Bantle Symposium on Business-Government Relations

Can the Banking System Regulate Itself?  Is Government Regulation an Improvement over Laissez Faire?

Larry White, Professor of Economics, George Mason University

Historically, banking systems have not operated purely on the basis of profit-and-loss market discipline. Where the role of market discipline was politically circumscribed, as in the United States, cooperative self-help and self-regulatory institutions evolved, particularly clearinghouse associations.  Government regulation of banks in the United States has a complex history. Before the New Deal, our banking system was weakened with geographic and other restrictions, and since then we have again weakened our banking system with privileges like (systematically underpriced) deposit guarantees and the promise of “too big to fail” rescues.  Much as we use a baseline model of free trade to understand the impact of tariffs and trade restrictions, I propose that we should begin with a baseline model of free banking to understand the impact of bank regulation.  Just as many tariffs and trade barriers can be understood as resulting from fiscal concerns combined with “rent-seeking,” so too can many contemporary banking regulations. Apparent rent-seeking actions at the Federal Reserve Bank of New York during the 2007-9 financial crisis are particularly troubling. The crisis gives us a window into the dangers of allowing discretionary rule by authorities to trump the principle of the rule of law. ​

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