Financial Regulation and the “Money Power”

In the end, financial regulation will best serve the insiders, the “money power.”

In one of his essays criticizing inflationary free-silver proposals in the late nineteenth century, the great laissez-faire champion William Graham Sumner wrote:

We hear fierce denunciations of what is called the “money power.” It is spoken of as mighty, demoniacal, dangerous, and schemes are proposed for mastering it which are futile and ridiculous, if it is what it is said to be. Every one of these schemes only opens chances for money-jobbers and financial wreckers to operate upon brokerages and differences while making legitimate finance hazardous and expensive, thereby adding to the cost of commercial operations. The parasites on the industrial system flourish whenever the system is complicated. Confusion, disorder, irregularity, uncertainty are the conditions of their growth. The surest means to kill them is to make the currency absolutely simple and absolutely sound. Is it not childish for simple, honest people to set up a currency system which is full of subtleties and mysteries, and then to suppose that they, and not the men of craft and guile, will get the profits of it? [Hat tip: Larry White.]

It seems to me that this point is entirely applicable to the current debate over stepped-up financial regulation. In the end, it will best serve the insiders, the “money power.”

No Shortage of Regulation

Let’s begin by noting that there has been no shortage of financial regulation over the last 30 years. The much-faulted era of deregulation is a laughable myth. If anything can be said to have failed in the run-up to the current financial mess, it is the regulatory state. (Of course, much else also failed, including the Federal Reserve system and housing policy.) The idea that we suffer from a shortage of regulation is wrong. Therefore, the idea that we need more regulation to prevent a repeat of the debacle is worse than wrong.

Some advocates of regulation may agree that we don’t need more regulation but rather better regulation. I agree. We do need better regulation. But what does that mean? Once we understand the nature of markets and bureaucracies, there’s only one reasonable conclusion: Better regulation means regulation by market forces. Free markets are not unregulated markets. Instead, they are severely regulated by competition and the threat of losses and bankruptcy. Anything government does to weaken those forces simultaneously weakens the otherwise unforgiving discipline imposed on business firms (and their counterparties)—to the detriment of workers and consumers. Public well-being suffers.

Admittedly, this is a hard sell. Explaining how markets work when they are free of the government’s easy money, favoritism, implicit guarantees, and other perverse incentives takes time and the listener’s concentration. Denouncing markets, railing against greed (which of course never taints politicians), and calling for more government power makes for good sound bites. In the Internet and remote-controlled-cable-TV era, patience is a scarce commodity. So advocates of liberty have barriers to overcome.

Interference with Free Exchange

Of course government interference with free exchange (misleadingly called “regulation”) is portrayed as necessary for the public good. A key to understanding why it is not is grasping the inability of bureaucrats to know what they would  need to know to do the job they promise to do. Markets–particularly financial markets–are too complex for government officials (or anyone else) to manage. No matter how much power they are given, they will not be able to see the future, spot “excessive risk,” or anticipate how things might go wrong.  But they can be counted on unwittingly to interfere with innovation that would yield public benefits. Any move toward central direction courts disaster. Decentralization and the discipline of competition are our only hope for economic security.

If government management of financial activity does not serve the public, whom does it serve? This is where Sumner’s quote comes in. He understood that government regulation creates a complicated web of rules and procedures and powerful bureaucracies, which in turn create rich opportunities for manipulation, advantage-seeking, and outright corruption. And who will be in the best position to game the system? The “money-jobbers and financial wreckers,” that is, the insiders, the “money power.” They will be closest to the regulators. They alone will have the information and incentive needed to turn the vague and complex rules–which they will no doubt help write–to their benefit. How many times must this happen before we learn?

As Sumner says, “The parasites on the industrial system flourish whenever the system is complicated. Confusion, disorder, irregularity, uncertainty are the conditions of their growth.”

So, he asks, “Is it not childish for simple, honest people to set up a . . . system which is full of subtleties and mysteries, and then to suppose that they, and not the men of craft and guile, will get the profits of it?”

