Fairness and Right Size

Posted: Nov 11, 2011 12:01 AM

Last night in the debate, John Huntsman talked about banks being the “right size”. That’s a normative economic statement. What is the right size? How can one person, agency or legislation determine the right size for a bank?

Why not let the market determine the right size? If they have a growing customer base that they service competitively, let them be as big as they want.

When you start to examine things, it’s better to use “positive” statements that can be scientifically proven and replicated. For example, “A higher minimum wage will cause higher levels of unemployement.”, can be scientifically proven and replicated in both theory and practice.

Megan McArdle writes about a similar theme today in the Atlantic. What’s fair?

Then we had our own financial crisis and it became suddenly, vividly clear: democratic governments cannot do even obvious right things if the public will not tolerate it. Even dictators have interest groups whose support they must buy.

It’s a subjective question just like “How much money is enough?”. Is there a pat answer? No, it’s totally dependent on a lot of variables.

The important thing is to get the regulation and law written correctly. They need to be written in such a way that the market is hyper competitive, transparent, and the checks and balances that come with markets can act. When companies fail, like the banks did in 2008 and GM/Chrysler did, we let them tumble.

Capitalism and free markets cannot work without creative destruction.

The largest problem with the banking sector is not the banks, it’s the regulatory apparatus that surrounds them. People like Sal Arnuk and Joe Saluzzi have been writing about how screwed up the marketplace is for a long time. No one is listening. The reason no one is listening is because there is so much money at stake. Bringing true flat, horizontal competition and transparency to markets would mean that the profits would shift away from entrenched bank traders to other places in the market. Banks have a huge stake, so they not only control the way the rules and markets are structured on Wall Street, they control the way the laws and regulations are written at the SEC, CFTC, Dept of Justice, and on Capitol Hill.

Independent traders know the consequences of having uncompetitive markets. Eventually they break because the natural checks and balances of markets can’t work to re-balance them. Instead of having new, or rewriting current regulations, it might be better to have a blank slate with no regulation at all and see what happens. Let the market determine what’s right.

It brings me back to right size. If we can determine the “right size” for banks. where does it stop? Is Facebook too big? What’s the right size for a social network? An oil company? A news agency? A car company? Your company….

Too often, we are spoon fed the concept of fairness. Social justice is wrapped up in fairness; too much profit, the living wage, health care is a basic human right and the rest of their diatribe. Capitalism and its allocation of capital is the fairest thing I know.

It takes a lot of hubris to say you know the right size for something when a gazillion independent agents in a transparent marketplace can determine it for you each and every minute of every day.

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