A modest proposal for free market bank reform
The reason we have this huge, complex, and inefficient bank regulation system is that history shows there will be bank panics. If there is bank panic in an industrial economy, the effects are devastating and long-lasting. Bank collapse triggers bank collapse in a spreading circle that, in the absence of deposit insurance, destroys consumer savings and business clearing accounts ( so businesses fail to pay workers and vendors). Consumers with lost savings can’t pay their own debts. Businesses with lost clearing accounts and no access to credit also collapse - bringing down their supply chains and customers with them. And so on. But the system established in the 1930s in the USA, although far better than that of primitive societies like the European Union, is obviously not good enough. We could, as many demand, increase the level of government supervision of banks and other financial institutions. But the alternative is to step back, look at the problem, and see if there are now better ways of addressing it. And there are.
Modern communications, electronic payments, and data bases make it easy for the government to set up savings and clearing accounts - say in a postal bank. Each citizen could have a limited savings account, say, up to $1million at 4% interest, and a checking account with a debit card. Each business could have a no-interest clearing account with a small fee per transaction. If we wanted to get more sophisticated, we could have the government lend to citizens based on something like the same credit algorithms that credit card companies use now.
Money kept in private banks would be a matter of individual choice - better possible returns versus risks.
The result - the infectious instability of bank panics would be averted and the government could reduce size of the regulatory system. The necessary functioning of clearing, savings, and even basic lending could be separated from the rest of the financial system. The result would stabilize the system, reduce the price of money, reduce the amount of the economy that is forced to go through the fee extraction process of the financial industry, and also limit the government role in bank regulation.
See also: the mysterious capture of left economics