He said, “I like this idea. In essence, it says that you cannot gamble with other people’s money, because, if you lose enough, the state will be forced to pay up. So, instead of having thinly capitalised entities taking risks on the lending side of the balance sheet while promising to redeem fixed obligations, financial institutions would become mutual funds. Risk would then be clearly and explicitly born by households, who own all the equity anyway. In this world, financial intermediaries would not pretend to be able to meet obligations, that, in many states of the world, they simply cannot.”
Hat tip to Lawrence Kotlikoff.