Arnold Kling  

Big Banks

McArdle Advocates 376,537.65% ... Pyramid Power...

Tyler Cowen writes,

Obama proposes a new banking plan and everyone is commenting for instance here is Simon Johnson. The plan seems to involve limits on bank size and limits on proprietary trading.

In principle, I am against attempts by government to structure industries. But I take the view that the political economy of small banks is better than that of large banks. Large banks find it easy to persuade regulators that they are doing wonderful things and find it easy to persuade politicians that they need to be bailed out. Maybe small banks would find this task somewhat harder.

Agnostic of the gene expression blog writes,

If voters truly did not approve of antitrust practices that beat up on corporate giants, we wouldn't see it -- the offenders would be driven out of office...

This is a special case of what Bryan Caplan writes about in The Myth of the Rational Voter: where special interests succeed in buying off the government, it is only in areas where the public truly supports the special interests. For example, the public is largely in favor of steel tariffs if the American steel industry is suffering -- hey, we gotta help our brothers out! They are also in favor of subsidies to agribusiness -- if we didn't subsidize them, they couldn't provide us with any food! And those subsidies are popular even in states where farming is minimal. So, such policies are not the result of special interests hijacking the government and ramrodding through policies that citizens don't really want. In reality, it is just the ignorant public getting what it asked for.

Read the whole thing, which is one of the best expositions of the North-Wallis-Weingast thesis that you will find. "Agnostic" claims that humans developed an aversion to large economic institutions during the era of "natural states," when the ability to assemble a large coalition mattered more than producing quality goods at low prices. My view of banking is that we are still in the "natural state" mode, where political connections and cronyism matter more than price and quality.

COMMENTS (6 to date)
Loof writes:

“Only” is a lonely absolute that sticks out like a sore thumb. In this context it means governments are never, ever, not in one instance, bought off by special interests in areas that the public does not truly support. If this is the rational truth of sheep economics; it is another instance opposally thumbed by goat economics.

There are key differences between sheep and goat economics. It is easy to get sheep to follow a shepard and sheep are so simplistic its supereasy to get them to follow a wolf in shepard’s clothing. On the other hand, goats are smart and damn hard to lead. As such, there has never been a case of a wolf dressed like a goat or a goatherd.

While the Englishmen following John Locke certainly weren’t sheep; they definitely saw the Scots as a bunch of goats. The Scottish Enlightment led by Hume’s analysis, Reid’s commonsense; Smith’s wisdom is all about goatish philosophy, politics and economics apposed to sheepishness.

The economics profession should get goat smarts and stop wholly following woolly sheep led by wolves in shepard’s clothing. With this Loof poof recognize the “natural state” of goats economically working the invisible hoof. Ever bigger banks become many mini-banks; ever bigger busnesses become many many mini-businesses.

Please welcome this worldwide movement towards Libertopia with a 2nd American revolution. Let's do it peacefully this time.

agnostic writes:

"the era of "natural states," when the ability to assemble a large coalition mattered more than producing quality goods at low prices."

That's a more succinct way of putting it than my rambling one. I'll be borrowing that when I refer to NWW in the future.

Doc Merlin writes:

Limits on bank size? didn't we try this in the 1800's? I remember this not working so well.

Rational American writes:

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John T. Kennedy writes:

Would the complete deregulation of banking tend to lead to larger or smaller banks? Would it tend to lead to less or more stable banks on the whole?

The idea that the banking system will be improved by imposing more regulations seems to implicitly assume that the *new* regulations will be imposed and administered by angels, contrary to every step that got us here.

bjk writes:

Regarding gov't guarantees and big banks, this is what AK said some time ago:

"What is the optimal amount of safe assets provided by the government? If you want to say "none," that means you have to put up with a lot less capital investment. Maybe that is optimal, but I suspect otherwise. I suspect that, up to a point, creating safe-seeming assets out of risky investments makes us better off. On the other hand, it could be that we typically have way too much risky investment, because government errs on the side of creating too many safe-seeming assets."

Banks used to be in the business of borrowing short and lending long . . . but when Frannie started to drive down mortgage rates, it took the some of the risk and the returns out of that business. Isn't one of the simplest ways to restore health to the banks to let them return to the mortgage market? It would mean higher mortgage rates, but maybe rates have been depressed by Frannie for too long, with harm to the banking system.

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