Guest Post: Comments on Lawrence Kotlikoff’s Jimmy Stewart is Dead

From Craig Heimark, a recovering derivatives trader

Perversely, what prompted me to read Lawrence Kotlikoff’s new book, Jimmy Stewart is Dead, was a review that described his proposal as forcing all banking to become mutual funds. That seemed both radical and naive, but coming from a well known economist, I thought it would be interesting to see if he could make a credible case.

On Style

Jimmy Stewart is Dead is both amusing and annoying. Kotlikoff gets on the bank-bashing bandwagon, calling the current industry structure corrupt. He goes name by name from Fuld all the way through Rubin describing them as technically incapable of running their firms,as con men as they clearly were peddling snake oil. It evoked Matt Taibbi’s Goldman Sachs as vampire squid article. I have mixed feeling about this style. It made Kotlikoff’s book easy and fun to read, but it often served to discredit the analysis. Just as when I read the vampire squid article, I was left with two feelings. One – it was far too much in the conspiracy theorist school of journalism to be taken seriously. Two – unfortunately its analysis was all too correct. Similarly, I took some guilty plesures in the gossipy snake oil accusations and anecdotes – frankly none of which are actually wrong, but this overblown style undermines and obscures what is actually a serious proposal (or at least the beginnings of a serious proposal) for fundamental reform

On Substance

As a post on Naked Capitalism earlier this year noted, Mervyn King, the governor of the Bank of England, gets it: the financial services industry needs to be restructured. So far the proposals are all about tinkering at the edges. What is actually needed is industry level reform. Yes, reform will cause real change – but again that is exactly what is needed.

Kotlikoff’s recommendations fall short of that standard. Essentially he is proposing a return to some of the thirties style reform. In that era, we separated securities from loans. Today that separation is impossible, due to the insertion of securitization (a desirable innovation) into all aspects of financial services. Proposals like Volker’s to focus on proprietary trading as the evil I think are right in a desire to return to a simpler, more transparent, more understandable system, but fatally flawed as trading IS the the problem, nor is any separation of “customer” trading from proprietary trading possible in a real world sense. Instead what Kotlikoff proses is separating financial intermediation from risk transformation. So he would effectively ban all prop trading from intermediation and place all risk transformation into general partnerships. He get there by focusing on the evils of leveraging. He is not opposed to leverage per se – though he goes to lengths to discredit Millier Modigliani as unrealistic as it ignores very real costs and no doubt has made a entire generation of manager inappropriately comfortable with too much debt. Rather his point in not that leverage is bad, but that YOUR leveraging ME (as either a shareholder in a fin services firm – or as a taxpayer) without my explicit knowledge and consent is root of all evil.

He feels – all too correctly – that this unsupervised leveraging of other peoples’ capital is both magnified and probably only possible by government actions, creation of moral hazard and explicit government guarantees. From my perspective he focuses too little on the x-efficiency argument (meaning traders and short term bonuses cause the management of public financial service firms to behave in a manner not consistent with long term creation of firm value) and too much on the sins of the government in creating moral hazard, exacerbating the too big to fail risk, and so on. But no matter – the essence of his line of logic is that financial risk transformation (whether yield curve or factor transformation) is risky and as such should be done in general partnership type structure that cannot take advantage of limited liability, By contrast, he arguest that financial intermediation does not require and in fact should not be allowed to make bets based upon leveraging their financial balance sheet.

The problem is he prattles on for 123 pages on gossip, government ineptitude, and many, many pages on virtues of mutual funds before getting to his specific proposals. And when he gets there he does not lay them out in the 5 or 7 bullet point they require but spreads them across a couple of chapters. Further his single chapter on transitioning from current structure to his desired future state is not thoughtful – and ironically for someone who criticized Miller Modigliani as misleading because it ignores transaction costs, make exactly the same mistake in his implementation chapter.

Nervertheless -the book caused me to think differently about the problems and the solution space and so I recommend it to those interested in fixing our financial system.

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  1. attempter

    Today that separation is impossible, due to the insertion of securitization (a desirable innovation) into all aspects of financial services.

