Amar Bhide: Backstopped Banking Must Be Boring

Amar Bhide, a former McKinsey colleague, one-time proprietary trader, and now professor at the Fletcher School, takes a position in the New York Times today that goes well beyond Volcker Rule restrictions. He argues that all financial deposits need to be guaranteed, and as a result, what is done with those deposits needs to be restricted severely.

I could not have said this better myself:

Relying on the Fed and other central banks to counter panics is dangerous brinkmanship. A lender of last resort ought not to be a first line of defense. Rather, we need to take away the reason for any depositor to fear losing money through an explicit, comprehensive government guarantee. The government stands behind all paper currency regardless of whose wallet, till or safe it sits in. Why not also make all short-term deposits, which function much like currency, the explicit liability of the government?

Guaranteeing all bank accounts would pave the way for reinstating interest-rate caps, ending the competition for fickle yield-chasers that helps set off credit booms and busts…

Banks must therefore be restricted to those activities, like making traditional loans and simple hedging operations, that a regulator of average education and intelligence can monitor. If the average examiner can’t understand it, it shouldn’t be allowed. Giant banks that are mega-receptacles for hot deposits would have to cease opaque activities that regulators cannot realistically examine and that top executives cannot control. Tighter regulation would drastically reduce the assets in money-market mutual funds and even put many out of business. Other, more mysterious denizens of the shadow banking world, from tender option bonds to asset-backed commercial paper, would also shrivel.

These radical, 1930s-style measures may seem a pipe dream. But we now have the worst of all worlds: panics, followed by emergency interventions by central banks, and vague but implicit guarantees to lure back deposits.

Go read the op ed in full. And circulate it widely. We are past the point of half measure when it comes to banking.

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  1. Elliot

    I must be old; I remember the days of boring banking…when my savings and even checking accounts accrued interest.
    Back when finance and the Dow were mentioned in the evening news, but there weren’t business and finance shows all over everywhere touting Wall Street’s line. As things have changed and eroded those regulations put in after the 30’s, my parents got increasingly worried about what would happen…. they were right. It would be wonderful to get off that roller coaster of worrying what the bankers have decided to do with the country.

    1. Lyle

      To boot as the ex-chairman of Wells Fargo said putting banking on the basis suggested would result in it becoming boring, basically as it was called in the 1950s a 3 6 3 business, borrow at 3% lend at 6% and be on the golf course by 3. The ex-chairman said if he had thought that banking would remain so he would not have gone into it, as it would be a boring job. Now this would drive the best and brightest to more productive roles in society, and leave us with middling bankers who would not invent such strange products, (and let more physicists be physicists, rather than being financial engineers)

    2. F. Beard

      when my savings and even checking accounts accrued interest. Elliot

      The proper real interest rate for risk-free deposits is 0%. No risk should equal no reward, no? But due to the price inflation caused by the banks, people often need to chase yield just to try to keep up.

        1. F. Beard

          That’s the price you pay for 100% risk-free. If you want interest then it’s only right you bear some risk.

    3. F. Beard

      It would be wonderful to get off that roller coaster of worrying what the bankers have decided to do with the country. Elliot

      Well put! Why the heck do we tolerate an obviously fascist money system that recurrently wrecks the economy and even threatens world peace?

      Let’s not kill bankers; the Devil would shrug. Let kill banking and the Devil will howl in pain!

  2. Cheyenne

    “Tighter regulation would”

    Stopped reading. The subjunctive voice is the refuge of Bernanke, whose real-world predictions are what? 0 for 38 now?

    Why do people continually fall for the “better regulation” mantra without demanding REAL regulation, which is punishment?

    Chinese law once prescribed the death penalty for both robbery and murder. This experiment was short-lived, as robbery scenes were thereafter discovered to be full of dead bodies. And why not? Once you’ve committed one capital offense, the rest are easy and eliminate witnesses to boot.

