Monday, September 14, 2009
Barack Obama's speech on Monday to Wall Street outlines an overhaul of the regulatory regime. On the anniversary of the bankruptcy of Lehman Brothers, politicians from both sides of the Atlantic are looking to remodel capitalism. The thirst for greater regulation is strong, united around Gordon Brown's judgment that "laissez-faire has had its day … the old idea that the markets were efficient and could work themselves out by themselves are gone".
The notion that the present financial system is "laissez-faire" is, of course, ludicrous. At present, we have a nationalised organisation that holds a state-granted monopoly on the issuance of currency. If this were any industry other than finance, the Bank of England would be seen as the Soviet-style planning board that it is.
Defending laissez-faire is therefore not a defence of the status quo; it is a positive prescription for a totally new regime. Here are three courses of action that would liberalise the banking system:
1. Legalise insider trading. The regulators have failed spectacularly. They did not foresee the systemic risk created by excess credit creation and over-leveraging, and it would be naive to expect any single organisation to steward an entire industry. Demonising hedge funds and banning short-selling miss the point since these are the ultimate protest vote for market participants. The meltdown of a year ago would not have happened had protesters been truly able to act on their knowledge; legalising insider trading would allow asset prices to integrate as much information as possible.
2. Repeal legal tender laws. When sovereigns control currency, they debase gold coins to augment their own coffers. When politicians control currency, they print money to monetise their debts. Even by giving control to independent central banks, we haven't found a way to protect the value of money, since there is still a monopoly provider with an incentive to inflate. The best form of consumer protection is competition, and commercial institutions should be allowed to offer currency to allow markets to determine the most effective medium of exchange.
3. Eradicate crony capitalism. The official narrative is that when Lehman Brothers failed, it sparked a crisis of such proportions that state action was the only way to prevent another Great Depression. But as we start to learn more about what went on behind closed doors, things become murkier. The haphazard manner in which some banks went bankrupt and others were bailed out probably has more to do with personal networks than economic necessity. But even if you have faith in the government to exercise its powers in the public interest, it simply doesn't have the knowledge to act. It's understandable that Hank Paulson put more emphasis on Wall Street than on conservative banks that spend less on lobbying, because that's the world he lives in. For the rest of us, these deals create regime uncertainty and weaken the power of markets.
These radical proposals challenge conventional wisdom and, in doing so, manifestly demonstrate that the present system is not laissez-faire. We have just scratched the surface of a free-market alternative, and critics have an intellectual obligation to admit this. Let's open the debate to a free market in money.
Anthony Evans is assistant professor of economics at ESCP-EAP European School of Management. Read related comments from the Mises Economics Blog.For further reading:
"Strip the Bank of England of its power", The Times, July 2, 2009
“Insider Trading: Hayek, Virtual Markets, and the Dog that Did Not Bark”, Henry Manne, Journal of Corporation Law, Fall 2005
"The Modern Witch Hunt", Alexandre Padilla, October 22, 2002
"Abolish Legal Tender", D. Alexander Moseley, February 1999
"What is Morally Right With Insider Trading", Tibor R. Machan, Public Affairs Quarterly, April 1996
"Money and How to Privatise It: An Introduction", Roderick Moore, 1994
"The Failure of State Money and the Case for Monetary Individualism", Simon McIlwaine, 1991
"In Praise of Insider Trading", Matthew O'Keeffe, 1989
"Information, Privilege, Opportunity and Insider Trading", Robert W. McGee and Walter E. Block, Northern Illinois University Law Review, 1989
"The Illegality of Legal Tender", Philip W. Newcomer, December 1986