    That triple lie, that it was ever an “innovation” at all, that it was ever “desirable” for the human community, and that it’s now a law of the universe rather than a simple political choice which can be undone by another simple political choice, is as far as I needed to read.

    1. joebhed

      Totally agree.
      “We’re waist deep in the Big Muddy……”
      I haven’t read the book, but I do have a personal view that is violated by the fact that privileged persons can ‘leverage’ the money system in any way that threatens the existence of that entire system, and my well-being.
      The license that exists for shadow bankers to create new ‘non-money monies’ did not always exist, and is neither necessary nor, IMHO, Constitutional, reserving that power for ONLY the Congress-assembled.
      Maybe it’s true that Dr. Kotlikoff fails to lay out the transaction costs of the transition, but that is likely because the venture into the exit strategy FROM the debt-money system of ‘leveraged’ finance has been so seldom taken.

    2. Doug Terpstra

      If finacial securitization is like homeland securitization the “desirable innovation” bit is arguable. Revealing my own ignorance no doubt, securitization, derivatives, swaps, debt obligations, special purpose vehicles and REPOs sound like just so much robber baron hooey to me — elaborate aceademic fabrications designed to construct ungodly and ungainly leverage in order to loot the public treasury and commonwealth. But what do I know?

      1. Doug Terpstra

        Sorry, I meant to say “academic”. Regarding the ‘securitized’ shells used to hide their piracy and embezzlement, whether through Fannie, Freddie, free (-to-banksters) Fed money, MBS purchases or whatever, it is clearly the taxpayers who are securitizing the casino bosses’ gambling and saving their immoral butts from moral hazard.

      2. attempter

        If you know it’s robber baron hooey, then you know just fine.

        Though I don’t follow the part about “homeland security”, whose goal has been to enhance fear and accelerate creeping totalitarianism, while never making anyone actually safer.

        Not at all desirable, and innovative? On the contrary, one of the oldest tricks in the tyrant’s book.

        But since it’s a big con, it is just like financial “innovation” in that sense.

  2. charles

    Not all securitization are toxic. The toxic elements are :
    – moral hazard, stemming from a “true sale” from the sponsor
    – maturity transformation, when the sponsor, or any other entities, provide an implicit or explicit off balance sheet liquidity guarantee to a structure that is essentially funding long asset with short liabilities.

    A good example of safe and desirable securitization is the covered bond (invented by the Germans as Pfandbriefe). It exists since 1769 and performed quasi-flawlessly ever since. One could perfectly imagine the same mechanism for receivable securitization, auto-loans or student loans. A US Covered Bond market would go a long way replacing the GSE monsters.

  3. Wanderer

    The reformers of the 1930s were geniuses compared to the Giethner’s et al of today.

    In the 1930s there was an understanding that the housing industry was critical to US economic growth. However, they also knew that no one in his right mind would want to be a buy and hold investor of a home mortgage. They created a tax subsidized industry — the Savings & Loan — that received tax benefits for issuing and holding on to residential mortgages. They also ‘guaranteed’ funding for the mortgages by giving the S&L’s a monopoly of interest bearing government guaranteed demand deposits. And the government set the rate on those deposits.

    Everything worked beautifully until the 1970s when the “free markets” mafia told us that we needed to de-regulate interest rates. Soon banks offered money market accounts and the S&Ls lost their ability to fund mortgages.

    Don’t get me started on what Reagan did to the S&Ls.

    Tranche securitization was considered as a ‘market based’ alternative to the S&Ls as it created a means for investors to buy and hold specific pieces of a mortgage. Alas, they found it difficult to place the toxic waste tranches that resulted from this securitization. One reason why the originators of mortgage securitization: First Boston, Salomon Brothers, DLJ, Kidder Peabody, etc. either no longer exist or no longer exist as independent entities.

  4. rootless_e

    The obvious fix is raising the top marginal individual tax rates – on all income including “cap gain”. Simple and removes the casino incentive.

