08/11/11 Reform the Banking Industry


The reason why banks got so big in the first place is because of the disproportionate power they began to wield over the political system.

The influence has had pernicious effect on both major parties, and all branches of Government.                 

The truth is governments can no better run banks than bankers can hold national elections.  And yet, this is what seems to be happening. To wit the Obama administration’s recent wrangling over how to approach the financial community for a hand out without giving away the store .

The solution seems pretty clear.  Banks need to be regulated in a way that makes them either less big, less risky, or both.  If, to use the banking regulators euphemism, some institutions are “systemically important,” then they should be regulated like public utilities have been: they are allowed to earn a certain enumerated profit margin over cost, and submit to local political control.   That will make them less sexy and banking less prestigious.

But there is a solution for those who want to innovate.  Private individuals and institutions can lend each other money on an arms-length basis, without the use of government leverage or Federal guarantees to depositors.

This is true capitalism, when the risks are fully born by the parties to the transaction and not the broader society.