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Our Unregulated Banking System, or, Why I Am Not An Interventionist, Part I

December 9, 2011

I spent a good chunk of yesterday grading in the library at the University of Memphis. My goal was to lash myself to the mast long enough to get through a few stacks of assignments, and as I can’t access the wireless network at UM, their library seemed ideal (incidentally, I was grading assignments in which students were to evaluate Thaler and Sunstein’s claims about “libertarian paternalism”; see this issue of Cato Unbound for interesting essays). During one break to stretch, I saw that I was in the same room as the Code of Federal Regulations (CFR). Something about the CFR jumped out at me: there are seven volumes of regulations dealing with banking containing 5,618 pages of regulations at two columns of sort-of-small type per page (this includes indexes).

I’m fairly sure that lobbyists’ influence on these regulations was and is non-trivial, and this strikes at the heart of why I am not an interventionist. I have seen at least one sign from an Occupy protest in which someone claimed that “the system isn’t broken; it was designed this way.” Indeed: as Michael Munger has pointed out in several posts, the state is force. Force will accrue to those most willing to use it. The classical liberalism to which I subscribe is not the “everyone gets what they deserve, sink or swim, steely-eyed resolve and hard work will always make everything better” strawman that is so easy to dismiss. My classical liberalism, and my skepticism of government intervention, comes from recognizing that scarcity and the knowledge problem are non-negotiable constraints. Interventionists’ stubborn insistence on pretending otherwise helped create the distorted incentives that have left so many burdened with mortgages and student loan debt they can’t service.

The best discussion of the housing boom and bust that I’ve seen is still Thomas Sowell’s The Housing Boom and Bust (my review is here).* The causes of the crisis are many and complex, but let’s make no mistake: a lot of the messes in which we find ourselves came from policies aimed at making housing and higher education “more affordable.” Thoughtful opposition to these policies wasn’t rooted in disdain for or callousness toward the poor, but in an understanding of how the policies would change incentives to the ultimate detriment of the people the policies were allegedly enacted to help. In a strongly-worded polemic, philosopher Jason Brennan points out how public choice economics explains the phenomena that have caused so much outrage. To borrow from the economist Alan Blinder, doing good requires more than a soft-hearted concern for the plight of the poor. It requires a hard-headed understanding of the incentives that create and perpetuate poverty in the first place.

*–my review of his Intellectuals and Society will appear in a future issue of Economic Affairs. Here’s an interview with Sowell on Intellectuals and Society.

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