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A way to fix the financial system that might actually get implemented

Via Arnold Kling at the EconLog blog, is his plan to fix the US financial system. It applies with equal force to the UK, I think, apart from one or two specifics. It is not the sort of more radical measure that the likes of Kevin Dowd has favoured, but it is pretty good and it actually is something I could envisage being attempted. I even think it might be possible to contemplate a partial breakup of the banking system to avoid a “too big to fail” issue although I would caution that bigness, per se, is not the problem. What is the problem is the fractional banking system as it now operates under the moral hazard regime of a central bank, legal tender laws, and the rest.


“The overarching principle I have is that we should try to make the financial system easy to fix. The more you try to make it harder to break, the more recklessly people will behave. By reducing the incentives for debt finance and for exotic finance, you help promote a financial system that breaks the way the Dotcom bubble broke, with much lesser secondary consequences.”

Anyway, something for the politicians to ponder.

Here is a related post of mine a few weeks ago about the need to push the case for free market banking even though the details can be sometimes overtaken by events.

7 comments to A way to fix the financial system that might actually get implemented

  • Anyway, something for the politicians to ponder.

    Not really and I will tell you why: the ‘make it easier to fix’ option requires less constant intermediation by politicians and if there is any thing that politicians cannot abide, it is something that makes them less central to an issue… any issue.

  • PersonFromPorlock

    The object of economic regulation isn’t stability, fixability, or anything else to do with economics. It’s to channel money from either the government or government-coerced customers to businesses and interest groups which have bought their politician.

    There may be some interest in economic virtue at the margins, but the core of the program will always be payback for payoffs. Virtue will not be allowed to interfere.

  • Paul Marks

    I will ignore the real issue for awhile (more of that further down) in order to deal with the plan itself.

    It is not very good:

    Why Federal “housing vouchers” – that sounds like (sounds like – because it is) another corrupt scam that (for example) might soon be turned into a securities bubble and traded all round the world.

    After all the very politicians (and media people) who are now denouncing Goldman Sachs for trading housing backed fiancial products are THE SAME PEOPLE who backed the “affordable housing policy” (i.e. the policy of lending people money to buy houses they could not afford – and financing the project by turning the mortgages into securities and passing them on to…..) and who STILL BACK THE AFFORDABLE HOUSING POLICY (for example by endless bailouts of people who can not pay for the houses they should not have bought).

    In fact they also pushing the “Cap and Trade” scam – where (at the Chicago Climate Exchange) “climate credits” will be turned into securities and ……….. (oh we know the rest).

    Still back to the plan.

    Why “10 banks into 40 banks” – why not 9 banks into 41 banks?

    It is ARBITRARY – it has no connection to any principle at all.


    Every time the housing bubble looked like it was going to pop the Federal Reserve came along and pushed more money at it.

    Just as with all the other bubbles.

    A policy that leaves the Federal Reserve in place is a waste of time.

    “But Paul it has to be a politically possible plan”.

    Now we come to the real issue – the issue I did not deal with at the start (because I decided to examine the plan first).

    PersonFromPorlock is correct that most politicians (and so on) are corrupt – and therefore this (or any other) plan would only interest them if they benefitted from it.

    Anyone who thinks that most Senators or Congressman are interested in “doing the right thing” is demented. So there is no point in presenting a “politically possible plan”.

    BECAUSE NO NON CORRUPT PLAN IS “POLITICALLY POSSIBLE”. One will have to bribe (or threaten) to get any Bill pass.

    So one might as well present a 100% pure libertarian policy – as such a policy is no less unlikely to be enacted than the one presented here. If politician X had to be bribed (or threatened) to get a policy into effect – then it might as well be a good policy as opposed to a half hearted policy that does not really deal with the main issues

    However, it is worse than this.

    Certainly most politicians are corrupt – for example Barack Obama has been involved with the corrupt “Chicago Climate Exchange” scam for years (indeed he was on the board of the organizations that created it), just as he was personally at the heart of the “affordable housing” scam also.

    The man is a scumbag (as are the “mainstream” media who cover things up for him) – but Barack Obama (and some other politicians) are a lot WORSE than scumbags.

    There is the matter of ideology – of political principles. Oh yes Senators and Congressmen do have them (even some of the most corrupt also have real principles – Barney Frank is an obvious example).

