Regulators are causing bank failures. Returning banks to free market would strengthen economy

Washington Times ^ | 07/06/2011 | Richard Rahn

[SeekAndFind]

Beware Greeks bearing debt - or any other country that has too much of it. Despite ever-increasing government regulation of banks, which often are required to hold government debt as reserves, the systemic risk of a failure in the global financial system is growing rather than diminishing. There are solutions that require less, rather than more, regulation.

Some banks have been around for a couple of centuries or more, particularly in Switzerland, and yet they continue to thrive without government help. Only one Swiss bank out of 350 required state intervention in the financial crisis of the past few years. If you look at the big banks that have been in trouble or the banks that regulators and others worry about being in financial trouble, you will notice that virtually all of them have a corporate form of ownership and are heavily regulated. They also increasingly are being forced to be tax collectors for governments. Yet banks that are organized as general partnerships, such as Swiss private banks, where the owners of the banks have unlimited liability, have, in almost all cases, avoided failure or having to go to the government for a bailout.

To understand why some banks have avoided problems and others seem to have a continuing problem, it is useful to review the basics of banking. Traditionally, a bank takes deposits from individuals and institutions and then lends the money to others, receiving interest from its loans and paying interest on its deposits. If some loans or investments go bad, or if many depositors suddenly want all of their money back, the bank must have reserves to cover such problems. These reserves can be made up of the capital supplied by the owners of the bank, retained earnings and/or government bonds.

[agere_contra]

The moment a Government backstops a bank (or other financial institution): that bank becomes a cancer that begins to destroy society, the laws of contract and common morality.

[Doofer]

Despite ever-increasing government regulation of banks...

Total bull crap....

[PeterPrinciple]

Despite ever-increasing government regulation of banks...
Total bull crap....

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Not sure what you are trying to say, please explain.

[Uri’el-2012]

I believe it started with the
Community Reinvestment Act
under Jimmah Carter.

It was amplified under Clinton.

And went ballistic under Bwarney Frank and Chris Dodd.

It was supported by Republican Progressives like the Bushes.

Looking at it from the long view
it nothing more than the Cloward–Piven strategy

It was designed, supported and implemented
by the Marxist/Anarchist wing of the Democrat Party.

It was cheered on by Progressive Republicans.

[PeterPrinciple]

There is an alternative form of bank ownership that is likely to lead to fewer problems and avoid the “too big to fail” problem, and that is mutual-fund banking. Former Federal Reserve governor and now University of Chicago professor Randall S. Kroszner and George Mason University professor Tyler Cowen foresaw the oncoming banking crisis and proposed mutual-fund banking 20 years ago. Their proposal is more relevant than ever. A mutual-fund bank would be somewhat analogous to a credit union or a mutual savings bank but would differ in one key respect. “In both mutual banks and mutual-fund banks, the depositors constitute the banks’ ‘shareholders.’ One becomes an ‘owner’ of the bank by making a deposit and ceases to be an owner only by withdrawing the deposit.” Depositors would be residual claimants and hold a direct claim to the assets of the mutual-fund bank, thus earning a return tied to the performance of the underlying investment portfolio. In contrast, depositors in mutual savings banks and credit unions receive a predetermined interest payment.

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This does sound interesting. At one time during the thirties?, we had growth of local mutual insurance. I think that would be a good thing but don't know what caused it and wonder if we can bring it back.

[screaminsunshine]

Uhhh. The market is no longer free. Guess you have not noticed. This is a managed public market.

[RatRipper]

I am an officer in a community bank and a former state regulator and you are utterly ignorant of the facts.

[Gen-X-Dad]

The only mistake we have made with our TBTF banks is that we did not liquidate them and sell them off to their competitors who actually played by the rules and didn’t nuke our economy. Instead, we rewarded their bad behavior with boat loads of free FED money to paper over their toxic assets and sustain their over-leveraged derivatives. They then get to buy up the good guys and speculate and gamble as if nothing changed. Now they are whining that all of that free FED money came with strings attached and it is destroying their ability to do business.