by Morgan Ricks
January 09, 2014
The Dodd-Frank Act of 2010 is now widely viewed to be at best insufficient, and at worst a costly misfire. Members of Congress are considering new and different measures. Some have proposed substantially higher capital requirements for the largest financial firms; others favor an updated version of the old Glass-Steagall regime. A simpler approach—which we can call the “licensed money” approach—centers around the financial sector’s short-term debt (think maturities of under a year). The approach confines the issuance of broad money to the existing deposit banking system; it gives the Fed the power to cap the quantity of broad money outstanding and to adjust the cap in the conduct of monetary policy; it wraps broad money with a public backstop, making it sovereign and default-free; and it charges the banking system a fee for this public commitment. The licensed money approach is designed to render the financial system panic-proof.