Big Should the Banks Be?
by Thomas E. Woods, Jr.
by Thomas E. Woods, Jr.: Conservatives
and the Elephant in the Living Room
Johnson has a piece at Bloomberg today that urges the Romney/Ryan
ticket to make reining in the big banks a major campaign issue.
(Thanks to Michael
Johnson makes some good points. (Forget his stuff about how great
Teddy Roosevelts trust-busting was, and that the firms in
question were exploiting the consumer; prices were falling
in the industries he targeted.) The big banks do indeed receive
market-distorting subsidies of various kinds, the result of which
is that they grow bigger than they would otherwise be.
Johnson is being too timid. The Federal Reserve System itself is
a subsidy to the banking system (what could be more obvious?), but
no mainstream economist is going to say so.
are being put forward, including raising capital requirements on
the largest institutions. This would force them to rest on a sounder
footing, the argument goes, and would counter the incentives to
be reckless that their too-big-to-fail status encourages.
I am not sure
exactly how to deal with the present condition of the banks apart
monetary reform, but I wouldnt rule out a proposal like
this one as a second-best alternative. No doubt some people will
claim that its a violation of the free market to impose common-sense
controls on financial institutions. But how so? These institutions
enjoy various forms of government privilege, and commercial banks
even have FDIC coverage. They are shielded from the free market,
which means their behavior is not the behavior they would engage
in on an actual free market.
To my mind,
the key point involves bearing in mind the argument
of Jeff Herbener, the economics professor at my Liberty
Classroom. Fiat paper money cannot be regulated by profit. The
production of all other goods in society is economized and regulated
by the principle of profit and loss. Fiat money, propped up by legal
tender laws, cannot be regulated by profit, because it is always
profitable to create more. The costs of increased production are
from this is that in the case of banks (which in our system can
create money out of thin air by making loans and crediting the borrower
with a checking account balance created out of nothing), we cannot
say that existing firm size is socially optimal. In any other industry,
there is a non-arbitrary test of firm size: the profit-and-loss
test encourages firms to reach a size that best satisfies consumers.
But there is no profit-and-loss test in the creation of fiat money.
As a result, firm size is arbitrary, and does not involve passing
a market test.
with permission from TomWoods.com.
E. Woods, Jr. [send him
mail; visit his
website], a senior fellow of the Ludwig von Mises Institute,
is the creator of Tom
Woods’s Liberty Classroom, a libertarian educational
resource. He is the author of eleven books, including the New
York Times bestsellers Meltdown
(on the financial crisis; read Ron Paul’s foreword)
Politically Incorrect Guide to American History, and most
© 2012 Thomas
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