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Banking Reform Proposal

Summary of the above link: The banking system should be remade in the image of Limited Purpose Banking (LPB). LPB advocates modeling the entire banking industry after the mutual fund industry. Banks would manage these funds for a fee, but only consumers and investors would own shares in them. For example, if you wanted a checking account, you would buy shares in a mutual fund where each share was always worth a dollar. You would be able to redeem this money at any atm, or use a debit card against your share balance. If you wanted to invest in commercial mortgages, you would buy shares of a mutual fund for that purpose. The fund is technically its own corporation with its own shareholders separate from the banks. The fund would invest your money, and any gains or losses would be reflected in your share’s price. You take as much or as little risk as you want, and banks are exposed to virtually no risk because they just earn management fees and do not have any connection the actual assets.

via Banking Reform

This is a very interesting idea — it would drastically change the banking industry and the way banks operate today. However, the mutual fund industry has a host of problems as it is. Many funds are built on unrealistic expectations carefully cultivated by marketers, leading many consumers to chase returns by frequently switching funds, always pulling their money in and out of the wrong place at the wrong time. The consumer education neccessary to make this happen would be enourmous. Many americans can barely handle the digital TV transition, let alone an extremem makeover of the banking system.