    This of course presumes that laws are enforced to begin with. This is not regulation, a relatively new phenomenon. It is retribution, ancient, and it serves an essential function. Without it, all else is precatory. William Black seems to understand–unlike seemingly all economists–how very dangerous it is to let criminals just roll around at their leisure.

    So while demands for perfect regulation are just swell, Wally, they are missing the pinata by one essential dimension.

    What would make MF Global’s customers more whole? Terrific regulations implemented untold months from now? Or seeing Corzine’s head rotting on a pike?

      1. andrew hartman

        this article describes a pretty decent thing to work for: back to boring banking.
        and some of you have to talk about heads on pikes? WTF is wrong with you?

        1. Mel

          Well, whether it works or not depends crucially on the *kind* of regulations that will be used. If Mr. Corzine winds up calling in every day “The depositors’ money is all gone, they need more!” and has to take time-out for the rest of the afternoon — that won’t be very effective. We need at least the threat of excitement.

    1. Yves Smith Post author

      1. This is not a demand for perfect regulation.

      2. This is a NYT op ed. You can only make max 3 points in the space they give you. Why do you assume Bhide is NOT in favor of prosecution? He says to say “no” to bankers in a pretty firm way.

  3. jake chase

    Every sane individual knows exactly what should be done about finance: cut it down to size, close the casino to backstopped institutions, incarcerate and denude a generation of executive looters. Instead we will continue to watch a bribed Congress (and an empty suit President) fatten on bankster money suppied by a complicit Fed. The only question is whether or not the CDS neutron bomb will or will not explode.

  4. EricJ

    I think it would be a huge mistake to reenact 30s era regulation. At the time, a lot of people, including Irving Fisher and the Chicago Plan (not Chicago School) economists, saw that the problem was the ability of banks to create money. The regulations were put in place as a compromise to allow private money creation to continue.

    I hope that another global crash will herald the end of the era of private central banks and fractional reserve lending. The only dubiously positive thing about them is their ability to rise out of their own ashes. But every time they do, it means even more pain down the road. Time for a change.

    1. Paul Jurczak

      Yes to “Bring Back Boring Banks”, no to “fully guarantee all bank deposits”. Bankers will always be one step ahead of the regulators. In our corrupt political system, regulators will always be impeded in their ability to regulate. Full guarantee of deposits would just open an irresistible, practically infinite capacity channel of reversed wealth redistribution.

      Leave current deposit limits and adjust them for inflation. Motivate depositors to do their homework before they part with their hard earned savings. Educate them how the system works, so they will be less likely to chase after financial bubbles.

    2. Lyle

      As if with todays limits its hard to protect a lot of money. For example in my town of 20k there are 10 financial institutions, so that one can get 2.5 million before setting up payable on death accounts. Let alone lets talk about web banking.
      Now for big corps it is a problem but they have the staffs to do due diligence.

  5. F. Beard

    The article implies that banks lend deposits which is not true and also ignores that interest rates are already very low for bank deposits.

    The true solution is not further backstopping of the financial system by government (fascist much?) but for the government itself to provide a risk-free storage and transaction service for its fiat that makes no loans and pays no interest – a sort of Postal Savings System.

    As for the banks, all government privileges for them should be removed including a lender of last resort and government deposit insurance. Let banking become what it truly is, an inherently risky and unstable private business suitable only for sophisticated investors at best.

    Of course we need a universal bailout too for moral reasons and to preclude deflation as the banks are put out of the counterfeiting (“credit” creation) business.

    Let’s do better than Andrew Jackson and not just “Kill the Bank” but kill banking or at least reduce it till it “would drown in a bathtub”.

    1. citizendave

      F. Beard, I’ve been hoping you would bring up your idea for a government money storage system again. It seems to me that Treasury is already set up to do something like what you suggest, just by tweaking the interest rate, or rate of return, on savings bonds. In return for the security of having the government maintain accounts for us, instead of interest we would have confidence that we could get back what we put in. (Not like the Social Security Trust Fund, which loans money to Treasury, only to have congresscritters say they can’t afford to repay the loans.)

