We need a new banking model; 3-6-3 rule redux
When I was wee lass, banking went like this: the S & L on the corner would pay 3% on savings accounts, lend it out at 6% for home mortgages, and the bank guy would be on the golf course by 3 o'clock (hence, '3-6-3 rule'). Very predictable, very staid, very boring, very reliable, and modestly profitable: there were no such things as derivatives, and the bank held the paper until it matured.
BERNANKE HAS MESSED THIS ALL UP
When the interest rate is near zero, and the real interest rate is negative (inflation is higher than the returns on Treasury paper), this model does not work very well. True, there are a few brave souls (local banks and credit unions) still using this model, and I applaud them, but what about the financial mega-stores?
TOO BIG TO FAIL IS TOO BIG
Quite simply, banks should be allowed to fail, and this should not be so huge as to take the Fed, Treasury, the US economy, and the US taxpayer with it. If not, break them up into itty-bitty pieces. I am tired of hearing that this will put our banks at a competitive disadvantage; a brief glimpse at the EU banking system will reinforce my opinion.
BRING BACK THE 3-6-3 BANK
Well, just about any banking model would be better than what we have right now. I would like to see the old-style banks return: the place where we deposit our paychecks and get our home loans are entirely separate from the place where you buy IRA's, hedge funds, annuities, insurance, and stocks and bonds. It is understood that once you take your money out of the 3-6-3 bank and into a financial supermarket, your money is no longer safe or insured.
You might suspect that I am advocating a return to Glass-Steagall, but I am not. This new bank would be obligated to keep its mortgage paper and to not sell them (yes, I know, this would reduce the amount of home mortgages written), and are prohibited from any financial activity that is not directly related to deposits or mortgages, plus no leverage. How we would regulate the new financial supermarkets is a whole different issue (and tell Helicopter Ben to knock it off).