Suspect Power

The “money power” ought to be suspect in a corporatist mixed economy such as ours, with its central bank, cartelizing regulations, and “too big to fail” guarantees. Sumner is onto something when he says the “surest means to kill [the money power] is to make the currency absolutely simple and absolutely sound.” But we should go further: Subject the financial system to the brisk winds of open competition, profit and loss, and bankruptcy.

We won’t get that from government regulatory “reform.” Rather, the money power will win again.

This column was originally published in 2010, in The Freeman.

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  • The Late P Brooks||

    I was watching an interview the other day with some "banking expert". The interviewer asked what "effective regulation" would look like.

    Unfortunately, the answer was not, "If you fuck up, you lose your ass."

  • cw||

    I'm guessing the "expert" said the opposite.

  • OldMexican||

    Of course government interference with free exchange (misleadingly called "regulation") is portrayed as necessary for the public good.


    Of course it is. No bureaucrat or legislator is going to call it "interference to benefit our cronies."

    I was explaining to a coworker of mine that regulations and legislation to that effect comes directly from the efforts of lobbying efforts from already established corporations.

    Bureaucrats and legislators are not only not clever enough to anticipate the supposed problems stemming from commercial and financial activity; they're incapable of understanding the economic reasons for some of these problems, so even if the regulators or legislators were acting out of good faith, the resulting solutions would still not fix the problems but even make them worse. Most regulators and bureaucrats do not act in good faith, however - they are self-interested individuals just like you and me, and will act accordingly.

    My coworker asked me if I really believed that regulations were written by lobbyists, and I asked him: "What do you think all those lobbyists do over there in Washington, DC? Hang around?"

  • Killazontherun||

    An ad with sound, Reason? Terrorist.

    Note to everyone with Adblock -- mute the ads sound before blocking or you'll be stuck with the audio.

  • ||

    Reason.com is actually the reason why I use as ad blocker.

    I do not mind the ads so much but it got so bad that it was freezing up my browser.

    As soon as I installed anti-tracking/ad blocking software the problem went away.

  • Ted S.||

    I always surf reason with only cached images set to load, and I still get browser freezes.

    I think it might have to do with the massive amount of antisocial networking shit they use.

  • Xenocles||

    I just installed an adblocker - it was taking about a minute every load before I could even scroll. Thanks for the tip.

  • ||

    The only blocker I have is Flashblock, for those stupid Flash ads that play on their own. Now I have to click them if I want them to play, or I can designate specific websites as allowing Flash videos.

  • Tulpa Doom||

    government interference with free exchange (misleadingly called "regulation")

    Not seeing how that's misleading. Regulation is obviously "interference" with what would happen if the regulator weren't there. Just like with a voltage regulator, or a pressure regulator, or whatever.

    If anything, loading up a bunch of emotionally charged terms is what's misleading.

  • OldMexican||

    Re: Tulpa Doom,

    Not seeing how that's misleading.


    The term implies that the government's role is pertinent and necessary, when it is neither.

    There's a difference between a voltage regulator and a rat gnawing at the electrical cables - the government is gnawing at everybody's cables, Tulpa.

  • Tulpa Doom||

    There's good regulation and bad regulation. Richman is claiming there is no such thing as good regulation (other than the market's inherent tendencies, which aren't really regulation).

  • OldMexican||

    Re: Tulpa Doom,

    There's good regulation and bad regulation.


    Is that an opinion or a statement of fact?

    Richman is claiming there is no such thing as good regulation


    He's claiming that the government's can't be good regulation due to the knowledge problem.

    (other than the market's inherent tendencies, which aren't really regulation).


    Again, is that opinion or a statement of fact? If market forces make people follow a certain path rather than another - like systematic thievery - isn't that regulation?

  • Tulpa Doom||

    If market forces make people follow a certain path rather than another - like systematic thievery - isn't that regulation?

    No, because it's inherent to the market.

    What is not inherent to the market? Fraud prosecution, bankruptcy protection, theft prosecution, police intervention to prevent theft, etc. I guess you don't want any of those.

  • OldMexican||

    Re: Tulpa Doom,

    No, because it's inherent to the market.


