Thursday, January 14, 2010

The Non-Reform Banking Club

Is the banking industry a subsidiary of big government? Read the Wall Street Journal article on why the banking industry hasn’t been subject to most radical reform.

Unsurprisingly (see previous posts about the “Classical Banking Club” on this blog), after governments’ bailouts, banks have rapidly returned to business as usual and the pressure for drastic reform seems to have cooled. The WSJ suggests a public choice explanation. Excerpt:

“Those who have had powerful positions in the public sector tend to move on to a later, and often more lucrative, role in banking.”

The French, who have an extensive experience of this system, also have a word for it: “pantouflage”, and one is reminded of the well-known theory of George Stigler: the capture of regulatory authorities by business interests.

This makes the current criticism of the alleged excesses of “liberal” (in the European sense), or “free market”, or competitive capitalism’s responsibility in the financial crisis, irrelevant. The current reality is one of a collusive, public-private, symbiotic capitalism.

The solution then is not to be found in an additional extension of the public sector and public spending, but in establishing a clearer frontier between public and private, business management and the bureaucratic-political class.

And take note: the new book by Laurence J. Kotlikoff, the leading proponent of “limited purpose banking” (or “narrow banking”, or else “classical banking”) is to be published in March. The title: “Jimmy Stewart is Dead, Ending the World’s Ongoing Financial Plague with Limited Purpose Banking”.

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