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Competition is a Discovery Procedure

My friend (and co-blogger at Market Correction) Andy Morriss yesterday sent this excellent letter to the Wall Street Journal:


David Wessel warns that “the business model for big
U.S. banks is broken” and that if bankers don’t devise a better
model Rep. Barney Frank will (“How to unbreak the banks,” Jan. 10).
Mr. Wessel is correct that most banks’ business models are not currently
producing profits, but this is not cause for concern for anyone but their
shareholders. Markets are a discovery process, with firms and investors learning
as they try new ideas and react to changed conditions. What markets need is a
stable regulatory environment, in which every dip in the market does not
produce a new set of rules.  Unfortunately, there is little evidence that Rep.
Frank and his comrades on the House Financial Services Committee understand
this, making it virtually certain that they will rush to “solve”
the banking crisis with new legislation. The best assistance Rep. Frank could
offer would be to commit his committee to resolute inaction for an extended
period of time, offering both banks and investors the assurance that the rules
of the game would remain unchanged and allowing them to learn from their
experience in the market place.

Andrew P. Morriss
H. Ross & Helen Workman Professor of Law and Business
Professor, Institute for Government and Public Affairs
University of Illinois

I here emphasize only that Wessel’s suggestion that someone specialized in winning elections to Congress (such as Rep. Frank) could possibly develop a better business model for banks is ridiculous.  It’s like supposing that a crocodile, observing some misfortune visited upon an owl, could sensibly develop a better way for birds to behave.


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