Have banks sufficiently reformed?
I see one issue to be 'fractional reserve banking', and a second to be 'asymmetric risk'. (This essay is a re-posting from March 2012)
The pressure on bankers to over-lend is what brought about the recent sub-prime mortgage debacle. So we must reduce the temptation to make risky loans. And increase the penalties for bad loans. There seems to me to be no reason why banks should keep the interest when they lend money they do not own. So my first simple suggestion is that the tax rate on profits from lending should be related to the capitalisation of the bank. When a bank lends 10 times its capital, 90% of the interest it receives should be taxed away, leaving it only 10%. If it lends twice its capital, it retains half the profit. Simple!
It may be objected that when a bank lends out money, albeit money that it does not own, it runs the risk of not getting it back, and the interest is the compensation for that risk. That argument fails if the banks are bailed out by the state.
Banks operate to match loans to clients. If a loan defaults, the bank must certainly loose its share of the loan (10% or 50% in the above examples), but maybe should bear a stiffer penalty. The 19th century mechanism was to let the over-extended banks fail, and then to lock up the board of directors for debt, or fraud. That worked well enough to inculcate 4 generations of prudent banking and 130 years without a serious bank run; but the hardship to hundreds of thousands of innocent depositors is now regarded as intolerable, and governments tend (it seems) to step in to supply the missing money.
Fine, but I see no reason why the insolvent/imprudent bankers should escape, as they seem to be doing. Have any gone to prison? Has anyone drawn up a list of directors who would now be bankrupt were it not for the state's intervention? Or a balance sheet of the money that must be repaid to the public by the banking sector, bank by bank? This failure is not only unjust, the risk-asymmetry is very dangerous. Gambling for the bank is (currently) a case of "heads I win, tails you lose". An idiotic situation. The money must be recovered, however long that takes.
So my second simple suggestion is like the first: "tax or fine the banks".
(See also: Higher tax bands
Estate and Wealth tax
Government Spending 2
Deficit Spending 1
Deficit Spending 2
Budget 2012
Positive Money
Positive Money 2
The Money Masters and Positive Money
Monetarism 1
Why tax? Why not just print money
Bank capitalization)
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