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CHAPTER 8: BANKS, MONEY AND MACROECONOMICS Splitting up Banks I started to write a book on banks and money a year ago. I stopped when | realized that I don’t know enough about the subject. I have some experience and have done some reading in those fields, but not enough to justify a whole book. A chapter, or part of a chapter, is more like it. Sumerian temples doubled as banks, mostly for agricultural loans to finance the next crop. It is from their records, in clay tablets, that we know they understood compound interest and the capitalization formula. Deposit-and-lend banks as we know them today emerged in Venice and other European cities in the twelfth and thirteenth centuries. Chapter 1 said that equity investors cannot be attracted at leverage (deposit/equity) of less than 10:1, that even one tenth so much leverage is unstable in high winds, and that we rebuild the banking system after every systemic failure because we blamed the high winds rather than the rickety structure. I said that the solution is to split up banks as we know them into deposit banks which invest in ETFs on the one side, and lending banks which raise funds from investors rather than depositors on the other. These entities would have separate stockholders, and would not interact unless incidentally. A different kind of bank split-up has been urged since the 2008 crash. Repeal of the Glass-Steagle act had allowed commercial (deposit-and-lend) banks to operate as investment banks (brokerage firms). Many blamed the crash on that repeal, and on investment bank innovations such as mortgage-backed securities. I think those critics are looking in the wrong direction. The problem, as with most bank crashes over the centuries, was overleverage encouraged by nearly costless deposits. The solution is not to peel off brokerage operations from the mix, but to peel off deposits. Chapter 8 Banks, Money and Macroeconomics 2/8/16 1 HOUSE_OVERSIGHT_011090