    What is that supposed to mean? Are you trying to say that regulatory mechanisms that are inherent are not really regulatory mechanisms? Does that make natural selection not a regulatory mechanism then?

    What is not inherent to the market? Fraud prosecution, bankruptcy protection, theft prosecution, police intervention to prevent theft, etc.


    Those are services, Tulpa. Services.

    I guess you don't want any of those.


    That's a clumsy cop-out, like those used by dishonest leftists: "You just don't like children!"

  • Tulpa Doom||

    Those are services, Tulpa. Services.

    Services to whom? The person getting prosecuted or arrested isn't being served, are they? The creditors who get screwed out of being repaid aren't being served by bankruptcy, are they?

    They're regulatory mechanisms...preventing the free market from reaching certain of its logical conclusions that would be very bad.

  • robc||

    They're regulatory mechanisms

    No they arent, they are criminal prosecution mechanisms.

    [Except the bankruptcy one]

  • robc||

    Fraud prosecution, bankruptcy protection, theft prosecution, police intervention to prevent theft

    3 of those 4 arent regulations.

    It may be a semantics things, but I distinguish between criminal law and regulation.

    This happens all the times. Someone says "regulations are [mostly] bad" and the response is "what about laws against murder, huh". THAT ISNT A FUCKING REGULATION.

  • VG Zaytsev||

    Bankruptcy isn't a regulation either.

  • Tulpa Doom||

    It's definitely govt interference with the marketplace.

  • Tulpa Doom||

    And you're letting Richman get away with calling the law of supply and demand "regulation" so gimme some slack too.

  • ||

    And you're letting Richman get away with calling the law of supply and demand "regulation" so gimme some slack too.

    Not the same thing. The laws of supply and demand aren't services, they're understandings of how market forces interact. And he's specifically referring to things like competition as things that regulate markets, which is true. You don't get slack for lazy thinking and conflation.

  • Sam Grove||

    Better: The difference between a regulator and a limiter. The regulator is always affecting behavior whereas a limiter only acts when behavior transgresses limits.

    Hence a limited government would only act against actual violation of the equal rights of individuals but a regulatory government must violate those rights and in so doing, causes problems that require further regulatory intervention.

    A regulatory government creates systemic incentives that interventionists seem unable to comprehend, but the incentives tend toward corruption as it becomes apparent to the regulated that it is cheaper to game the system than to remain competitive in a dynamic market.

  • Tulpa Doom||

    Free markets are not unregulated markets. Instead, they are severely regulated by competition and the threat of losses and bankruptcy.

    Inherent, internally-driven tendencies are not usually considered "regulation". If I throw up after eating 10 pounds of chocolate, that's not considered regulation of my dietary intake.

    And bankruptcy is really not part of the free market, it's a common law encumbrance on the free market to prevent people from being forced into debt slavery.

  • OldMexican||

    Re: Tulpa Doom,

    Inherent, internally-driven tendencies are not usually considered "regulation".


    Considered by whom?

    If I throw up after eating 10 pounds of chocolate, that's not considered regulation of my dietary intake.


    Again, not considered by whom? If the process serves to limit your caloric intake, then how can that not be regulating your caloric intake? You are twisting concepts just to conform to your preconceived idea of what "regulation" means or entails.

  • Tulpa Doom||

    Considered by whom?

    People who aren't trying to make too-clever points in libertarian echo chambers.

  • OldMexican||

    Re: Tulpa Doom,

    People who aren't trying to make too-clever points in libertarian echo chambers.


    What is that supposed to mean, Tulpa? You are making this argument from popularity, not I. The fallacy is of your doing, not mine.

  • Tulpa Doom||

    For better or worse, the meaning of a word is a popularity contest. You can define the word to mean whatever you want, but don't go out and complain about how it's misleading for someone else to use it a different way than you would define it.

  • ||

    You're either arguing dishonestly, or you're horribly ignorant of the English language.

    From Wiktionary:

    regulate:
    1. To dictate policy.


    Things like competition and and threats of loss certainly dictate policy. Those that violate those policies fail.

    2. To control or direct according to rule, principle, or law.


    Again, market forces definitely direct things in the market according to principles. The understanding of those principles is called economics.

