The Fed decided, after Wa-Mu and Lehman Brothers went under, that no other big financial institution would be allowed to fail, codifying the notion of too big to fail. But in order to function properly, the marketplace must be allowed to reward the successful while letting the failures fall by the wayside.
Critics of capitalism point to this recession and the Panic of 2008 as proof the marketplace isn’t efficient, that it must be propped up and regulated even more. The counter-argument is that the marketplace wasn’t allowed to work. Government intervened.
Selgin believes the Fed, after helping fuel the housing bubble, has morphed from central banker into central planning agency with a corporate welfare department.
In choosing which firms to save and which to leave to the vagaries of the marketplace, the Fed has gone where no orthodox central bank has gone before in picking winners and losers.
And as sure as day follows night, crises bring on cries for reforms.
More regulation of the financial industry is premised on the charge that this recent crisis was brought about by deregulation that defanged regulators of the power needed to rein in those greedy you-know-whats.
“Those who believe this crisis happened because regulators didn’t have enough power are lacking an historical perspective on financial regulation,” Slegin says. “We’ve been mucking about with regulations of financial institutions since before the Constitution was ratified.”
The history of financial regulation in this country has been a long one, mostly more regulation with a smattering of deregulation every now and then. Almost without fail, regulation has led to new problems, the professor states.
Selgin sees some of the most egregious actors in the most recent financial meltdown as creations of the reforms following the Great Depression. The Glass-Steagall Act, for example, separated commercial and investment banking and gave birth to the world of such freestanding investment banks as Merrill Lynch, Bear Stearns and Lehman Brothers.
We all know where that led.
Thomas Oliver writes a business column. He can be reached at firstname.lastname@example.org.