Jimmy Stewart Is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking.

• Author: O'Driscoll, Gerald P., Jr.
• Position: Book review

Jimmy Stewart Is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking

Laurence J. Kotlikoff

Hoboken, N.J.: John Wiley & Sons, 2010, 241 pp.

Chapter 1 of the book is titled "It's a Horrible Mess," and in it Laurence Kotlikoff, a professor of economics at Boston University, reminds the reader of the breadth, depth, and horror of the global financial crisis. It is a cure for the dispassionate observer of events, an indictment that would send all but those with ice water in their veins to sign up for the Tea Party Express. The book is a particularly well-written account of the crisis that begins in housing finance, spreads throughout the financial system, and then throughout the real economy. The crisis hit in tsunami-like waves beginning in 2007 and continued into 9,009.

In Kotlikoff's words, "We thought we had well-functioning banking and insurance companies with competent directors, world-class managers, responsible regulators, and incorruptible rating companies. But overnight, we it learned it was a sham." The theme that financial capitalism was a sham runs throughout the book. He asks and answers in the affirmative whether Wall Street is running a Ponzi scheme. Russ Roberts, an economics professor at George Mason University, has reached the same conclusion, and similar indictments have been made across the political spectrum. Former Fed chairman Paul Volcker has suggested much of what occurs on Wall Street involves moving economic rents around without creating economic value. In short, Kotlikoff echoes the opinion of many observers.

Other themes include both the perfidy and sheer incompetence of those who ran major financial institutions, the failures of the regulatory apparatus, and the haplessness and confliction of those directing financial policy.

Kotlikoff employs a journalistic style, but underlying the account is the analytic mind of a first-rate economist. He is eclectic in his theoretical approach, telling the reader "I'm neither a Keynesian nor a monetarist," but I believe in the possibility of "multiple equilibria associated with coordination failures." As the subtitle suggests, the analysis of the crisis is a prelude to a proposal for reform: limited purpose banking. LPB is a variant of narrow banking. He expands on traditional narrow banking proposals in two dimensions, and thereby moves to a much broader financial reform.

Traditional banking is a debt-based system in which banks borrow money from the public in the form of deposits. Bankers keep only a portion of the borrowed funds in the form of cash or reserves, and lend the rest out. As banker George Bailey (played by Jimmy Stewart in It's a Wonderful Life) had to explain to his angry depositors, their money...