    3. To adjust to a particular specification or requirement: regulate temperature.


    Again, the market DOES adjust things to particular specifications or requirements (according to the laws of supply and demand, for instance). The temperature thing doesn't really apply here.

    4. To adjust (a mechanism) for accurate and proper functioning.


    Certainly market forces adjust the market for "accurate and proper functioning".

    5. To put or maintain in order: regulate one's eating habits.

    This one's pretty obvious, too. And eating habits doesn't really apply to this. It DOES apply to things like, say, THROWING UP though.

  • BigT||

    regulate:
    1. To dictate policy.

    Things like competition and and threats of loss certainly dictate policy. Those that violate those policies fail.

    Competition and threats of loss suggest wise policies, but do not dictate policy. People can choose to disregard competition etc., and thus experience failure. With dictates there are no options. You misunderstand this definition. Regulate means the regulation leaves NO CHOICE about policy, unlike the 'indicators' like competition and threats of loss.

  • ||

    With dictates there are no options.

    Of course there are. You can still choose to break the law, if you're willing to pay the consequences.

    Regulate means the regulation leaves NO CHOICE about policy,

    Sorry, I must have missed the part where government regulations made it PHYSICALLY IMPOSSIBLE to break them. Stop making inane assumptions.

  • ||

    For better or worse, the meaning of a word is a popularity contest.

    And yet there are widely accepted common meanings of "regulate". Which I just mentioned.

    You can define the word to mean whatever you want

    We're not defining it, we're speaking directly to the commonly-used definitions of the word. YOU'RE the one who keeps trying to redefine it to we're automatically wrong.

    but don't go out and complain about how it's misleading for someone else to use it a different way than you would define it.

    Again, we're not defining it ourselves, we're referring to the understood modern meanings. Maybe you should take your own advice first, Tulpa.

  • ||

    I expect next you'll simply attack my choice of dictionary. But you'd probably do that no matter what source I used.

  • ||

    it's a common law encumbrance on the free market to prevent people from being forced into debt slavery.

    Huh?

    Without government enforcing the contract of the debt, debt slavery is impossible.

    If anything bankruptcy is a kinder gentler form of government enforced debt slavery.

  • Tulpa Doom||

    So contract enforcement is not part of the free market either? I tend to agree. These regulations are getting better and better.

  • robc||

    Spooner had an alternative to bankruptcy -- all unsecured debts can be written off by the debtor at any time.

    It seemed silly for obvious reasons in the 19th century, but with modern credit reporting agencies, not so much. Walk out on a debt, it goes on your record.

    Maybe someone gives you another loan in the future, maybe not.

  • Tulpa Doom||

    What if you don't think you're going to need a loan in the future? Or, more likely, figure you're better off walking out on your current debts, and keeping the loaned money, scot-free rather than worrying about the future.

    The bankruptcy process strikes a balance between making sure one who declares bankruptcy does not profit from it, and avoiding debt slavery.

  • Archduke Pantsfan||

    Has anyone seen this vomit inducing propaganda movie?

  • ||

    Archduke Pantsfan - *nearly vomiting* "the milk smells gross. Here smell it"

    Corning - "I will take your word for it"

  • Anonymous Coward||

    Yay! All hail the glorious proletarian revolution! Clinton surplus (which didn't exist)! Henry Ford raised wages because he was a friend of the people (not because he was trying to lure the best workers into his employ)! People were tricked into taking mortgages they couldn't afford! Everybody belongs to everybody else!

    Fuck Obama. Fuck his willful obfuscation of history, fuck his blind ignorance of economics, and fuck his union = middle class pandering.

  • VG Zaytsev||

    Is not Keynesian stimulus spending the ultimate form of trickle down economics?

  • SIV||

    I wish Ann Coulter, Rush Limbaugh and Sarah Palin controlled Congress rather than Boehner and Reid.

  • Bookkeeper||

    Thanks for the preview of how history books will describe the late 90's and early oughts.

  • ||

    Some advocates of regulation may agree that we don’t need more regulation but rather better regulation. I agree.

