The financial system, King reveals, is still wired so that a handful of well-connected people capture the benefits from risk-taking while the entire society bears the cost. Complexity was once used to disguise the risk in the financial system. Now it's being used to disguise how little has actually been done to fix that system. Or, as King puts it, "Regulation has become extraordinarily complex, and in ways that do not go to the heart of the problem. ... The objective of detail in regulation is to bring clarity, not to leave regulators and regulated alike uncertain about the current state of the law. Much of the complexity reflects pressure from financial firms. By encouraging a culture in which compliance with detailed regulation is a defense against a charge of wrongdoing, bankers and regulators have colluded in a self-defeating spiral of complexity."


The first thing that King thinks must be done is to separate the boring bits of banking (providing a safe place to deposit money, facilitating payments) from the exciting ones (trading). There is no need, he thinks, to break up the existing institutions. Deposits and short-term loans to banks simply need to be separated from other bank assets. Against all of these boring assets, banks would be required to hold government bonds or reserves at the central bank in cash. That is, there should be zero risk that there won't be sufficient cash on hand to repay people wanting to flee any bank at a moment's notice -- and thus no reason for those people to flee.

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