Sunday, April 13, 2014

The Economist on Bank Regulation

This week's Economist has a remarkable article on the state of commercial banking in the United States.  Here is their conclusion:

"State subsidies and guarantees are once again corroding the financial sector and creating new dangers."

The article cites two problems: 1) Problems arising from the FDIC deposit guarantees; 2) Problems arising from excessive regulation of lending.  Combined, the article concludes that the American banking system is:

" of the most regulated industries in the world, funded by taxpayer subsidies with lending decisions taken by the state."

If you were wondering why the American economy is going nowhere and why a future financial collapse is still possible even in a lackluster economy, go no further than this article.  While China is feverishly working to move their banking system to free market banking, the US has turned a free market system into an appendage of government.

Banking in American is no longer a contributor to US economic growth.  It is an arm of the US government that is instructed to lend in ways that government approves, not in ways that the free market would encourage.  Deposit insurance puts the taxpayer on the hook and eliminates any free market control of asset flows into the banks since all such are guaranteed.  In modern USA, the capital markets, as reflected in the commercial banking system, are no longer free.

The Economist has it right.  Check it out.

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