Prof. Stiglitz,



The fractional reserve system that requires a "deposit insurance" (which needs to be common in the case of the euro), is fundamentally problematic and only appropriate for periods of economic boom (i.e., growth), or parts of the world that can experience such growth at the expense of other parts. The expectation of perpetual growth, which requires perpetual increase of the money supply, which in turn requires perpetual increase of debt (because virtually all money is created as debt), is an illusion and a largely unstable system.



Perpetual growth cannot come from exploitation of increasing amounts of resources, because resources have limited quantities in the real world. The only place that perpetual growth would seem to be feasible, is the exploitation of perpetually deeper knowledge and this would be the, so called, knowledge economy. But, even in the field of exploiting the manufacturing of computer chips (which can fit exponentially increasing amounts of computational resources in fixed space), providing performance increases has become increasingly complex, actually stopping the course of delivering faster chips for any market. Generally, after some point, increasing resources cannot provide much more than the sum of the parts and, in fact, not even the sum of further increasing the parts is attainable, other than by diminishing the additive efficiency of these parts!



On the flip side, the fractional reserve system requires perpetual growth of the money supply and is ***very bad*** at managing deleveraging or even a stable size of money supply and associated debt, causing recessions. A system based on "deposit insurance", results in bad incentives for the banks and risky but high performing loans, which they cannot back in the inescapable bust that will come. At this point, not only the taxpayer has to bailout depositors (the "deposit insurance" may easily not suffice) and this way socialize the losses for privately taken risk. In addition, the losses, in the parts of the banking system that cannot be covered by the "deposit insurance", result in layoffs, dysfunctional banks that do not lend, further bailouts and public indebtedness, decreased consumption and, generally, recession or even depression. "The debt deflation theory of great depressions" (Irving Fisher, 1933) takes place in a larger or smaller scale.

[Read a very colorful presentation of the issue with deposit insurance here: http://www.positivemoney.org/how-money-works/advanced/how-do-banks-become-insolvent/#insurance]



The latter part of the financial system (the one that cannot be covered by "deposit insurance", but still has to be bailed out), which you believe in regulating (as I understand from other writings of yours), will not be tolerated anymore to exist at the expense of the poorer part of society. The costs are too great.



Instead of persisting in the dysfunctional fractional reserve system and, effectively, proposing broader socialization of banker losses, please get down to work and propose something better for the 21st century, that is not so inextricably tied to a notion of growth. The time of the growth doctrine is over and if economists do not rise to the level of the challenge, social initiatives will overthrow the financial system, along with any benefits it could have if it were functional.