Bankers are the New Lawyers
If supporters of free markets are to grapple effectively with the fallout of the late crisis, they need to start by getting one thing clear in their heads: Modern banks, especially the big banks, are not free market institutions. They are agencies of the government.
Creating and maintaining the value of the currency is a core function of government, laid out right in the Constitution (c.f. “and regulate the Value thereof”). In a modern, credit based financial system the mechanism through which dollars are created and their value regulated is the banking system.
In this way bankers are like lawyers, who are also government agents. Lawyers, officers of the court, are licensed distributors of a government service. One of the government’s jobs is to do justice; lawyers are the retail distributors of that justice. They have monopoly access to the government’s “justice distribution channels.” Similarly banks are the licensed agents though which government maintains its currency.
Free-market advocates don’t generally go around arguing that we should de-regulate lawyers. They used to do that, some, thirty years ago. But since the results have been pretty clearly a disaster one doesn’t hear that much anymore. We don’t want to set lawyers free precisely because they are government agents; setting lawyers free is a lot like setting government free. We want lawyers to be less powerful, not more; make less money not more; and if it takes tying them up in regulations like arbitrarily reducing contingency fees to do it, then most people think that’s a fair thing to do.
If there is one thing that the last few years have made clear it’s that government-backed bankers are even more powerful and dangerous that government backed lawyers.
Arguing for banking de-regulation as such, as many of us did in the 1980s and 1990s, is futile. No modern banking system can be deregulated in principle; apparent deregulation will always be a dangerous delusion. Even in a banking system with few apparent regulations, the government remains in charge. The government is always the great banks’ biggest client and thus will always make most of the rules, even if it pretends not to.
Where your treasure is there will your government’s heart be. Which is why the apparent deregulation of the financial sector under Reagan and Clinton—really the replacement of black letter law with regulatory discretion—ushered in the most devastating politicization of banking in American history.
Even a government that really truly tries not to regulate the banks can’t help doing so because the single most important factor in any bank’s business is the price of money. Hundreds of thousands of pages have been written about the S&L collapse of the late 1980s and early 1990s, comprising endless arguments over who did what to whom. Most of that literature is irrelevant. The S&Ls were doomed a decade earlier when the government permitted the hyper-inflation of the late 1970s and the double digit interest rates that went with it. Banks that lend long term at four cannot survive borrowing short term at fourteen. How the death scene played out over the next decade was merely a matter of detail.
It’s always like that. The question is never whether the government will control the banks, but how badly it will muck up the job.
‘Let’s deregulate’ is not a side in this fight. Free market types just have to hold their noses and get into the regulatory debate. Our mission: to roll back the power of the government/mega bank alliance. If that makes you uneasy, just keep telling yourself ‘it’s just lawyers, but worse.’
Andrew Redleaf is the founder and CEO of Whitebox Advisors. Celebrated by the New York Times and others for predicting the mortgage crisis long before the event, Redleaf’s monthly client letter is avidly read and quoted not only on “the Street” but in the financial press.
Richard Vigilante is the communications director of Whitebox Advisors and also the publisher of Richard Vigilante Books. He has served as editorial director of Regnery Publishing and as an editor of National Review.
Tags: Andrew Redleaf, bankers, banking deregulation, currency, free markets, government agents, lawyers, Richard Vigilante