      Maybe using the post office to handle the retail end of it would accomplish two things: help keep the post office in business; and leverage the existing PO infrastructure in most communities for retail money storage services.

      I think the Post Office Money Storage idea is very similar in spirit to what Professor Bhide is advocating with full government backstopping of banking, and what Yves has been advocating in “utility banking”. The old expressions “that’s money in the bank” and “you can bank on it” meant that we could be certain our money would be there when we wanted to use it. These days, not so much.

      If Treasury would offer an IRA, I would switch today. Professor Bhide used the phrase “extreme risk aversion”. That’s a fair description of my current position. As far as I know, the only way for me to put my retirement fund into Treasury bonds is to take a distribution from my conventional IRA (parked in a money market fund), which would have tax consequences for our household.

      Commercial banking poses a different set of problems, compared to household retail services. It would be nice if capital markets could function without putting the entire economy at risk.

      At this point I trust the Treasury more than I trust the private sector. Maybe “trust” is not the right word. If we can no longer count on the full faith and credit of the United States government, then all bets are off.

      1. F. Beard

        I think the Post Office Money Storage idea is very similar in spirit to what Professor Bhide is advocating with full government backstopping of banking, and what Yves has been advocating in “utility banking”. citizendave

        No and I doubt it. When I say “fiat storage and transaction service” that is ALL I mean. Government should NOT be in the money lending business. What Bhide is suggesting is a harder form of the current fascist banking model.

        Banking should be a PURELY private enterprise with zealous enforcement of insolvency and fraud laws.

      2. F. Beard

        Maybe “trust” is not the right word. If we can no longer count on the full faith and credit of the United States government, then all bets are off. citizendave

        Little trust is required; it’s only inexpensive fiat and the government can create endless amounts of it. And if we had genuine liberty in private money creation and usage then the government itself would have the highest incentive to keep careful books.

  6. Richard


    You might want to look at Lawrence Kotlikoff’s Limited Purpose Banking. It is the intellectual predecessor to Amir’s editorial.

    Amir looks to get rid of money market mutual funds, however, the money market mutual fund is actually the model for the bank he wants to create (I made this same point to Professor Kotlikoff).

    Also, Amir wants to make the assets banks hold so easy to assess that even a dumb bank examiner can get it right. I think this is a major flaw in his argument as it still makes the financial system dependent on the regulator.

    It is far better to require ultra transparency so that banks are required to disclose on an on-going basis their current asset, liability and off-balance sheet exposure details. Then everyone can see the risks that the banks are taking and market discipline has a chance at working.

    While I agree with you that we need something beyond half measures, I do not think Amir’s or Professor Kotlikoff’s solution is the way to go.

  7. Tony

    If the $250,000 cap on deposit insurance were eliminated, I suspect that the top 1% would start using banks to make all kinds of risky bets. Why make that $500 million risky derivative bet yourself when you can deposit it that money with a bank that you own and have the bank make the bet? You get all the upside with none of the risk.

    I agree very much with the ‘tighter regulation’ portion of the op-ed as I would like to see banks regulated to death.

  8. Jackrabbit

    I don’t think you can consider “boring banking” in isolation. Commercially, boring banking means less media buying, fewer branches, etc. And politically, it means less in campaign contributions and favors.

    TPTB like the system as it is. What (real) incentive do they have to change it? They will counter with the usual playbook: stoking fear of government control and excessive regulation, loss of jobs, kneecapping of financial innovation, etc.

    Practically speaking, the case for utility banking or boring banking has to be more compelling to Joe Sixpack. How do you draw the line from bankster attidutes and malfeasance (‘we have to dance while the music is playing’) and the loss of homes and jobs – in a way that is clear and direct?

    Oh, and hey, has OWS published an annotated list of grievences yet?

