Margareta Pagano: 'Scarier than any Stephen King story'

Our huckster-driven banking systems will plunge us into a horror of a crisis, warns a US professor – but, he says, he can fix it

The phone line was crackling when I spoke to Professor Larry Kotlikoff in Amsterdam last Thursday but his message was clear: the West can only fix its economies by fundamental reform of its banking systems, and, if it doesn't, we will soon be plunged into a financial crisis even bigger than the present one.

The Boston economist went further, telling me that the US bailout and the Obama administration's latest proposals are tinkering with the disease rather than treating it.

As he says: "All they've done is stick a Band-Aid on the cancer." And the cancer is a system which is designed for hucksters and snake-oil salesmen; one that allows financial companies to gamble with our money, secure in the knowledge that Uncle Sam – or another government – will bail them out. What's worse, the more governments do bail them out, the more they will gamble at public expense.

Kotlikoff is unusual among economists; he doesn't just criticise but has a plan for change; one which would stop future financial crises, restart investment in the economy, and restore trust in banking.

To understand his solution, you have to know what Kotlikoff believes caused the crash: Not low interest rates, toxic debt and leverage, or trade imbalances; these are symptoms, not causes. In his words, fraud, greed, malfeasance, Ponzi schemes, corrupt bankers and regulators, kickback accounting, fractional reserves, insider-rating, top Harvard students who in effect became croupiers, and director sweetheart deals are responsible. If you want more reasons, you'll find them in his book: Jimmy Stewart is Dead: Ending the World's Ongoing Financial Plague with Limited Purpose Banking, to be published next month. Jimmy Stewart, of course, playing super-nice George Bailey, famously saved his small-town Savings & Loan from a nasty local monopolist in the 1946 film It's a Wonderful Life.

Kotlikoff calls his new regime Limited Purpose Banking because it does what it says; it limits banks to their legitimate purpose – connecting and intermediating between borrowers and lenders, savers and investors. He wants banks banned from lending money that is not matched in cash reserves. And, under LPB, all corporations engaged in any financial intermediation – banks, hedge funds, insurers – would act as middlemen. They would create mutual funds, sell shares in the funds to the public and use the proceeds to buy assets, not unlike a unit trust. But they would never own any financial assets, so could never fail due to bad risk, thus making banks the "disinterested intermediaries they pretend to be". Banks, then, would let people gamble, but the banks themselves would not. "If Dick Fuld or Nick Leeson wish to gamble, let them do it with their own money. We don't have enough babysitters to protect us from these people," he says. Quite right.

He's not against bankers per se, but says there are enough "fast-talking con artists, riverboat gamblers and highwaymen" to ruin the system. Nor is he against gambling, depending on whose money is used. Mutual funds have been around for centuries – the US has 8,000, holding over $12trn (£7.5trn) of assets, and they have not been hit by the crash. They also allow for risk, known as "parimutuel" betting. Nor will there be a lack of credit – mortgages can be lent on the same basis and there's no reason why the system shouldn't allow maximum liquidity.

Kotlikoff says LPB should be policed by a new government body which would clear all securities sold by its funds; giving maximum transparency, and allowing people to see what risk they are taking. No more bottles of cyanide being sold without the label, which is how he describes the toxic-debt problems. There's another plus – LPB can be put into effect easily and at little cost.

It's no wonder Kotlikoff's big ideas have caught the fancy of Mervyn King, the Governor of the Bank of England; so much so that the relatively unknown economist was thrust into the spotlight after King namechecked him at last week's Treasury select committee, saying his proposals deserve further study. Hailed as King's "obscure guru", Kotlikoff, who first met King while working at the Bank in 1998, assures me it's the other way round: "It's Mervyn who is my guru; there's no doubt his views on this crisis are responsible for pushing serious reform to the top of the agenda in the US as well as the UK." Nor is Kotlikoff obscure; he's written extensively in the US criticising President Obama's bailout, but it's only now his work is filtering through to the UK.

This weekend, the professor is back in Boston. But he's coming to Britain in February for more talks with King and other economists, by which time his proposals will have had a wider airing and, no doubt, taken some flak. But, as one economist – who along with five Nobel Laureates has endorsed Jimmy Stewart is Dead – says: "It's scarier than anything Stephen King ever wrote." We have been warned.

Archie and Adam are just the pair to put ITV's prima donnas in their places

Ken Barlow had better watch his back. As a relic of the 1960s, the ageing lothario of Coronation Street could be one of the many targets for ITV's dynamic duo, Archie Norman and Adam Crozier. Chairman Norman brought in his old-friend Crozier as chief executive last week to much fanfare.

