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Which leads us to the better way: Limited Purpose Banking (LPB). To understand it, think about trucking companies. Were trucking companies to sell rights to future shipping at a guaranteed price, they'd make a bundle in the short run. But were gas and other trucking costs to soar, the companies and the economy would shut down. One such episode would suffice for the government to outlaw this kind of gambling by trucking companies, limiting them to their legitimate and critical purpose.

To keep banks from shutting down the economy, we propose a new regime. Under Limited Purpose Banking, banks would let people gamble, but they would not themselves gamble. Banks would operate exclusively as pass-through mutual funds. Specifically, they would be permitted to one and only one set of activities: create mutual funds, sell shares to these funds to the public, and use the proceeds to purchase assets. These mutual funds would provide as much credit as the economy needs, allow us to engage in as much risk-taking as we want, and provide maximum liquidity.

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