  5. Siggy

    Jimmy Stewart is dead, poor Jimmny Stewart, I grieve for his passing. My condolences to his family, friends and fans. And what about the Bailey Building and Loan, how fares that institution?

    Not very well, it has been looted by a serving of hubris and greed, well seasoned by crap think. Has this crap think been the result of stupidity or malicious intent? Then I wonder, just how much of this crap think is really more of the form of: lets put some lipstick on this pig and take her to market. That thought leaves me with hubris and greed.

    Hubris and greed, now those are inherent aspects of human nature. Across centuries and cultures, societies have achieved the control of hubris and greed by mores, laws, customs, and most successfully by incentives. One of the more effective incentives has been joint and several liability.

    With the rush to incorporation we have lost the baby and the bath water. No one’s a principal, everyone’s an agent. Everyone’s mission in life is to extract a commission. Some are inclined to fancy up the styling of the process by calling it rent seeking.

    Jimmy Stewart is indeed dead as is the venerable old Bailey Building Loan. We are quite literally the poorer for their passing. Not so much for what they were but for what they represented.

    What this country and the world is in need of is the recognition that above all it is important to be able to honor a contract. AIG made some 40,000 contracts that it knew it could not honor. It does not matter that those contracts were, by their definition, executory and contingent on events and conditions yet to occur. And it does not matter that the apparent probability of occurance was deemed to be low. What occurred was a misrepresentation of capacity to perform. At the least it was a massive actionable tort and quite probably a fraud.

    This scandal that we are mired is similar to Teapot Dome in the reach of its corruption and malfeasance. The real question that needs to be addressed is: if Jimmy Stewart and Bailey Building and Loan are long gone, Where lies the DoJ?

    1. Doug Terpstra

      “…above all it is important to be able to honor a contract. AIG made some 40,000 contracts that it knew it could not honor … What occurred was a misrepresentation of capacity to perform. At the least it was a massive actionable tort and quite probably a fraud.”

      If not an open and shut case of fraud, it is surely the basis for the stripping of all personal assets on behalf of taxpayers. It would be, anyway, if the banksters did not own the DOJ and the courts.

  6. AK

    Looks like an interesting book to me though a little bit short for such important topic.

    Hope Kotlikoff collects all critical reviews, thinks them out and rewrites the book as its second edition. Then I will buy to read it. :)

  7. nowhereman

    May I humbly suggest “Web of Debt” (The Shocking Truth About our Money System And How We Can Break Free) by Ellen Hodgson Brown, J.D.
    An historical account of the Fiat money system which demonstrates how Central Banks create money from debt and which has led us into our current predicament.
    Not only that, it provides a reasonable means to overcome our current predicament, something that a lot of texts on this subject fail to do.
    An easy read tied entertainingly to L. Frank Baum’s “The Wonderful Wizard of Oz”
    I can guarantee you will never look at “Money” and how it is “created” the same way ever again.

  8. MichaelC

    This disclaimer is becoming almost universal when Taibbi is mentioned, so its time to ask, why do you feel it still needs to be said at all?

    Just as when I read the vampire squid article, I was left with two feelings. One – it was far too much in the conspiracy theorist school of journalism to be taken seriously. Two – unfortunately its analysis was all too correct.

    What’s ‘unfortunate’ about point Two? The analyis is top notch, and that’s priority one, plus Vampire Squid is now part of the lexicon.

    There’s a bit of snobbery at work which is a little offputting, in that Taibbi’s style makes him unsuitable for the polite society of thoughtful people, yet thoughtful people support his analysis, yet “fear’ he’ll be marginalized, as they participate in marginalizing his style. Less squeamish people who would never be aware of the depth of the rot are tuned in. He’s transcended what you’re calling ‘conspiracy school’.

    Besides, as more details are reported, the collapse is looking very much like a ‘conspiracy’, or at least a successful gaming of the regulatory structure, so the classic conspiracy journalism tag applied to right wing wingnuts doesn’t seem to apply to Taibbi.

