Imagine for a moment that the TSA announced it was going to remove all X-ray machines from airports and instead limit carry-on bags to the size of a small briefcase. Would you feel safer? Any Jack Bauer fan knows it’s not the size of the bag but what’s inside that should worry us.
That is our main concern with Arnold Kling’s NR piece “Break Up the Banks.” The problem is not bigness but blindness, and it applies to the entire financial sector.
First, the good news. As a respected economist with impeccable libertarian credentials, Kling is just the guy to deliver a message free-market conservatives desperately need to hear: Banks, and especially federally chartered banks, are not free-market institutions. “Just deregulate” is not a satisfactory answer to the bank problem any more than it is to, say, the lawyer problem.
Deregulating lawyers eased the path to litigation and so expanded the power of the courts over our lives. Similarly, so-called bank deregulation vastly expanded government power. Black-letter law was replaced with regulatory discretion, creating the most politicized banking system in U.S. history and inspiring such great crony-capitalist ventures as that powerhouse firm Fannie, Freddie, Dodd, & Frank.
The market unassisted can’t regulate banks because the banks, as the foundation of the credit system that supports the dollar, are inextricably intertwined with government. Our failure to grapple with this has left conservatives speechless on financial reform. Our admirable instinct to “just let the market do it” has put us in a box. Kling shows us the box.
Alas, Kling’s analysis falls apart with his vague, poorly supported claim that it was the sheer scale of the banks that made them dysfunctional. The problem goes much deeper. Both the mortgage crisis and the bank panic it precipitated were overwhelmingly crises of lost information.
Markets are made of minds, thinking. But public securities markets, even at their best, have always tended to be rather mindless: speculative, frantic, self-reflexive trading centers untethered to serious analysis of value. Adam Smith saw this; so did the old masters of investment analysis such as Benjamin Graham (Warren Buffett’s teacher), who regarded the stock market as psychotic.
As with a mental patient who sees things that aren’t there, the psychosis is rooted in bad information. Securities markets treat highly complex firms almost as if they were bushels of corn, making billion-dollar trades on the basis of the sort of minimal formalized information one uses to buy or sell a grain future.