    The US government (really no need to distinguish between TEAM BLUE/RED) set up a system that failed miserably. They dumped trillions of dollars through fanny and Freddy into a market that normal market forces would never sustain because of the risk. Several big firms (AGI Lehman ect) which already got substantial government support and regulatory favor from competition failed while others did not.

    The government then gave these bad actors 100s of billions in support and added 1000s of pages of new regulations insuring that that their assets could never be transferred to competitors.

    Better regulations my ass. We need less.

  • Tulpa Doom||

    The hypothetical "advocates of regulation" in question prefer both less AND better regulation.

  • ||

    Land use planners and their sycophants always talk about smart growth nd intelligent development when the shit hits the fan...and they always end up advocating for and implementing more regulations not less.

    Computer makers have no regulations special to them. Why are banks and financial institutions so magically different?

    You are full of shit tulpa.

  • Tulpa Doom||

    Computer makers have no regulations special to them. Why are banks and financial institutions so magically different?

    Because they're totally different types of business. Computer makers don't take people's money from them with a promise to give it back eventually, and then turn around and spend that money on something else.

    If you made it a crime to lend out money that you were supposed to be holding on to for a customer, then banks wouldn't need to be regulated beyond that. Obviously that would totally destroy our banking system since it's based on lending.

  • VG Zaytsev||

    Computer makers don't take people's money from them with a promise to give it back eventually, and then turn around and spend that money on something else.

    Neither do banks.

  • Tulpa Doom||

    Where does the money for bank loans come from?

  • ||

    Where does the money from a building contract come from? Where does the money from a real estate contract come from? Where does the money from a business lease come from? Where does the money from a dealer car loan come from? where does the money from an deal equipment loan come from? Where does the money from manufacturer to dealer loan come from?

    I can see why the logic of voteing for Romney is so appealing to you.

  • ||

    Wow. Uh....do tell us. Where does the money for bank loans come from?

  • VG Zaytsev||

    They create it.

  • Tulpa Doom||

    LOL. In a healthy fiscal situation, I mean.

    The money for loans comes from deposited funds, all of which are eventually due to be returned to the depositor. It's called fractional reserve banking...something anyone commenting on financial regulation and expecting to be taken seriously should at least be marginally familiar with.

  • VG Zaytsev||

    The money for loans comes from deposited funds, all of which are eventually due to be returned to the depositor. It's called fractional reserve banking...

    I think you don't understand what happens in fractional reserve banking, wherein banks lend out multiples of the funds that they hold on deposit, which are also available for immediate withdrawal.

  • Tulpa Doom||

    A particular bank cannot lend out more money than it holds in deposits.

    The multiplier effect occurs when loaned funds from one bank are deposited in another, and the second bank loans that money out, etc. The origin of the loan is still from deposited funds.

    Not all deposit accounts are available for immediate withdrawal, either, of course. And the banking system would collapse if everyone tried to withdraw their deposits at the same time.... meaning they're available for immediate withdrawal only under normal conditions.

  • VG Zaytsev||

    The multiplier effect occurs when loaned funds from one bank are deposited in another, and the second bank loans that money out, etc. The origin of the loan is still from deposited funds.

    No the multiplier effect comes from the fact that the money is multiplied by being available to two or more people at the same time. The other way to see this is to say that lending creates new money.

    Not all deposit accounts are available for immediate withdrawal, either, of course. And the banking system would collapse if everyone tried to withdraw their deposits at the same time....

    That was a threat when withdrawn deposits could be held as gold coins in personal stashes. But it is impossible in todays environment when withdrawls take the form of digital transfers to other institutions or green slips of paper supplied by the fed.

    You're just flat out wrong, which is shocking because you are generally an intelligent and well informed person. You seem to believe that we have a 100% reserve banking system, which is what you are describing.

    How do you think the money supply grows or contracts?

    Why have different measures of the money supply at all?

  • VG Zaytsev||

    Here's a short paper predicting deflation that was written from an austrian-libertarian perspective a couple of years ago.

    http://libertarianpapers.org/a.....p-2-43.pdf

    The TL:DR takeaway is that in modern banking systems deposits follow lending, the do not precede from lending.

