Saturday, October 22, 2011

Banking Isn't the Problem

Reaction to Irish banking and financial crises...Image via Wikipedia
There's nothing inherently faulty with people lending their money to others or with an intermediary taking part of the action for arranging things.

Most of the recent problems with banking have a different root cause, namely that the government relieves you of all responsibility for choosing wisely who you lend your money too.

Your savings are insured. But unlike rational insurance, risky banks are insured at the same cost as prudent banks. That doesn't exactly give banks useful feedback about the risks they are taking.

On top of that, the government also implicitly guarantees to these banks that they'll never let them go out of business. So they can take all kinds of risk and only suffer when they don't take enough high-paying risks.

And, over time, those in charge of this insurance take money for gradually loosening standards for what they insure. Yes, Congress is actually corrupt. Sorry to break it to you.

Oh, sure, Congress clamps down on the banks AFTER bad practices lead to disaster. But then, slowly and inexorably, time and lobbyist cash gradually get Congress to loosen standards.

The public, who didn't truly understand the causes of the previous disaster, has forgotten about what happened, the political pressure dissipates and Congress returns to subsidizing unreasonable risks.

But don't worry: you're insured. Unfortunately, unlike any other insurance you've ever bought, behind the scenes, the actual costs are being billed to you. You'll be forced to pay higher taxes in the future to clean up the very disaster the government supposedly protected you from.

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