Jimmy Stewart is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking

274 Pages·2010·2.38 MB·English

by  Laurence J. Kotlikoff

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Additional Praise for
Jimmy Stewart Is Dead
“Theeconomiccrisishasforcedustoexaminetheshortcomingsofour
financialsystem.InJimmyStewartIsDead,LaurenceKotlikoffarguesthat
trustinthebankingsystemhasbeenbrokenandthatonlyboldactionwill
restore it. He calls for true transparency and offers thoughtful proposals
such as Limited Purpose Banking to help restore trust in the system
and to prevent such hardship from occurring again. Every Washington
policy maker and public-spirited banker should read this book.”
—Bill Bradley, former United States Senator
“ThisbookisscarierthananythingStephenKingeverwrote,andjustas
well-written.DistinguishedeconomistLarryKotlikoffhasstartedanew
genre:nonfictioneconomichorror.Kotlikoffknowswhathappenedand
why,andhasthecouragetopointfingersandnamenames.Onecannot
turnthefinalpagewithoutthesensethatthisbookmaybeourcountry’s
last hope.”
—Kevin Hassett, Director of Economic Policy Studies; Senior Fellow,
American Enterprise Institute; columnist, Bloomberg News
“The only sure way to avoid another Wall Street meltdown and ensure
financial institutions act in ways that serve the economy is to separate
the utility function of banking, connecting savers to borrowers, from
the investment function of the financial market casino. Laurence Kot-
likoff’s Limited Purpose Banking proposal is an important and timely
step forward.”
—Robert B. Reich, Professor of Public Policy, University of
California, Berkeley; former U.S. Secretary of Labor
“Larry Kotlikoff is that rare economist who comes up with the most
original ideas when the stage is crowded with pedestrian analyses by
othereconomists.Hedoesitagainwiththecurrentfinancialcrisis.This
isamarvelousbookthatwillrepayacarefulread,evenifyouareassmart
as Larry Summers and Ben Bernanke.”
—Jagdish Bhagwati, University Professor of Economics and Law,
Columbia University
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“This remarkable book from Larry Kotlikoff is an invaluable read for all
of us who care about our country’s long-term competitiveness. I found
it innovative, original thinking with a perspective of great value from a
man to whom we should all pay attention.”
—Admiral William Owens, Chairman, AEA Holdings Asia;
former Vice Chairman, Joint Chiefs of Staff
“If Michelin gave out stars to economists, Larry Kotlikoff would get
three of them—worthy of a detour. Mixing villains, wit and wis-
dom, Jimmy Stewart Is Dead is a great read with a serious message.
Kotlikoff makes a compelling case for regulation that would restruc-
ture the banking system to limit banks to their basic functions, and
he shows how doing so would allow market forces to make the next
financial crisis less likely and less severe. This is a desperately needed
antidote to the spate of proposed reforms from the usual pundits
that amount to nothing more inspired than a call for more regula-
tion without a recipe for smarter regulation. Iconoclastic but practi-
cal, Kotlikoff is one of the most creative economists of his generation
and one of its premier policy analysts. It would be folly not to listen
to him.”
—Stephen A. Ross, Franco Modigliani Professor of
Financial Economics, MIT
“Informative, infuriating, and insightful. If you think you understand
the extent of the malfeasance by Wall Street and by our Federal Gov-
ernment, you are in for a rude shock when you read this book. Larry
Kotlikoff understands the scope of the problems we face better than
any economist I know; he uses clear, accessible and lively prose; best
of all, he offers an innovative and provocative solution to this gar-
gantuan problem. Send copies of this book to your representatives in
Washington!”
—Edward E. Leamer, Chauncey J. Medberry Professor of
Management; Professor of Economics and Professor of Statistics,
University of California, Los Angeles
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“This is provocative and hard-hitting analysis. A leading academic
economisttakesofftheglovesandgoesahardeightroundswithfinance-
as-we-know-it. The result is a fresh and clear proposal for reducing the
risks that arise as people with savings provide funding to people mak-
ing productive investments in any economy. If we implement Professor
Kotlikoff’sideas—oranycloseapproximation—theU.S.cancontinueto
generate entrepreneurship, growth, and jobs, without repeatedlyhaving
to bail out our big banks. This is beyond appealing; it is compelling.”
—Simon Johnson, Professor of Entrepreneurship, MIT Sloan;
former Chief Economist, International Monetary Fund
“Larry Kotlikoff has been consistently ahead of the curve in the debate
onAmerica’scomingfiscalbreakdown.Nowheturnshisattentiontothe
financial crisis that threatens to bring that fiscal breakdown forward to,
well,quitepossiblythisyear.Iwaswhollypersuadedbythecasehemakes
for Limited Purpose Banking. It is clearly the best available remedy for
thepresentappallingstateofaffairs,inwhichhighlyleveraged‘toobigto
fail’institutionscanexpecttaxpayerstopickupthemulti-trillion-dollar
tab when their gambles go wrong.”