    When I use the language I am about to use people assume that “I do not really mean it” or “I do not know what I am saying”.

    But I do know what I am saying – and I do really mean it.

    Barack Obama is not just a corrupt scumbag – he is also something that is a lot worse.

    Barack Obama is also a life long Marxist dedicated to doing as much damage to the West in general and the United States in particular, as he can. AND HE IS FAR FROM ALONE IN WASHINGTON OR OTHER CAPITALS (it is later than people think).

    So, J.P., WHY would Barack Obama (President of the United States) support this plan?

    How does help destroy the “capitalist” United States, and the “capitalist” West?

    If it does not help in the task of destroying “capitalism” (i.e. civil society) Barack Obama will not be interested in backing it.

    So it is not “politically possible” – no more than getting rid of the Federal Reserve (and the rest of a libertarian agenda) is “politically possible”.

    So we might as well say what we really want (such as getting rid of the Fed), as that is no more unlikely than this plan.

    Any rolling back of government first depends on sending these people back to the Hyde Park area of Chicago (and so on).

    Corrupt politicians are hard enough to work with – but corrupt politicans who are also IDEOLOGICAL ENEMIES OF THE WEST are impossible to work with.


  • Paul Marks

    In case anyone (perhaps a young and innocent person) is thinking “we will get past the politicians by explaining things to the newspapers and broadcasters – and get the people to put pressure on the politicians”.

    The “mainstream” media (both print and electronic) is both corrupt (financially and intellectually) and full of collectivist ideology.

    “But they are privately owned Paul”.

    It makes no difference (with a few exceptions) – as the msm are filled with the same sort of “educated” people that dominate the Administration and the Senate and House of Representatives.

    The msm will not report even the most blatent corruption – if the corruption concerns their ideological leaders and ideological causes (such as Barack Obama and the Chicago Climate Exchange).

    And the msm has an ideology that blames all problems on the “free market” or the “unregulated market”.

    This ideology is proof against all rational argument and against emprical evidence.

    For example, showing that the high cost of health care is caused by government intervention (regulations and schemes) did not stop the msm (Time, Newsweek, Economist, most of the major newspapers, ABC, CBS, NBC and CNN) campaigning night and day for MORE government health regulation and schemes – WITHOUT LIMIT (by the way – that is why the supposed great gulf between “liberalism” and socialism is a sham in practice, as the “liberal” will always demand bigger government regardless of how big the government already is).

    On financial regulations – the usual suspects (Time, Newsweek, most of the major newspapers, the “free” broadcasters, plus CNN) will also demand even more government control -with their own doubts being (as the BBC put it “does it go far enough?”).

    If anything the American media (outside News International and a few talk radio companies) is even more biased and collectivist than the government owned BBC in Britain.

    There is no hope what-so-ever that the so called “mainstream” media in the United States will really repent – they are both utterly dishonest (they lie and cheat without shame) and totally twisted by collectivist ideology. IOn short they are much like the “education system” (the universities and so on) that produced them.

    One can only try and work round them – and hope for their bankruptcy.

  • In all the time you’ve been blogging at Samizdata, Jonathan, have you ever known a western politician – in any western country – to successfully deregulate (even partially) anything of serious consequence?

  • Johnathan Pearce

    Mike, well, during the time I have been aware of public affairs, which goes back to the early 1980s, I can remember examples such as the removal of exchange controls, for instance – a far-reaching change – deregulation of trucking and airlines in Europe and the US; the Big Bang deregulations of financial services in the mid-1980s in the UK; in the late 90s, we had the abolition of the Glass-Steagall Act which affected banking, and so on.

    In the current decade, no, I cannot think of a significant rollback of financial regulation or regulation on business. Not surprising, really, if you consider the ideological winds that have blown these past 10 years. But to say it is impossible to happen would be stretching that too far. There have been deregulations before, and there could be similar moves again. Much, of course, depends on whether the economic situation gets so dire that countries realise it is their only option for reform.

  • “if you consider the ideological winds that have blown these past 10 years. But to say it is impossible to happen would be stretching that too far. “

    I am not suggesting it is impossible, but it does occur to me that these “ideological winds” have been blowing (from where?) for a lot longer than just these last ten years irrespective of Maggie and Ronnie – neither of whom actually managed to halt the overall growth of the UK and U.S. governments.