    Which is rather obvious if you consider the implications of fractional reserve banking in a political economic environment of pure fiat currency. which the US has had since the last, tenuous links to gold were severed by Nixon.

    Leverage limits, which ostensibly exist to protect depositors in fact exist to prevent run away money creation and inflation. Those limits broke down to varying degrees in the credit bubble of the early aughts, predictably leading to runaway money expansion and inflation.

  • VG Zaytsev||

    2nd paragraph should be:

    The TL:DR takeaway is that in modern banking systems deposits follow lending, the do not precede lending.

  • ||

    If you made it a crime to lend out money

    Nice goal post moving.

    This is worse then joe's bullshit.

    What the fuck do you think a contract is?

    "Oh so I am now randomly going to start talking about outlawing contracts as an argument of why regulations are good and free markets are bad"

    Brilliant.

  • Tulpa Doom||

    Will you people please go learn what "goalpost moving" is before accusing me of it in the future?

    computer manufacturers never caused the economy to collapse because they screwed up their business.

  • ||

    Well, that's probably because computer manufacturers never had regulations that incentivized horribly risky behavior with the guarantee that government would make it all better.

  • Tulpa Doom||

    Moral hazard is a problem but banking is a more fiscally dangerous industry even without it. The only people who can be screwed by a computer manufacturer are their vendors and lenders. A bank failure, not so much.

  • BMFPitt||

    Regulation is like medicine. It is sometimes needed, and can be life-saving, but you have to actually take the right stuff in the right dose or it can be worse that whatever you're taking it for.

  • Cavpitalist||

    I think you might be Jeff Long. Blink three times if I'm right.

  • The Late P Brooks||

    Inherent, internally-driven tendencies are not usually considered "regulation". If I throw up after eating 10 pounds of chocolate, that's not considered regulation of my dietary intake.

    I think it must be just about time for the penguin on my telly to explode.

  • Almanian's Evil Twin||

    Ohhhhh - intercourse the penguin.

  • RengFin||

    Yeah dude that makes a ll kinds of sense man. Wow.
    www.TotalVPN.tk

  • wakeup||

    Get a kick out of this: How The Shining proves the Moon landings were faked.

  • Heroic Mulatto||

    Needs more Lizard People.

  • Caleb Turberville||

    Mother of god.

  • johnl||

    Enforcement of SEC rules in smalcaps is so lax that they are essentially unregulated. If Congress repealed all laws for them and devolved their regulation to a stock exchange, that would be an effective increase in regulation.

  • The Late P Brooks||

    computer manufacturers never caused the economy to collapse because they screwed up their business.

    Keep going...

  • Lyle||

    Chavez needs to die.

  • peterpalms||

    The current Federal Reserve System created in 1913 is facing imminent collapse as described in "The Creature from Jekyll Island", fifth edition, published September 2010 at which point the National debt of the U.S. had reached $202 trillion,

    Everyone is aware of this and the decision to ignore these facts is politically motivated as described in chapter 24, 25, 26 The last 90 pages of this 600 page book. This economic collapse is no accident. It's intention is a New World Government and world currency

    The Federal reserve is neither an arm of the government nor is it private. It is a hybrid. It is an association of the large commercial banks which has been granted special privileges by Congress A more accurate description would be simply that it is a Cartel protected by federal law. " Because all fiat currency in history has always collapsed. . The money supply will continue to expand, inflation will continue to roar, and the nation would continue to die. Issuing money without gold or silver backing violates the constitution. They are not subject to the law. It should be abolished. They are not independent of the government. they have taken over the government.
    • It is incapable of accomplishing its stated objectives.
    • It is a cartel operating against the public interest.
    • It is the supreme instrument of usury.
    • It generates our most unfair tax.
    • It encourages war.
    • It destabilizes the economy.
    • It is an instrument of totalitarianism.

  • John Niewicki||

    Here is an article I wrote that is a nice complement to the above piece: "All government imposed regulations are bad for consumers, productivity, and innovation"

    http://www.gather.com/viewArti.....4979599433

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