Back to the gold standard

Ok but would this be from the offset, say in your MW system a new bank is set up, do they have to declare from the get go what sort of banking there doing and stick to that one branch?

Raz
 
You had all this with Glass-Steagall

http://en.wikipedia.org/wiki/Glass%E2%80%93Steagall_Act
 
Never really thought of, to be honest. But off of the top of my head - I'd be inclined to say 'no'. That way is's dynamic and allows small banks to grow while putting every increasing restrictions on their prop actions. Hopefully that would encourage small banks to get bigger and big banks to get smaller by spinning of parts when they've already successfully built them. It seems ti have the right incentives at the right points.

Of course, the hard part is figuring out what 'too big' means and how to enforce it, but I think a good start would be lowering or revoking their FDIC insurance in a public way. It's pretty easy to move banks and no one's going to keep their money in an uninsured bank. Unless......When the 'normal' retail clients leave maybe some of the more risk-seeking ones could be encouraged to stay for higher deposit rates. Which makes sense, they will know the score and be willing to trade that counter-party risk for a higher return.

The nice thing about using FDIC as a vehical is that it's very public, and would probably scare the crap outta mom and pop. Which is exactly what you want to happen. Mom and pop will just take an hour or two to move their money to the otherwise identical bank across the street and will have overcome the friction involved with switching banks.

(That's the entire marketing of banks and credit cards, they'll pay for customers because once people start banking somewhere they never move.

Those banks who want to get into prop when they're large will know ahead of time that There's usually not much difference and no on like moving anything. Those banks will know ahead of time what those size calculations are, so they'll have to make a decision. Either one is okay. Although I'm not really familiar with the ins and outs of Goldman's balance sheet I could easily see a bank like them willing to give up their high-net-worth customer business for the ability to continue to do one-off 5B trades with guys like Buffet and wold governments.

The details are ALWAYS the sticking point, but these sorts of ideas about regulation are really optimal if you can get hem right (big 'if', of course). People are still free ti act as they like but they're require to bear the full cost of their behavior rather than just apportion. They want to take big swings? Great, go to it, but you can't stick your other customers with the risk - unless you compensate them for it and they understand thew deal.
 
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