—Niall Ferguson, William Ziegler Professor of
Business Administration, Harvard Business School;
author, The Ascent of Money
“Kotlikoff provides a marvelously clear explanation of how today’s fi-
nancial system really works, stripping away all the obscure jargon. At
the same time, the book is a passionate and strongly worded indictment
of the system and a blueprint for how to fix it from the ground up.
Kotlikoff’s basic thesis: that today’s financial institutions have become
taxpayer subsidized casinos increasingly divorced from the basic inter-
mediationactivitiessocietyexpectsthemtoperform—ishardtorefute.”
—Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy
and Professor of Economics, Harvard University;
former Chief Economist, International Monetary Fund;
co-author, This Time Is Different
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“I always make time in my busy schedule to read anything Larry
Kotlikoff writes. You should too. Why? He is always insightful in his
analysis, provocative in his predictions, and creative in his proposed so-
lutions. In Jimmy Stewart Is Dead, Kotlikoff lays open the fundamental
fissures in the financial system and presents a radical solution: Limited
Purpose Banking, an idea related to proposals during the Great De-
pression by renowned American economists Frank Knight and Irving
Fisher.WhenIwashelpingcleanupthelastAmericanfinancialcrises—
the Savings and Loans mess and the Latin American debt fiasco for
the big money center banks—I lamented the dearth of creative policy
thinking before they struck. Policymakers, investors, taxpayers, and all
concerned citizens will find much to mull over in this readily accessible
book.”
—Michael J. Boskin, T.M. Friedman Professor of Economics and
Senior Fellow, Hoover Institution, Stanford University; former
Chairman, President’s Council of Economic Advisors, 1989–1993
“Laurence Kotlikoff is one of the original thinkers of our time. Even if
youdon’tagreewithhisspecificproposals,Larry’snewbook—withthe
provocativetitle,JimmyStewartIsDead—islikelytoleadyoubeyondthe
conventional ways of dealing with the economic challenges facing our
country.”
—Murray Weidenbaum, Edward Mallinckrodt Distinguished
University Professor and Professor of Economics, Washington
University, St. Louis; former Chairman, President’s Council
of Economic Advisers
“This book is heaps of fun. But it is entirely serious, and comes
at the right time. The profound change—Limited Purpose Banking,
whichKotlikoffrecommendsandthatwedesperatelyneed—couldonly
be undertaken now that we’ve seen the full dangers of maintaining the
current financial system. Kotlikoff entertains with great energy while
instructing using facts made for fiction. To understand the most effec-
tive changes we can make to truly fix our financial system, read this
book.”
—Susan Woodward, Principal, Sand Hill Econometrics; former Chief
Economist of the U.S. Securities and Exchange Commission;
former Chief Economist of the U.S. Department of Housing
and Urban Development
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“Our financial system puts us all at risk. This book shows that it doesn’t
have to be this way. We can have all the benefits of a modern economy
without having crises like the last one. Or, if policy makers don’t listen,
like the next one. And the next...”
—Paul Romer, Senior Fellow at Stanford Center for International
Development (SCID) and Stanford Institute for Economic Policy
Research (SIEPR), Stanford University
“Thisbookgripslikeanovel.But,it’snoworkoffiction.It’souractual
financialhorrorstoryinwhichwefaceongoingeconomictortureatthe
handsofgreedybankers,incompetentregulators,andcorruptpoliticians.
The book is a penetrating and painless (indeed, fun) education as well
as a saving grace. It offers the only clear path to economic salvation—
forcing banks to do the one and only thing they are here for—financial
intermediation.”
—Christophe Chamley, Professor of Economics, Boston University
“If the Crash caused you to fear for your job, your retirement, and for
the future of your children, read this book. You will be led by one of
America’s most eminent economists through a blow-by-blow account
of what happened and why, and there will be times you will feel like
running to the window to shout out your outrage and call for change.
Kotlikoff’s proposal for Limited Purpose Banking calls for the most
radical overhaul of banking legislation since the Great Depression.”
—Uri Dadush, Senior Associate and Director of International
Economics, Carnegie Endowment for International Peace;
former Director of International Trade and
Director of Economic Policy, World Bank
“Forget narrow banking concepts. Professor Kotlikoff forces us to con-
sider Limited Purpose finance, and does so with humor and enlighten-
ment.”
—Robert R. Bench, Senior Fellow at Boston University School
of Law; former Deputy U.S. Comptroller of Currency
“Larry Kotlikoff has written a fascinating book. It is a must read for
everyone who wants to understand the current financial crisis and what
we can do about it.”
