Dubai World Default

As Dubai World’s default shows, the financial crisis is far from over. Surprise, surprise, among the creditors with the biggest exposure is Royal Bank of Scotland – a reminder that reckless lending by supersized banks was a global phenomenon. Taxpayers are entitled to ask for a radical reform of banking regulation to ensure they will never again have to foot huge bills for financial folly.

Limited Purpose Banking, which I discuss in my forthcoming (February 22, 2009 with Wiley and Sons)book, Jimmy Stewart Is Dead -- Ending the World's Financial Plague Before It Strikes Again, provides a credible and simple solution to our financial debacle.

The risk of preserving the existing system are much higher than the President's economic generals are acknowledging. With some $24 trillion in contingent liabilities (this, according to Neal Barofsky -- Congress' TARP watchdog), a run on the banks and insurance companies would require Uncle Sam to print massive sums of money, which would spell hyperinflation, which would mean that anyone who didn't run to get his money out of the banks and insurance companies (by surrendering his cash surrender policies) would end up with worthless paper. I.e., Uncle Sam's FDIC insurance and other guarantees are, in fact, a hoax. They are promises to pay dollars, not guarantees of purchasing power.

Thus a run on the financial system can be fully self-sustaining and rational from the perspective of any individual. All we need is a match to set off this conflagration. Let's hope we implement Limited Purpose Banking before that match is lit by one of a whole range of possible ignitions (e.g., China dumps U.S. Treasuries, the dollar falls 30 percent over deficit fears, U.S. unemployment jumps 3 percent).