Let’s state at the outset that if your only conception of libertarian financial reform is to end the fed and go to a gold standard then you should probably skip this post as you’ll be dissatisfied. Here’s a post over at ZeroHedge on gold and tungsten that you’ll probably enjoy more. Now without further ado…Yesterday we linked to Arnold Kling’s conservative/libertarian case for hard caps on bank sizes. The gist: big banks are bad for democracy, as all big financial institutions are bound (doomed?) to become Fannie Mae (FNM) and Freddie Mac (FRE) GSE-like institutions. Nobody wants that, except for a small few situated nicely at the nexus of the political/moneyed classes.
It’s hard to find fault with his argument, especially in light of the recent crisis.
So in that spirit, we figured we’d dust off an old post that we wrote just under a year ago, which is based on the libertarian concept of the tragedy of the commons:
Every libertarian loves to cite the old parable about the tragedy of the commons.
You know: A town has its common land, and in a spirit of community it says all the herders can let their animals graze there for free. But, whoops! Without private property, nobody has an incentive to economize and everyone over-grazes, destroying the commons.
Well, to some extent, we have a financial commons. We’re all forced to use the same legal tender. If Citigroup (C) goes out and creates credit beyond all proportion, and then needs a bailout, there’s a good chance it can damage the value of my dollars when the Fed has to print. You saw this in the extreme in Iceland, where the value of the currency totally collapsed.
You see it in the UK already, and it could get much worse if a Barclays-size bank ever collapses. It has a balance sheet bigger than the nation’s GDP, and the value of the pound could go to toilet paper if the government has to print up a bailout for it.
Exactly how this is implemented is not trivial. Leverage (rather than size) caps may be the answer.
As Felix Salmon recently pointed out in response to a Tim Geithner letter opposing hard leverage caps (on the grounds that foreign banks might have larger caps, rendering ours unable to compete), the last thing we want is to return to a banking system where everyone just competes on leverage alone.
This would be going back to the anarchic commons, where the only game in town is to bring your cows, and let them gobble up as much grass as possible, without slowing down. The right knows the answer to this problem: private property. Surely some equivalent notion could be established in finance.
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