This morning our Treasury Secretary, Timothy Geithner, testified about his ideas for implementing more regulation in the financial industry. I find the whole process a little chilling.
Congress and Mr. Geithner make the implicit assumption that we need more regulation of financial institutions because those institutions did a lot of crazy things that they would not have done under stricter control. None of them, however, acknowledge-indeed they don’t even understand-that government gave banks the power to create the flood of money that really caused the problem.
If your business made money by lending money, what would you do if you have a seemingly limitless supply of your raw material-i.e. money? Of course, you would make more and more loans. You would act rationally and do what you need to do to make a profit and stay in business.
Without that limitless pool of money-and without the regulation-you would shepherd your resources. You would lend only to those whom you felt have a good change of paying you back. You would regulate own business. If you did not regulate your business, your customers and shareholders would impose regulation on you by taking their business elsewhere.
Government regulation only distorts the allocation of relatively scare resources. Instead of distorting allocation, make the resource scarcer. Stop the banks’ ability to grow money at will. Don’t regulate the “free market” from existence.
“We have met the enemy… and he is us.” – Pogo
“There are none so blind as those who will not see.”