A Positive Program for Laissez-Faire?

by Mario Rizzo

I am deeply impressed by Henry Kaufman’s opinion piece in today’s Wall Street Journal. I think he makes a very good case for  breaking up financial institutions deemed too-big-to-fail as opposed to the regulatory alternatives being contemplated. As much as it pains me to think about the government regulating the size of any firm, this may be an option that is far, far better than the politically feasible alternatives.  You can imagine the horrors that are out there being proposed.

Many of my readers will disagree but I am very willing to be persuaded otherwise.

17 thoughts on “A Positive Program for Laissez-Faire?

  1. If the choice really is between a socialized banking sector and smaller firms, I think the libertarian answer is pretty clear – smaller firms. How damaging the breakup is an empirical question that depends on how much the returns to scale are internal to firms. It’s pretty clear that concentration financial services is efficient based on the concentration in New York, London, Dubai, etc. There may even be additional political benefits because no one firm will be able to influence politicians as much as the old ones were able to. Populist anger will likely be appeased and perhaps attention will move to other areas. In time, if big firms are efficient, they’ll grow back. Socialism however won’t heal.

  2. I,too,am deeply impressed with Kaufman’s piece. He hit the nail on the head both about the Fed and too-big-to-fail. The size and complexity of the major financial firms do not reflect market forces, but public policies. Those waxing eloquent about the joys of the financial supermarkets need to consider the costs these financial monstrocities impose on the economy and polity. Gary Becker and others have suggested progressive capital requirements with respect to size as an alternative to using antitust.

  3. It seems to me that the problem isn’t that they are too big to fail, but interference by the decision makers in government. This perverse incentive alone seems to provide the willingness to take huge amounts of risk. You take away the ability to prop up a disfunctional organization it will no longer act in such a manner. Making businesses smaller does not take away the ability of the government to interfere, but merely adds another layer of meddling and political shenanigans.

  4. I think I would prefer the smaller firms poison if I had to pick. On the other hand, could the fear of regime uncertainty foist itself on investors? Think about it, will this help bring about an environment where there will be less investment over the idea of too-big-to-exist? We all know how Washington is, they can switch from too-big-to-fail to too-big-to-exist? I smell a lot more antitrust cases in the future if something like this is implemented. That’s just my pessimism, what do you guys think?

  5. Excessive risk is the key issue, but is inextricably tied up with size. These firms do not grow to size for economic reasons. And the government doesn’t then “interfere” because of their size. The banks grow large to get the government protection afforded large firms. With government protection, excessive risk taking is then possible. I agree that antitrust is a hamfisted way of approaching the problem.

  6. I hope you weren’t impressed by his ending:

    Our financial system is at a crossroads. We can either succumb to the forces that are shifting markets toward greater government back-stopping and socialization. Or we can create a structure in which no institution is too big to fail, and a financial system that is supervised effectively by a modernized central bank.

    By all means, let’s have a system in which no institution is too big to fail.
    But that implies free banking and a gold standard, not “a modernized central bank”
    with “effective supervision,” whatever that is.
    I’d like to see an op-ed in the WSJ whooping up the abolition of the Fed.

  7. Mario,

    that reminds me of the discussion we had. I agree, it would have been better to do that and not need intervention in the future – even though it seems kind of ORDO 🙂

  8. “If the choice really is between a socialized banking sector and smaller firms…”

    It probably is.

    “It’s pretty clear that concentration financial services is efficient based on the concentration in New York, London, Dubai, etc.”

    Well, very big firms are very efficient at lobbying government for very big favors!

  9. “Ordoliberalismus does not exist in the United States. It is a foreign idea.

    Are you related to Walter Eucken?”

    Hahaha.. 🙂

  10. Breaking up the big banks sounds like an idea as old as Teddy Roosevelt. Antitrust is an American obsession that other countries find hard to understand. When JP Morgan set up the trusts, he was simply creating something in the US that was already in place in Germany, France, and later Japan. Oligopoly and the cartel is the normal state of affairs. You really should pay some attention to Schumpeter, not Milton Friedman and the entire Chicago tradition.

    In recent years, the myth of the rational market has caused enormous damage. Asset markets are random because they are inherently unstable, not because they are perfect. If you want to address an issue that has real public appeal, try executive compensation. The notion that CEOs are paid their marginal product is an illusion that must be dealt with by those ultimately responsible, economists.

    Antitrust is as hopelessly utopian as Marx. It brings up a vision of American life that disappeared with the frontier.

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