Competition in the Banking Industry

As Erik Kain notes, the point I made yesterday isn’t limited to the telecommunications industry. It applies with equal force in banking.

A good example of this principle at work is Cato scholar Lawrence White’s 2004 call for greater regulation of Fannie Mae and Freddie Mac. White argued that full repeal of these companies’ various state-granted privileges would be the best way to deal with these entities. But given that that was unlikely to happen he advocated more aggressive regulation as a second-best alternative. In retrospect, it’s obvious that this was the right position to take.

The same point applies to the “too big to fail” banks. In an ideal world, the bailouts wouldn’t have happened and most of these firms would be emerging from bankruptcy around now. But we don’t live in that world, and we’re not likely to get there before the next financial crisis.

Probably the most important moment in last year’s fight over banking regulation was the failure of the Kaufman-Brown amendment, which would have established a maximum size for banks in an effort to forestall future “too big to fail” problems. It was supported by a handful of savvy conservatives like Tim Carney, but most free-market conservatives and libertarians ignored it. I’m not going to point any fingers, since I was barely paying attention to the financial reform debate myself. But I do wish more supporters of the free market had followed Carney’s lead.