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When the Best Plan is No Plan at All

I was recently asked to submit a "solution proposal" concerning a panel, on "The New Global Financial Architecture," in which I'm to take part at this September's Global Economic Symposium in Kuala Lumpur.  The proposal is supposed to summarize my own scheme for reforming the global financial system, showing, in 700-1000 words, that my plan is "feasible," "innovative," and (naturally) of "positive social impact."

A you might well expect, the request posed something of a challenge to this unreconstructed Hayekian.  Here, for whatever it may be worth, is what he came up with.

Truth be told, I'm not quite sure that my proposal is consistent with the organizers' assumption, as given in their "challenge" to the panel, that "Different regulators – including the monetary authorities – must cooperate in order to achieve better but not necessarily more regulation." I hope, in any event, that it will help fuel a spirited discussion.

  • I agree with disposing of deposit insurance and lender of last resort. I’d also dispose of TBTF guarantees. However, I WOULD HAVE government perform one service and that’s to provide some sort of totally safe warehouse or savings bank for those that want it.

    Governments actually already provide that service in that anyone can invest in government debt and that form of saving is near 100% safe. That sort of savings or warehouse bank already exists in the UK: National Savings and Investments. NSI invests only in short term government debt, and account holders (of which I’m one) can have their money shifted to any other bank account in 24 hours. It’s done by phone rather than online or by cheque or plastic card.

    Having done that, you’ve more or less implemented full reserve banking. That’s because where a commercial bank fails badly, depositors take a hair cut. Thus those depositors are effectively a type of shareholder. And full reserve requires that banks / lending entities be funded only by shareholders, not depositors.