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LPB transforms all banks into mutual fund holding companies that do one thing only – issue 100 per cent equity-financed mutual funds. These mutual funds (unit trusts) give investors shares, not IOUs, in exchange for their money. The mutual funds then invest these monies in the securities in which they specialise, such as mortgages, small business loans, corporate stock, sovereign bonds and cash.
In moving money from those who buy the mutual funds’ shares to those who sell securities to the mutual funds, mutual funds act like small banks. But they are small banks that cannot fail because they never borrow. Conduct all financial intermediation through LPB mutual funds and you have an entire banking system that never fails. Add a regulator that verifies and discloses on the web, in real time, all the securities held by the mutual funds, and you have a banking system that people can trust.
Mutual fund banking already accounts for 30 per cent of all intermediation in the US. It is also very similar to the two-century old covered bond mortgage system in Denmark, Germany and Sweden.
Under LPB, bank runs threatening the payment system are a thing of the past. The payment system is based on cash mutual funds. Cash mutual funds hold only cash and are naturally backed to the buck (or the euro). All other mutual funds fluctuate in value and make no promises they cannot keep.
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