Tuesday, April 6, 2010

Financial Reform

In a discussion of financial reform Paul Krugman divides "those who really do want reform" into two camps:

  • Those seeking to limit "the size and scope" of banks
  • Those seeking to "regulate what banks do, not how big they get"

Krugman's list neglects the biggest and most important camp: those seeking to reduce the size of the demand for credit.

The demand for credit includes not only new uses of credit but also existing credit-in-use, or existing debt. Those of us seeking to reduce the gross accumulation of debt are onto the most essential element of financial reform.

As for myself, I favor all three elements:

1. Limit the size of banks -- not by regulation, but by eliminating the advantage of bigness from the existing tax structure.

2. Limit the scope of banks, or what they can do, essentially by reinstating regulations that were set up after the Great Depression, but which were removed after economic growth slowed in the 1970s.

3. Limit the demand for credit by setting up tax incentives to accelerate the repayment of debt. By reducing the total demand for credit, we reduce the need for finance in our economy, reducing the factor cost of money and freeing up profit and income for the productive sector.

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