  9. Fred

    The usual reality-free discussion here at naked capitalism :

    “Regulations are the solution”. Right.

    As I recall, the sequence was that we have always had regulations written by the Bankers, the Fed itself was originated by them.

    So for 100 years we have had in place a regulatory apparatus designed and implemented by the Banksters themselves, one that produced the booms required for the various politicians to be re-elected and also had the happy side-effect of concentrating wealth in the hands of the already-wealthy.

    Completely ignoring the many episodes of failure, e.g. the S&L crisis, and the ultimate result, all of you apologists for the Establishment now conclude that the regulatory apparatus was quite a success, and that we need to get back to such regulations.

    No discussion of how that might happen, given the ownership of Congress by Banksters. No discussion of what could be done to prevent the Banksters from buying the regulations they like. No discussion of how citizens can prevent regulatory capture, much less actual examples of such.

    No, it is an article of faith for most posters that big government is a positive thing in the lives of the poor, contrary to all evidence. It is an article of faith that Progressives only need elect good people, like Obama, and the situation will improve. Big government is obviously the answer.

    If someone will provide a single example of a country that has pursued this course for 50 years and done well, I will stop bothering you true believers with reality.

    Meanwhile, you all want to decry the current situation as the result of big bad , rather than as the outcome that was intended by both Banksters and politicians from the beginning.

    Over the last century, very many people have warned that oligarchy was the inevitable result of big government. Very many people have said that no country can persist once the people understand they can vote themselves largess from the public purse.

    Yet everyone here is outraged by the inevitable, wants to repeat the experiment.

    1. Yves Smith Post author

      Wow, a religious diatribe with only one factual anchor, and that one dead wrong. The S&L crisis resulted from DEREGULATION of S&L investment and S&Ls got their heads handed to them as they raced into businesses they didn’t understand. If they had stayed stupid, as Bhide recommends, they would be fine.

      Do you always put your foot in mouth and chew in public?

  10. MichaelC

    I agree with the overall boring banking goal, but Bhide’s solution has some flaws. As it stands now it does matter whose ‘wallet, till or safe it (currency)sits in’. You could insure all deposits (with an unlimited cap) only if the institution or vehicle it sits in actually does strictly limit risk taking.

    I may have the causality mixed up here, but as I recall interest-rate caps, or rather restrictions on paying interest on checking accounts, led to the creation of Money Market accounts in the first place. Furthermore interest-rate caps coupled with the deposit guarantees were the key factors in the Savings and Loan debacle.

    Restricting the investment of govt guaranteed deposits to activities an examiner of average intelligence can understand is the right goal. Adhering to those restrictions should serve as the basis for extending the government guarantee to bank depositors. If the regulators get restrictions on the asset side of banks balance sheets right, there’s no need for caps on interest rates or on the size of individual account guarantees.

    But, a blanket guarantee should not be extended to Money Market funds in their current form. Instead Money Market funds should be required to fix their accounting to disclose that they routinely and increasingly ‘break the buck’. That disclosure alone would do more to drive MM deposits back into the safety of guaranteed bank deposits. As the ‘super safe’ assets those funds invest in are becoming scarcer, their opaque disclosures are masking massive risks that should not be guaranteed.

    One of the issues that’s come up in the current version of the Volcker rules is that as it stands now, MM funds may qualify as ‘covered funds’, which would subject MM funds to the Volcker restrictions. The funds industry is up in arms and wants an exemption.

    In a recent speech Volcker explained his views on MM accts:
    ‘If money-market funds are to continue providing significant funding to regulated banks, they should be subject to capital requirements, deposit insurance protection and stronger oversight of their investments, Volcker said.
    “The time has clearly come to harness money market funds in a manner that recognizes both their structural importance in diverting funds from regulated banks and their destabilizing potential,” Volcker said in a speech last month that was highlighted by The New York Times on Saturday.”