It's a good move: Crozier, if nothing else, is audacious: when in charge at the Football Association he brought in Sven-Goran Eriksson as England's first foreign manager, while at Royal Mail he cut 60,000 staff to turn losses into profits.

Few doubt that beside Norman, Crozier will be just as radical at ITV. Already there is talk of charging for ITV's secondary channels. Fears that Crozier and Norman are not the right guys to run what is ultimately a creative business misses the point: one of ITV's past problems has been too many thrusting prima donnas brooking no interference.

No doubt they would rather that John Cresswell had stayed in charge. Cresswell himself was "playing a game of poker", according to one of my sources, hopeful he would land the top job even though he said he would leave once a long-term replacement was selected.

A media man through and through, Cresswell became interim chief executive after the Tony Ball fiasco. Apparently everyone was telling Cresswell that ITV wouldn't find someone of his calibre and that he would eventually get it.

If Cresswell was gambling, he lost – but his hand was strong enough to justify the bet. As ITV's viewing figures and advertising revenues have improved – mainly because of the X Factor results – so Cresswell's reputation has soared. Wouldn't surprise me at all if, when this or the next government finally confirm the privatisation of BBC Worldwide, auntie's commercial arm, Cresswell is offered the top job.

Start your day with The Independent, sign up for daily news emails
ebooksAn introduction to the ground rules of British democracy
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

SThree: Talent Acquisition Consultant

£22500 - £27000 per annum + OTE £45K: SThree: Since our inception in 1986, STh...

Recruitment Genius: Experienced Financial Advisers and Paraplanners

Negotiable: Recruitment Genius: This extremely successful and well-established...

Guru Careers: FX Trader / Risk Manager

Competitive with monthly bonus: Guru Careers: We are seeking an experienced FX...

Guru Careers: Investment Writer / Stock Picker

Competitive (Freelance) : Guru Careers: An Investment Writer / Stock Picker is...

Day In a Page

Lionel, Patti, Burt and The Who rock Glasto

Lionel, Patti, Burt and The Who rock Glasto

This was the year of 24-carat Golden Oldies
Paris Fashion Week

Paris Fashion Week

Thom Browne's scarecrows offer a rare beacon in commercial offerings
A year of the caliphate:

Isis, a year of the caliphate

Who can defeat the so-called 'Islamic State' – and how?
Marks and Spencer: Can a new team of designers put the spark back into the high-street brand?

Marks and Spencer

Can a new team of designers put the spark back into the high-street brand?
'We haven't invaded France': Italy's Prime Minister 'reclaims' Europe's highest peak

'We haven't invaded France'

Italy's Prime Minister 'reclaims' Europe's highest peak
Isis in Kobani: Why we ignore the worst of the massacres

Why do we ignore the worst of the massacres?

The West’s determination not to offend its Sunni allies helps Isis and puts us all at risk, says Patrick Cockburn
7/7 bombings 10 years on: Four emergency workers who saved lives recall the shocking day that 52 people were killed

Remembering 7/7 ten years on

Four emergency workers recall their memories of that day – and reveal how it's affected them ever since
Humans: Are the scientists developing robots in danger of replicating the hit Channel 4 drama?

They’re here to help

We want robots to do our drudge work, and to look enough like us for comfort. But are the scientists developing artificial intelligence in danger of replicating the TV drama Humans?
Time to lay these myths about the Deep South to rest

Time to lay these myths about the Deep South to rest

'Heritage' is a loaded word in the Dixie, but the Charleston killings show how dangerous it is to cling to a deadly past, says Rupert Cornwell
What exactly does 'one' mean? Court of Appeal passes judgement on thorny mathematical issue

What exactly does 'one' mean?

Court of Appeal passes judgement on thorny mathematical issue
E L James's book Grey is a reminder of how the phenomenon of the best-seller works

Grey is a reminder of how the phenomenon of the best-seller works

It's hard to understand why so many are buying it – but then best-selling was ever an inexact science, says DJ Taylor
Behind the scenes of the world's most experimental science labs

World's most experimental science labs

The photographer Daniel Stier has spent four years gaining access to some of the world's most curious scientific experiments
It's the stroke of champions - so why is the single-handed backhand on the way out?

Single-handed backhand: on the way out?

If today's young guns wish to elevate themselves to the heights of Sampras, Graf and Federer, it's time to fire up the most thrilling shot in tennis
HMS Saracen: Meeting the last survivor of a submarine found 72 years after it was scuttled

HMS Saracen

Meeting the last survivor of a submarine found 72 years after it was scuttled
7/7 bombings 10 years on: Martine Wright lost both legs in the attack – she explains how her experience since shows 'anything is possible'

7/7 bombings 10 years on

Martine Wright lost both legs in the attack – she explains how her experience since shows 'anything is possible'