Ten years after the 2008 financial crisis, economists are still debating whether the policy response at the time was excessive or insufficient (e.g. the excellent recent Macro Musings podcast with Larry Ball on the Lehman collapse) and whether banking needs further reform. In the UK and continental Europe, radical reforms to finance are being contemplated, including by veteran Financial Times columnist Martin Wolf, who last month wrote in support of the radical Vollgeld proposal put to a referendum in Switzerland (see Why the Swiss should vote for “Vollgeld”, which is behind a paywall, sorry).
Vollgeld would have prevented banks from lending out money acquired from depositors on a long-term basis to households or businesses. Instead, the banks would need to hold all the depositors’ money in reserve, in case depositors all wanted to withdraw all their money at once. This would certainly make the system safer, and would prevent banking panics and bank runs, but it would sharply increase the cost of borrowing, unless say the central bank stepped in as a lender to households and businesses, which appears to have been part of the Vollgeld plan. In my view, the Swiss were eminently sensible in rejecting this radical proposal, with 76 percent voting against it at the referendum last month.
That said, I acknowledge the 2008 financial crisis highlighted the too-big-to-fail problem with major financial institutions, which means government bailouts appear inevitable in times of financial crisis, and it is widely agreed this problem has not yet been fixed. So I’m pleased there is extensive debate about banking regulations, even if I disagree with many of the radical proposals.
Incidentally, one of the most interesting proposals for large-scale reform of banking has come from Australian economist Nicholas Gruen, who I work with from time-to-time on consulting projects. Gruen would have the RBA take deposits from households just as it takes deposits from banks. The RBA would also lend money to households against safe collateral (e.g. a home, but only up to 60 percent of its value). The justification advanced appears to be that the provision of bank accounts and payment services could soon solely be done electronically, and could be a natural monopoly which may be best placed in a central bank. As Martin Wolf, who referred to Nicholas Gruen’s proposal in his FT article on Vollgeld, noted:
“The technological reasons for branch banking are, after all, perishing quickly.”
Note that Gruen has posted a letter he wrote to the FT on his proposal at Club Troppo:
It would be good to know what the RBA thinks about proposals to reform the financial system along the lines of Vollgeld or the Gruen proposal. Fortuitously, for those of us in Brisbane, there is the opportunity to ask a very senior RBA official about these proposals at an upcoming lunch.
The Economic Society of Australia (QLD), of which I’m one of the Vice Presidents, is privileged to be hosting a lunch at the Hilton Hotel, Brisbane on 22 August featuring RBA Deputy Governor Guy Debelle:
There are still tickets available, and I would encourage you to attend if you can. The RBA typically does not announce the topics of its upcoming speeches, but there is no doubt the Deputy Governor’s address will be on an important economic issue and will attract much media and market interest.
RBA Deputy Governor Guy Debelle