    The NYT uses the same tactic. In a recent DealBook article, the writer, with no obvious tongue in cheek, summed up a recent Taibbi rant about GS as ‘a personal battle between Taibbi and GS’ ignoring the substantive points in his article.

    His style’s perfectly suited to to mirror the ugliness of his subjects. That’s a shock, and makes us uncomfortable (if we’re not psychos ourselves). Get over it. This is an ugly story.

    1. paper mac

      Well said. The condescension of those preferring to use the sterile, bloodless language of the field to describe high crimes and misdemeanors is particularly risible in light of the fact that Taibbi has done more to inform the public and constrain the actions of GS and others than any of these so-called experts.

  9. kulicuu

    I define conspiracy as coordination with discretion, and go on to recognize that conspiracy in general is a, or perhaps even the major component of social and economic life. That is to say, most conspiracy, as I’ve defined it, is benign. People coordinate; it’s what people do. People are private agents, or to put it another way, people are their own principals; therefore they are discrete, and private in their enterprises. So people conspire. Get over it. That’s the first point. My second point/proposition is that, as observers, when we lack full information about a questionable phenomenon, we go through the whole data acquisition and conjecture/hypothesis/theory process. Theorizing about conspiracy is therefore a central component of being a sentient being in a complex society of intelligent creatures. Get over it. Which cues my third point, which is that people who use ‘conspiracy theorist’ as a pejorative ought to be immediately suspect, of lazy thinking, intellectual dishonesty and/or idiocy, and possibly disingeneuity of some degree.

    When a society has gotten to the point that it denies the obvious, um…

    In honor of Taibbi’s compensation slash at the wingnut 9-11 truthers, check out this ‘conspiracy theorist’ site, and especially recommend viewing video of Richard Gage’s presentation:

    If a society is incapable of handling something so crass and obvious as 9/11, it probably doesn’t stand much of a chance with these far more nuanced issues of macroeconomic management/choices and financial regulation.

    The guest-poster exhibits classic symptoms of the problem. Gleeful collusive obfuscation. I’ve no doubt it’s profitable, at some level.

  10. Laurence Kotlikoff


    I appreciate your review of Jimmy Stewart Is Dead, but I think you very badly mischaracterize some of its contents. In particular, I don’t go after Goldman Sachs anywhere in the book. In fact, I point out that Goldman may do the best job on the street with respect to mark-to-market accounting. I think you need to read the book again. The book has been very strongly endorsed by George Shultz, Bill Bradley, Jeff Sachs, Ken Rogoff, Simon Johnson, Five Nobel Laureates in Economics, Michael Boskin, and lots of other very thoughtful, financially astute, and fair minded people. If this were a diatribe against Wall Street followed by a half-backed plan, they would not have provided the endorsements they did (posted at I don’t praddle on for pages based on gossip. Every statement is documented with footnotes. I’m explaining the nature of the people running our financial system and their monopoly on information and their inability to “manage risk,” for a reason — to convey why maintaining the financial status quo is an invitation for an even worse financial meltdown than we’ve just experienced. I’m also trying to explain the degree to which Uncle Sam has turned into AIG raised to the 10th power and the truly grave systemic risk that represents. There are deep economic insights about the current system throughout the book. You probably read the book quickly, got the jokes, but may have overlooked some of the economic points to which the humor and “gossip” was building. So please read it again slowly with the realization that I’m not into bashing people or gossip. I’m a serious guy and I expect serious people like you to see that discussing Dick Fuld, Jimmy Cassano, Jimmy Cayne, and their ilk, even in humorous terms, is being done to drive home a critically important point. These people are not fit to babysit our children, let alone manage our economy’s risk. There are key policy makers in the U.S. and UK (including Bank of England Governor Mervyn King) and other countries around the world considering Limited Purpose Banking. I’m sorry I didn’t present the details in bullet points, but please do take a look at the details. This is the only way to go with respect to reform and I need influential people like you to focus very carefully on what I’m proposing.

    I realize I may be sounding defensive and that most of what you wrote was extremely positive, so don’t overreact to my overreaction!

    best, Larry

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