A response to Arnold Kling’s post.
Arnold Kling, one of America’s premier libertarian economist, wrote an article for the National Review advocating breaking up the banks. This engendered a response from Andrew Redleaf and Richard Vigilante, who advocate greater disclosure under the same regulatory regime. Dr. Kling responded back, and gave this really good response:
In short, a “transparency” law is neither necessary nor sufficient to reform banking. It is not necessary, because the market could arrive at the right amount of transparency, which is almost certainly going to be less than 100 percent transparency. It is not sufficient, because even with transparency, creditors will lend excessive amounts to risky banks as long as they expect to be bailed out. To reduce the probability of bailouts, and hence to keep institutions that lend to banks on their toes, I think it is necessary (although not sufficient) to break up big banks, so that they have less political leverage.
This is my response that I posted on his blog:
One of the inferred answers I got from reading the piece from Redleaf and Vigilante is that they actually blame the banks for being too intertwined with the government:
“The market unassisted can’t regulate banks because the banks, as the foundation of the credit system that supports the dollar, are inextricably intertwined with government. Our failure to grapple with this has left conservatives speechless on financial reform. Our admirable instinct to “just let the market do it” has put us in a box. Kling shows us the box.”
I partially agree with this, which is why Dr. Kling’s response is appropriate. Our problem with our banking system, as it is with so much of our economy, is that we are forcing companies to serve two masters: the government and their consumers. Unfortunately, they cannot serve both because each one has differing objectives (not to mention those of the companies themselves are profit-maximizing firms). The solution is to eliminate one of these masters and go with the one the provides the most optimal benefit for society as a whole.
On its face that tells us which master has to go: the government. Politicizing banking or socializing loss while privatizing reward is what put us in this situation that we are currently in and the government’s solution is to give us more politicized banking and socialization of loss.
As Dr. Kling pointed out, there is no reasonable expectation that the banks would want to disclose all of their information and, if they did, what could any of us do with that information? There is a such a thing as too much information. We as consumers of banking services just need to know the answer to one simple question: will my money be safe at this bank? Any other information that we receive will just complicate that question. All of the government programs that we have put in place: FDIC insurance, loan guarantees, bailouts of banks, reserve requirements, etc., make it less likely that we can get a satisfactory answer to that question because the banks themselves have removed a lot of their own risk assessing tools because they know they have the government as a backdrop. (just an aside, this is also the government’s solution to healthcare. If we don’t like this for our banks, do we really think that we will like it when it comes to our healthcare?)
To sum up, Redleaf and Vigilante essentially are not “checking their premises” because they don’t recognize the inherent contradiction between having the bank serve their consumers and the bank follow the wishes of the government. After all of the regulations we have passed over the years we have not made banking more stable, but are making it more destable and more volatile. Eliminate the government from banking and then allow the market to figure things out as it goes along. “Progress” can wait.