Following the lost election of 2012, it has become trendy among American conservative writers to endorse the breaking up of the â€œbig banks.â€ Which banks are these? They are presumably the few that hold an unseemly majority of federally-insured banking deposits. As Doug French points out, â€œ40% of bank deposits are with the four largest banks and 78% of deposits are with the largest 1% of banks.â€ Such a large concentration of power is just begging for a hatchet job. To an ideology decidedly on the wane, it seems almost common sense for conservatives to join hands with progressives in instituting populist justice. The financial crisis of 2008 saw middle class America forced into paying for the mistakes of Wall Street. Fair is fair, right?
Many on the conservative side of the spectrum are starting to agree. In a recent column titled â€œTime to Break Up the Big Banks,â€ esteemed commentator George Will asserts that smashing the bank oligopoly isnâ€™t a violation of free market principles but is justified because the state â€œnurtured these behemoths by weaving an improvident safety net and by practicing crony capitalism.â€ Former Ronald Reagan speechwriter and Wall Street Journal columnist Peggy Noonan argues that â€œthe megabanks have too much power in Washingtonâ€ and Uncle Sam needs to wrestle them apart. Erick Erickson, purveyor of the influential site RedState.com, writes that the banks have essentially â€œbecome an extension of the governmentâ€ and that smaller government means â€œsmaller banks too.â€ Each voice is in agreement on the overall point that conservatives must detach themselves from the label of being in the pocket for greedy capitalists and take a stand with the little guy. That means a splintering of arguably the most infamous businesses in the country.
Like men going through a collective mid-life crisis, these prominent conservatives are trying to reinvent the wheel of their philosophy through endorsing leftist policy. Not only does it come off as shameless pandering but the eat-the-banks mentality is at a loss for sound economics. For all the ire directed toward the banking system by these defenders of limited government, their solution is one that feeds Leviathan rather than taming it.
The banking system is undoubtedly big. Of the 5,500 community banks in the country, only 12% of the industryâ€™s assets remain in their control. The big banks have become large not through market forces which tend to promote competition but by favorable government regulation. Deposit insurance, implied bailout protection, and a revolving door for regulators who devise loopholes to avoid costly infractions have all contributed to the banking sectorâ€™s growth. Yet no mainstream conservative has advocated abolishing the Federal Deposit Insurance Corporation. Few disagreed with the Troubled Asset Relief Program. And none are for getting the government out of regulating the banking sector entirely. The moral hazard and inherent corruption of government is an inconvenience quickly pushed to the aside, outside the view of the reading public. Eliminating state deposit insurance would, by definition, free taxpayers from the bad decisions of others. Removing all regulations over the banks would force the industry into standing on its own two feet. Both these decisions are absent in the conservative establishmentâ€™s view.
There is also the stubborn fact that no bank is an island. They are all, by design, one within the Federal Reserve System. As economist Frank Shostak writes,
The modern banking system can be seen as one huge monopoly bank that is guided and coordinated by the central bank. Banks in this framework can be regarded as “branches” of the central bank.
The Fed, through its open market operations and discount window, provides eligible banks short-term lines of liquidity should they find themselves in financial distress. The largest of the banks are often first in line to this portal of newly created money. It is through purchasing government bonds that these banks are able to sell those bonds back to the Fed at a price higher than on the competitive market. They are able to profit from the whole affair well before the rest of the public. Ending the Federal Reserve would not only force banks to be prudent since their lender of last resort would effectively be gone, but would put market for money back in the peopleâ€™s hands instead of one institution. For all their populist rage, most conservatives are silent on central banking.
The coup de grÃ¢ce is the privilege banks have in being able to pyramid credit through fractional-reserve practices. By having $1 billion in deposits, any bank is legally allowed to lend out up to $900 million and still stay within accordance of the Fedâ€™s 10% reserve ratio. When someone borrows from a bank, they are under the impression the loan is their money. The depositor who provided the initial capital is under the same illusion. Both have claims to withdraw money at any time yet the bank is not in possession of enough deposits to fulfill the request. Claiming to house the property of two individuals but, in reality, having enough deposits to cover only one request is fraud. There is an inherent inability to fulfill the contract as two or more patrons suffer from the impression that they can have full access to their funds at any given time.
The fractional reserve banking system, governed by the Federal Reserve, is a dangerous and unstable entity. Will, Erickson, and Noonan are all correct that it needs to be broken apart. But their method of government enforcement is misguided for it was the state and its endless capacity for handing out privileges that created the beast. Modern day banking is built upon a foundation of lies, treachery, corruption, and the unsound belief that the laws of nature and reason can be made null by government diktat. As economist and philosopher Hans-Herman Hoppe writes,
Two individuals cannot be the exclusive owner of one and the same thing at the same time.
True market forces and the outlawing of fraud would bring the banking system back from the precipice of insolvency it constantly hovers over.Â The state created the banking industry we see today because itâ€™s a main recipient of un-backed credit expansion. It is ultimately through central banking that government is able to finance itself. The convoluted arrangement is to the benefit of the government and the banks themselves. Trusting politicians to do the right thing and dismantle the whole thing is no better than trusting a thief with your motherâ€™s jewelry. Whatever emerges from their handiwork will not bear any resemblance to a real free market.
If conservatives truly wish to reign in the banking system, they should support the removal of all special privileges for the industry. Conservatism is supposed to be on the side of free markets- so let the banking system survive under those conditions. There will certainly be pain for the system as a whole but the injustices have gone on long enough. The current banking system is not fit to live. Rather than the state destroy it, allow it to destroy itself.