'Heads I win, tails you lose' banking

Economist Richard Felson told BloggingStocks that the above is the outgrowth of depositors insurance and federal support for banks, among other factors. "I'm not saying that all banks and thrifts operate this way, or all the time, but the sad fact is that, for the better part of a century we've seen this cycle of too-aggressive lending, followed by government bailout, followed by aggressive lending or lending that skirts the rules, followed by bailout," Felson said. "And this latest bailout, for bad bonds, questionable securitization schemes, and mortgage defaults, is going to be massive. The taxpayer has reached his or her limits."

What the U.S. cannot do, Felson says, is eliminate depositor insurance as "it's one of the bedrocks of depositors' faith in the system." Moreover, just the opposite appears to be the trend, at least for one year, with the U.S. Treasury Department's extension of depositor insurance to money market accounts, as part of the U.S. government's plan to bolster the financial system and prevent an economic cataclysm.

But neither can the same system remain in place that, many believe, "has encouraged certain banks to engage in reckless lending," Felson said.

The solution, in Felson's interpretation? Two-tier banking. Briefly, Felson argues that there should be two levels of banks. The first: private banks that invest in commercial operations, offer higher interest rates and have other exotic investment products, but offer no government insurance on deposits.

The second: community-based banks that invest primarily in conventional mortgages, offer very low interest rates on deposits, have no high-risk/high interest rate investments, but offer government insurance for depositors.

The community banks would also feature below-private-market salaries for executives, perhaps supplemented with a portion of benefits paid by the federal government. "But there would be no $500,000 per year executives in these banks, only modest executive salaries," Felson said.

The advantages of the two-tier system? "Fewer, costly federal government bailouts," Felson said. "The private banks could continue to invest in speculative, vacation condo complexes in suburban Las Vegas, it's just that when those projects fail, it will be on the stockholder's dime, not the taxpayer's."

Banking Sector Analysis: The FDIC-based system has been a hallmark of the American banking system, one that's enabled the typical citizen in the U.S. to sleep well at night, but perhaps it is time to revisit a two-tier banking concept. Here's hoping U.S. Rep. Barney Frank, D-Massachusetts, and chairman of the House Financial Services Committee, can enact the aforementioned reforms when the new U.S. Congress convenes in January 2009.