Arnold King review of The Financial Crisis and the Free Market Cure: Why Pure Capitalism is the World Economy’s Only Hope by John A. Allison.
In Allison’s view, it was misregulation, not deregulation, that caused the crisis. At a deeper level, Allison believes that collective efforts at financial regulation are doomed to fail, and that free markets are the only solution.
In my view, banking and financial intermediation pose a difficult problem. The challenge is that it is difficult to distinguish a prudent, competent banker, who is managing money responsibly, from a banker who is incompetent or a banker who takes risks irresponsibly, expecting to profit if things go well while expecting others to bear most of the loss if things go poorly. In good times, good bankers and bad bankers may be indistinguishable. Only under stress does it become clear which is which.
Allison is very good at criticizing the conventional approach. However, his description of the libertarian approach does not confront the obvious challenges involved. In particular, if ordinary individuals must bear the risks of failure to distinguish good bankers from bad bankers, are they not likely to place very little trust in financial intermediaries? Does this not imply a greatly diminished financial sector, reducing overall investment and growth in society?
If left to themselves, ordinary individuals will want experts to help them find the best banks in which to deposit funds. Experts can enhance their credibility by offering guarantees. Thus, consumers will be attracted to schemes that insure against loss. In other words, consumers will seek out the same sorts of services that government provides with bank regulation and deposit insurance. Perhaps these services will be provided effectively by market institutions. However, Allison fails to offer convincing evidence that this is the case. If there is a successful example of a modern industrialized country with a libertarian financial system, I am not aware of it. This fact does not prove that the libertarian approach is unworkable, but it puts a burden on Allison to go into greater depth to explain what he thinks would emerge to address these problems.
In Allison’s view, it was misregulation, not deregulation, that caused the crisis. At a deeper level, Allison believes that collective efforts at financial regulation are doomed to fail, and that free markets are the only solution.
In my view, banking and financial intermediation pose a difficult problem. The challenge is that it is difficult to distinguish a prudent, competent banker, who is managing money responsibly, from a banker who is incompetent or a banker who takes risks irresponsibly, expecting to profit if things go well while expecting others to bear most of the loss if things go poorly. In good times, good bankers and bad bankers may be indistinguishable. Only under stress does it become clear which is which.
Allison is very good at criticizing the conventional approach. However, his description of the libertarian approach does not confront the obvious challenges involved. In particular, if ordinary individuals must bear the risks of failure to distinguish good bankers from bad bankers, are they not likely to place very little trust in financial intermediaries? Does this not imply a greatly diminished financial sector, reducing overall investment and growth in society?
If left to themselves, ordinary individuals will want experts to help them find the best banks in which to deposit funds. Experts can enhance their credibility by offering guarantees. Thus, consumers will be attracted to schemes that insure against loss. In other words, consumers will seek out the same sorts of services that government provides with bank regulation and deposit insurance. Perhaps these services will be provided effectively by market institutions. However, Allison fails to offer convincing evidence that this is the case. If there is a successful example of a modern industrialized country with a libertarian financial system, I am not aware of it. This fact does not prove that the libertarian approach is unworkable, but it puts a burden on Allison to go into greater depth to explain what he thinks would emerge to address these problems.
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