The Boston University economist wants to take all the risk out of banking, hedge funds, and insurance companies. Some people are listening

Kotikoff, always outspoken, says the U.S. financial system is run by “miscreants” Dana Smith

ByPeter Coy

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The publishing world is too slow for Laurence J. Kotlikoff. On a frigid January day, the 58-year-old Boston University economist is pecking away at his computer keyboard in his airy office overlooking the Charles River. Kotlikoff’s forthcoming book, Jimmy Stewart is Dead, calls for a radical—and swift—reorganization of the financial system. So rather than wait for the book’s Feb. 22 publication date, Kotlikoff is e-mailing PDF versions to dozens of economists, journalists, and policymakers. “We have miscreants running the financial system left, right, and center,” says Kotlikoff. “Nobody is calling the [Obama] Administration to task and saying, ‘You guys are putting a Band-Aid on cancer.’”

Kotlikoff would drain the risk-taking out of commercial and investment banks, hedge funds, and insurance companies—turning them into boring, narrow intermediaries akin to mutual-fund firms. Instead of taking deposits and making loans, banks would connect borrowers and depositors with ultrasafe mutual funds created for those purposes. That would solve the problem of banks not keeping enough money in their vaults to pay depositors if they all wanted their money at once, a flaw vividly demonstrated to George Bailey, the character played by Jimmy Stewart in It’s a Wonderful Life (hence the title of Kotlikoff’s book).

Kotlikoff sounds so unrealistic that, like George Bailey, he could use a guardian angel to set him straight. But he’s beginning to catch the attention of powerful policymakers and the economists who have their ears. In Kotlikoff’s biggest coup yet, Bank of England Governor Mervyn King—Britain’s counterpart to Federal Reserve Chairman Ben Bernanke—urged members of Parliament to study the plan. In the U.S., Kotlikoff’s “limited-purpose banking” idea is finding support among economists across the political spectrum, including University of Chicago Nobel laureate Robert Lucas on the right and Columbia University’s Jeffrey Sachs on the left.

People who know Kotlikoff no longer marvel at his zeal. “Being Larry’s friend is not for sissies,” says Perry Mehrling, an economist at Columbia’s Barnard College, borrowing a line famously used about the hyperkinetic economist and Nobel winner Franco Modigliani. Kotlikoff attributes his drive to what he calls a healthy inferiority complex. “I never thought I was the smartest guy in the world,” he says.

A LEAP TO BANKING

Kotlikoff grew up with a twin brother and older sister in Pennsauken, N.J., near Philadelphia. Starting at age eight, he helped wrap packages during the Christmas rush at Kotlikoff’s, the family-owned department store in Camden. he credits a high school teacher for rescuing him from the “dummies track” in math with a summer of free private tutoring. the extra work helped him get into the University of Pennsylvania, from which he graduated with a degree in economics in 1973. Next came Harvard, where he earned a PhD in 1977. After brief teaching stints at UCLA and Yale and a job in the Reagan White House, he landed at Boston University in 1984 and hasn’t moved since, twice serving as department chairman.

Kotlikoff is not shy with his opinions. In the Coming Generational Storm, published in 2004, he and Dallas Morning News columnist Scott Burns advocated turning Social Security into personal retirement accounts. he backs replacing the federal income tax with a national sales tax. he served as economic adviser to the 2008 Presidential campaign of antiwar candidate Mike Gravel, who switched from the Democratic Party to the Libertarian Party in mid-campaign. And in his spare time? he runs a personal-finance software company called ESPlanner that helps people model retirement-saving strategies.

Jimmy Stewart is Dead is something of an intellectual leap for Kotlikoff because his expertise is in public finance, not banking.

How Larry Kotlikoff Would Fix the Financial System