A popular solution for the credit crisis in right wing circles is forcing banks to duration match their assets and liabilities--i.e., do away with interest bearing demand deposits (aka savings and checking accounts). Why is this a bad idea?
1. It would involve a massive, massive credit contraction. Hello, Great Depression.
2. Actually matching pool credit to particular loans would be a much more expensive business than the current banking system.
3. The expansion of credit has historically enabled a lot of things we like, such as homeownership and entrepreneurship.
4. How many people want to pay the bank to hold onto their money?
5. A smaller credit system will not ultimately prevent inflation/deflation. Without interest bearing accounts, savings become a wasting asset.
6. To the extent that it does prevent inflation, this is not necessarily a good thing--a little inflation greases the labor market, mitigating the effects of demand shocks.
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