When to let a bank fail

@ Methinks | Jul 16, 2009 11:18:34 PM - I hope you see this.

I second Russ - don't give up! I think your analysis is spot-on and more people need to realize that's what is happening. You write better that I do, so please keep trying.

My gut answer is 'always.' ;-)

Bailouts, and various kinds of government subsidy contribute to building a gap of sorts in the overall economy.

Where there's supposed to be solid foundation with bricks, mortar, framing, etc, there are actually huge gaps in the economic infrastructure caused by the artificial support of the government. Not just from bailouts, but the more common and everyday subsidy and a whole host of regulations that retard competition.

So, back to the building analogy, where there's supposed to be four by four framing connected to a solid foundation, in reality there's only stucco covering a huge gap in the wall where no undergirding exists. It looked like a solid wall that might be supporting its portion of the building, but of course it was a structural liability.

The bailouts are mostly a distraction. The government has controlled the financial industry since at least 1913; or maybe its the other way around.

The answer is to accept for now that these are essentially government enterprises, and strive for regulatory reform that will lead toward full privatization.

And the way to do that is remove the monopoly laws and open up the market to a parallel clearly-identified free banking system.

Vikingvista,

As usual, good stuff. The chance of this happening is slimmer than than the chance that I will be able to successfully travel in time tomorrow. Somehow, I think you already know that.

Once regulators are charged with an industry, the goal is to expand their power. Full privatization will make them redundant.

Plus, the public inexplicably has enormous faith in government and no faith at all in private enterprise. I think I've finally figured out why - at least in part. Regulation creates distortions and reduces competition. Protected from competition, the regulated companies no longer have to serve the customer to survive and they actively lobby the regulator to write regulation that raise costs, limit choice and generally create a horrible situation for the customer and more revenue for themselves. Since it is the company and not the regulator or the regulation that is most visible to the customer, the nominally private company and "profit motive" is blamed for their eroded position. Of course, it's true that profit motive drives the companies in a regulated industry to capture the regulator and this capture creates the problem for the customer, but the customer rarely understands this not so subtle subtlety and begs for more regulation which then erodes the customer's position further, which he then blames on the evil companies, which leads to begging for more regulation...and so on.

I give up.

Methinks,

Don't give up. Help those around you see the subtlety...

The profits encourage risk-taking. The losses encourage prudence.

Exactly.

Systemic failure in the market?

If there were such a thing, it would occur every time a donut shop went out of business, setting off an endless cascade of falling businesses.

It could only occur under "government," which alone has the power to force its mistakes on everyone.

Yet, many Austrian School economists, including Rizzo, O'Driscoll, and Ebeling, judging from my recent discussions with them at ThinkMarkets, which, by the way, have gotten me barred from it, and Leland Yeager, in his great piece in Liberty this month, appear to favor countercyclical intervention. But their shot of Vitamin I (inflation) would just be more of the same old poison. Whatever caused falling prices, technological progress or the downward phase of an interventionist business cycle, they are still essential signals of the market, and tampering with them will just keep the market going in the wrong, unsustainable direction.

What is needed is to halt all intervention and let the market find its own way back.

Posted today at ThinkMarkets

Richard Schulman Says:

"Keynesian economics has been debunked for decades now; so have the claims of the Fed to being capable of managing a stable value dollar and not creating periodic economic crises. What has been debunked in theory needs to be buried in reality.

When are Austrian-school economists going to vigorously make the case — here and elsewhere — that the Fed’s currency monopoly should be ended?

While there are many different proposals presently in circulation, the best resolution of the theoretical controversies would be to just let currencies representing the various proposals flourish — be they gold or commodity backed, fiat, fractional or 100% reserve-based — and let the market pick the winners.

Shouldn’t this forum be more active in forwarding this idea, so compellingly motivated by Hayek several decades ago?"

Congratulations, Mr Schulman, that says it all.

And hope you don't get banished for it.

Exactly.

By the way, if you've been following the discussion at ThinkMarkets between Mr Schulman and Prof O'Driscoll, you will see that the latter is a master at saying nothing.

"The government has controlled the financial industry since at least 1913"

The government has regulated it. It hasn't exercised complete control.

Methinks:

My take on why people trust government more than private enterprise is similar to what you were stating in the visibility of the private enterprise.

We don't pay for our public services directly, but through taxes of course, and people really do tend to forget that they're not free. Even when reminded, it doesn't sink in.

Private enterprise however, the public is reminded daily by their direct interaction that they are contributing to the profits of other people.

Profits are bad because of our human nature towards envy. Since I don't have to pay the policeman directly, I don't direct my envy towards him, even if I know that he's making a good living at taxpayer expense.

The reason consideration should be given to government bailout or controlled failure of, particularly depository, financial institutions is that these institutions--by way of Federal Reserve monopoly control, monopoly legal tender laws, FDIC, and a host of other regulations--are at best private franchises of government institutions. Allowing these institutions to fail is much like letting the Defense Department fail.

The answer is to accept for now that these are essentially government enterprises, and strive for regulatory reform that will lead toward full privatization.

And the way to do that is remove the monopoly laws and open up the market to a parallel clearly-identified free banking system.

"the public inexplicably has enormous faith in government and no faith at all in private enterprise."

All I'm saying is that we introduce a little competition, and give people a private option. If you like your government bank and you want to keep it, you can. ;^)

"tampering with them will just keep the market going in the wrong, unsustainable direction."

A step in the right direction would be to get them to at least admit that any benefits from intervention are for the few only, at the expense of the aggregate economy. If we can get people to realize that all government activity including bailouts are always a net EXPENSE, that would at least be progress.