Wednesday, October 24, 2012

A Free-Market Case for Ending Too Big to Fail

In the Daily Caller, I explore a free-market argument for ending Too Big to Fail:
The impetus for ending TBTF would not be to punish Wall Street but to restore it. In the current situation of opaque and indefinite government support, no one knows who’s going to be the next Lehman Brothers (a big bank that was allowed to fail). Some well-connected players may feel free to gamble under the belief that Washington will back them if those bets go bad, but one or more might be wrong in that assumption: their lucky firm could be the one Washington decides is to be the sacrificial lamb before bailing out other big banks. The liquidation of that firm could wipe out the wealth of its shareholders and also cause many traders to lose their jobs. If this bank had not assumed that it would have government protections, however, it might have acted more prudently. Fear of failure is one of the greatest sharpeners of prudence in a capitalist marketplace; by putting the safety net of government bailouts under certain banks, we at once encourage them to be more reckless and to make less sound investments. This is a bad outcome from both a civic and an economic perspective.

Republicans would benefit politically from ending TBTF. Such an enterprise would appeal to popular dissatisfaction with the banking system. But there is an even more pressing reason for trying to achieve this aim: ending Too Big to Fail would be a defense of the free market. In 2008/2009, the banking system came closer to being socialized than at any time since the Great Depression. If we are interested in ensuring a market-oriented banking system, we must apply the principles of the market to the banking system.
 Read the rest here.

On a similar note, the cover story of this week's Weekly Standard explains the various ways in which Dodd-Frank accelerates the concentration of capital in a few giant banks.

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