  11. Susan the other

    Why is one certificate called money and not another. Like a grocery coupon? Why can one kind of certificate be exchanged for something else, other than the redemption claim. Why is a national currency the medium of exchange for all other value? And why is our national currency suddenly so vacuous? Value seems unrecognized and inflexible. What does it mean? We’re all going nuts for lack of a definition.

    Can’t exchange one category of value for another without a medium of exchange; a medium which mediates between one value and another. But we prevent all mediation of value; we don’t even acknowledge most value. Can’t possibly define all the different values of all the zillions of things we might like to exchange. So we just call all points of value “dollars” and watch the whole thing become incomprehensible. Nothing seems to be worth anything anymore except the time it takes to circulate the meaningless money.

    We’re going to need lots of different kinds of appraisers to resolve this complexity of value. Please tell me what the exchange rate of clean water is to a bag of brown rice. To a bicycle. To a new scientific process.

    Wouldn’t it be better to become even more complex? We don’t need one big bank, we need thousands of value-specific banks issuing their own certificates. The cattlemen’s bank; the chemical research bank, the organic produce bank, the associated grocery bank, the fusion energy bank, the affordable housing bank, the practical education bank; the medical and dental bank, the environmental cleanup bank; the nuclear cleanup bank; the wildlife protection bank; the clean air bank; the service industry bank, teamsters, longshoremen, etc. And why can’t each one of them have their own currency? And then, after different currencies are established reflecting the value of the trade, product or service for which they are traded, can we please set up a universal clearinghouse for exchanging one value for another. Talk about controls. We keep thinking we want to simplify. Big mistake. We need to make money much more complex.

    I apologize for this. I’m going back on my meds now.

    1. George

      Great new opportunities for arbitrage. Great new opportunities for regulatory agencies.

      The Banksters and their political lackeys will love it.

      1. F. Beard

        The Banksters and their political lackeys will love it. George

        The banks need to have their money monopoly smashed. Then we shall see how practical private currencies are.

        And no, gold is not the answer. That would merely enhance the banks’ control of the money supply. The solution to monopoly is liberty, not a shiny metal.

  12. Jay Mani

    Mr. Bhide makes excellent points. This is a two step process that must be done together. Firstly only customer deposits would be guaranteed, not the overall bank debt. This is what Ireland did and it was the worst move possible. This doomed that society and economy and made moral hazard standard policy. Having an unlimited deposit guarantee without properly curbing bank speculative activity would be catastrophic in nature. That is why Mr. Bhide is stating back to basic banking.

  13. craazyman

    The notion of a regulator “of average education and intelligence” or an “average examiner” emits the nauseating stench of elitist drivel.

    I have a family member who had a career role at a bank regulatory agency that sent examiners out and around.

    Invariably, examiners would do their job with diligence and skill (let’s face it, this isn’t quantum physics) and find problems. The bankers would call up the agency’s top dogs or some senior politician who their cash floats and bitterly complain. The “regulator of average education and intelligence” would be smacked down. Sometimes hard. You don’t need to be a genius to see what this does to the examination process.

    The yardstick of “average intelligence” measures whatever you lay it up against, the industry too, where it comes up pretty short. And if you add “civic intelligence” or “moral intelligence” or “ethical intelligence” then you have another interesting set of measurements (and nobody does a better job than Naked Capitalism in revealing those numbers).

    This dude seems to mean well, but he sounds like a pompous ass who needs to get out more and mingle among the peasants. He might be surprised.

    1. F. Beard

      The notion of a regulator “of average education and intelligence” or an “average examiner” emits the nauseating stench of elitist drivel. craazyman

      Indeed! And it hints at the problem with trying to regulate banks. So-called “prudent” banking is likely to be very sub-optimal with regard to economic performance.

      The solution is not to try to fix banking but to allow genuine competition in the private money business. Then we could expect optimum performance and stability overall nationwide.

      If banking is such a good thing, it can surely bear genuine competition? And if it can’t then good riddance.

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