for banking reform are dealt with in some detail in these blogs – Operational design arising from modern monetary theory – Asset bubbles and the conduct of banks – - Breaking up the banks.
I start from the proposition that the only useful thing a bank should do is to facilitate a payments system and provide loans to credit-worthy customers. Attention should always be focused on what is a reasonable credit risk. In that regard, the banks:
So this is not a full-reserve system. The government can always dampen demand for credit by increasing the price of reserves and/or raising taxes/cutting spending.
The issue then is to examine what risk-taking behaviour is worth keeping as legal activity. I would ban all financial risk-taking behaviour that does not advance public purpose (which is most of it).
I would legislate against derivatives trading other than that which can be shown to be beneficial to the stability of the real economy.