Capital Markets

Don't Prop Up Wall Street


"While finance will remain a pillar of a well-functioning economy," Paola Sapienza and Luigi Zingales write in Forbes, "it's unlikely that banking will survive for long in its current form." Fortunately, they add, the current form isn't the only possible option:


Trust is essential in banking, and it's unlikely that banks can restore it. It's always difficult to regain trust; it's easier to start anew.

Luckily, starting anew is exactly what's happening in the banking sector, with the launch of several start-ups with innovative ideas. They range from new ways to insure mortgages to new models of lending to reliable consumers by bypassing the current banking system. Many others, such as Lending Club and Prosper, are popping up on the Internet, letting investors, rather than credit officers, decide who is creditworthy. It's too early to tell if these attempts will succeed, but it's vital that they occur. Through trial and error, a new world of banking will rise from the ashes of the old one.

Should the government subsidize these efforts? In a New York Times column this spring, Tom Friedman said yes, suggesting that it should dedicate a fraction of the Troubled Asset Relief Program (TARP) money to promote innovation. Fortunately, several venture capitalists have rejected the idea online, and with good reason: The government's record as a venture capitalist is rather poor.

Nevertheless, the government can foster the new and innovative in a crucial way: by ceasing to subsidize the banking dinosaurs. The evidence shows that subsidies to failing companies not only waste resources in keeping obsolete and inefficient firms alive, but also delay the entry of new and more efficient organizational models.

On a related subject, Zingales points out in City Journal that there's no particular reason why Wall Street should always be the world's dominant financial center, and several reasons to expect its relative power to erode.

NEXT: Spiking Public Pensions in California

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  1. From the article:

    The word for “crisis” in Chinese, weiji, is written with two characters: one (wei) means danger; the other, ji, means opportunity.

    From Dilbert (1999), season 1, episode 4:

    The Chinese have a word for crisis. It’s made up of two characters — Danger and Opportunity. Although this has nothing to do with anything, I enjoy mentioning it.

  2. It is unpatriotic to feed this economy on any level while fascists are in power.


    Stop buying.

  3. No shit is right. I love how it takes experts in Forbes to dish out things that all seem common sense.

  4. Unfortunately, what seems common-sensical to libertarians doesn’t always seem common-sensical to everyone else.

  5. Wall Street Will Drown Alone

    Imagine if Bush had the cojones to let AIG fail. We would be rid of Goldman and the rest of those rat bastards!

  6. Many others, such as Lending Club and Prosper, are popping up on the Internet, letting investors, rather than credit officers, decide who is creditworthy.

    And the SEC is dutifully hammering away on them to ensure their business models become untenable.

  7. Liberals love Darwin’s Theory. They are major advocates of teaching natural selection and evolution. I am not saying that is a bad idea, but let’s apply these theories that we are teaching. Darwin’s Theory is the only way to go when it come to biology, but God forbid we apply those same principals to our economy!

  8. Along these line,s I’d like to direct your attention to Bank of the Internet ….

    An acquntaince turned me on to this. They have no brick and mortar outlets, and hence can afford to pay you interest on your checking account, and reimburse you for ATM fees.

  9. Wall Street is already not the dominant financial center. Is this 1995? London is, by far.

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