—John C. Goodman, President and CEO, National Center
for Policy Analysis
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“Larry Kotlikoff has written a provocative, entertaining, and well-
written book, analyzing how our financial crisis arose and how
to fix it permanently. In some ways the last 20 years seem like
a return to the 1800s, with financial instability driving the busi-
ness cycle. Professor Kotlikoff tells us why and how to fix it. Any-
one interested in finance, options, long-term contracting, banking,
and financial and macroeconomic policy must read this book, and
it is a good read for the individual investor as well. His Limited
Purpose Banking financial fix is critically important to our future
prosperity.”
—R. Preston McAfee, Vice President and Research Fellow,
Yahoo! Research; former J. Stanley Johnson Professor of
Business Economics and Management,
California Institute of Technology
“This is an entertaining romp that explains our recent not-so-
entertaining financial calamity. Whether or not you agree with Kot-
likoff’s policy prescription, you must admit that it’s provocative.”
—Rudolph G. Penner, Institute Fellow, Urban Institute;
former Director of the Congressional Budget Office
“Kotlikoff lays bare the fault lines of traditional banking and makes a
compelling case why ‘Limited Purpose Banking’ should be part of the
reform discussion.”
—Professor Cornelius Hurley, Director of the Morin Center
for Banking and Financial Law at Boston University;
former Assistant General Counsel to the Federal Reserve Board
“Kotlikoff is a distinguished scholar with a passion for addressing the
big issues. His previous books for the general public dealt with tax
reform, Social Security, health care, federal deficits, and intergenera-
tional equity. In each case he demonstrates analytical clarity, political
independence, and a lively and entertaining writing style. Now he
has turned his attention to the financial crisis and once again offers
fresh insights and sensible proposals. I recommend this book to inde-
pendent thinkers of good conscience, no matter what their political
affiliation.”
—Zvi Bodie, Norman and Adele Barron Professor of Management,
Boston University
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“Kotlikoff makes a strong case for Limited Purpose Banking as the
best protection against the next financial crisis. I worry most about his
proposal for replacing all current federal and state financial regulatory
agencies with one massive federal financial authority; this authority, I
suggest,wouldincreasethescopeofregulatorymistakesandtheprospect
and capability of the federal government to allocate credit for political
objectives.Iencouragereadersofthisbooktomakeyourownjudgment
abouttheregulatoryenvironmentthatwouldbestcomplementLimited
Purpose Banking.”
—William A. Niskanen, Chairman Emeritus of the Cato Institute;
former Acting Chairman and Member of the President’s Council
of Economic Advisers
“This is a must read for everyone who wants to know not only what
wentwrong,buthowtofixit.Kotlikoffhasbrilliantanswerstothemost
important questions in economics today.”
—Anna Bernasek, economic journalist and
author of The Economics of Integrity
“LaurenceKotlikoffhasproducedanentertainingandinsightfulanalysis
of the great credit crisis and the ailments of the U.S. financial system.
This sets the stage for some radical proposals to change the structure
of the financial intermediation. In his view triage is not enough—
what is required is radical reconstructive surgery. Whether you view his
recommendations for Limited Purpose Banking as politically viable or
not, his analysis goes to the heart of the important flaws that have to be
confrontedifwearetoreducethelikelihoodofcrisesinthefuture.This
book is essential reading for those interested in the perils of financial
intermediation in the modern world.”
—Thomas F. Cooley, Dean and Paganelli-Bull Professor of
Economics, New York University Stern School of Business
“Kotlikoffunderstandsmarketsandmarketmakers.Andheunderstands
economics.Hevividlydiagnosesthefinancialplague,andhearguesthat,
as is, the system is unsafe at any speed. His remarkably simple cure does
not rely on a dying breed—honest bankers like Jimmy Stewart (a.k.a.
George Bailey), but on limiting banking to its only honest purpose—
financial intermediation.”
—Herakles Polemarchakis, Professor of Economics,
University of Warwick
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“Larry Kotlikoff provides a poignant, accessible, and engaging account
of how distorted incentives, leverage, and risk played a major role in
the financial crisis. He also confronts us with a scary account of the
government deficits that will come to haunt us or our descendants.
Kotlikoff’s ideas for how to change the banking system are thought-
provoking. This book forces us to step back and think about the basic
purpose of financial institutions, and whether there is a better way to
organize them.”
—Anat Admati, George C.G. Parker Professor of Finance and
Economics, Graduate School of Business, Stanford University
“Many doubt whether proposed regulatory reforms regarding capital
requirements will be effective in reducing the excessive risks taken by
banks and other financial institutions. Larry Kotlikoff offers a more
fundamental solution called Limited Purpose Banking (LPB), in which
banks connect borrowers to lenders and savers to investors without
taking on risk. This radical idea, challenging the existing structure of
all financial institutions, deserves to be at the center of the post-crisis
debate. Economists and practitioners alike will find this a compelling
book.”
—Eytan Sheshinski, Sir Isaac Wolfson Professor of Public Finance,
Department of Economics, The Hebrew University
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