Very good post by Ross Douthat here: "
Tyler Cowen's Counsel of Despair", commenting on a pair of great posts by Cowen.
The gist of Cowen, as related by Douthat: the recurring financial crises in capitalism are a product of the state's perpetual willingness to "socialize" (i.e., bail out one way or another using taxpayer money) the failures of financial institutions, which in turn induces entirely rational willingness by those institutions to take on greater risk -- a willingness that no amount of regulation by bureaucrats will ever be detailed or micro-managerial enough to overcome. And size isn't the problem -- many small banks can fail in waves too, as the Savings and Loan bust a while back demonstrated, and a few large institutions can behave in stable, relatively low-risk ways, as the example of the Canadian banks in the latest crisis indicates -- so Douthat's addition to Cowen seems not just beside the point but may well be counter-productive in the usual unintended consequence manner. The basis of the problem is rather what Cowen referred to as "state capitalism", and part of his solution
deserves his own words:
Breaking up the large banks would be striking at symptoms rather than at root causes, namely the ongoing growth of political power and the reliance of that power upon an ongoing inflow of capital.
If you do wish to break or limit the power of the major banks, running a balanced budget is probably the most important step we could take. It would mean that our government no longer needs to worry so much about financing its activities.
