Limited purpose banking will force lenders to use mutual funds as opposed to riskier investments, helping solve the current financial crisis, an economist said Monday.’ Boston University economics professor Laurence Kotlikoff proposed his solution to the current financial crisis at the College of Communication as part of the Great Debate before an audience of about 60. ‘ Professor Charles Calomiris of the Columbia Business School was expected to debate with Kotlikoff, but did not attend for unknown reasons. Finance and economics department Executive-in-Residence Mark Williams and School of Law Senior Fellow Robert Bench commented on Kotlikoff’s lecture instead. ‘ ‘I will debate myself,’ Kotlikoff said. ‘ Kotlikoff identified multiple ‘interconnected problems’ in the current U.S. financial crisis, including the housing market, investment risks and low interests rates. He said many failures by major financial institutions were due to ‘the inability to measure risks.’ ‘ Kotlikoff said the current financial system places too much responsibility in the hands of the U.S. government. The government, he said, has become the nation’s largest insurance provider and lender, an effective ‘Bank of the U.S.’ after bailing out companies such as AIG and Citigroup. ‘The government has made guarantees that it can’t satisfy,’ Kotlikoff said. ‘If everybody took their money out of banks tomorrow, the [Federal Deposit Insurance Corporation] would be short $6 trillion.’ ‘ The current system is dependent on a huge bluff by the government, he said. Kotlikoff proposed a system of limited purpose banking to restructure the financial industry. Limited liability companies would only be able to set up mutual funds that would be invested into securities. Mutual funds currently make up 33 percent of the financial system and withstood the recession the strongest, he said. ‘ ‘Under the current system, banks are at the craps table with chips of the public,’ Kotlikoff said. ‘We don’t need a system that will drive the country broke.’ ‘ Kotlikoff suggested a ‘Federal Financial Authority’ that could oversee the distribution of mutual funds to limited liability companies. Funds would be auctioned to the highest-bidding companies to create competition. ‘ ‘The public would get confidence in the system,’ he said. ‘Mutual funds can decrease but they won’t fail like other risky investments.’ ‘ Robert Bench, a financial regulator for 43 years, said Kotlikoff’s proposal was ‘directionally correct.’ He recommended a return to a segmented financial system that pulled the U.S. out of the Great Depression. The segmentation broke down due to global consolidation caused by technology and telecommunication innovations. ‘ ‘Consolidation succeeded until it was being abused and then it failed,’ Bench said. ‘A loss of control and multiple problems within the industry caused our current situation.’ ‘ Bench questioned the uncertainty of Kotlikoff’s proposal in terms of when the government could withdraw from its current system. Bench also said Kotlikoff should acknowledge the impact of his policy on the international economy. ‘ ‘How does government withdraw without collapsing?’ he asked. ‘Withdrawing too early may compound the problem and withdrawing too late could lead to inflation.’ ‘ Matt Williams, a risk management expert and consultant, said he was concerned about the transition of companies ‘too big to fail.’ He disagreed with Calomiris’s suggestion to make those companies bigger. ‘ ‘How do we transition people who are FDIC insured to transfer their assets into mutual funds?’ Williams asked. ‘ College of Arts and Sciences sophomore Todd Amaral said he viewed the debate as a fresh perspective from how the media addresses the crisis. ‘ ‘It was nice to see a different view of the issue compared to what I read or watch on TV on a regular basis,’ he said.’