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The free market banking myth

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December 04, 2009 – Comments (3)

The U.S. banking system is simply not a free market system, so it's nutty to think that there can be a free market solution to the problems that we're facing. Thus far, all of the deregulation and free marketeering has only served to make bankers rich and destabilize the system. Do we really want more of that?

Sure, sure, I know that Ron Paul and the elimination of the Fed is the answer for many, but I've yet to be convinced that this is any more of an adviseable route. 

Today on Fool.com I tackled this issue of treating a government-controlled system with free market solutions.

Matt

3 Comments – Post Your Own

#1) On December 04, 2009 at 6:05 PM, amassafortune (29.49) wrote:

Glass-Steagall should be revived because that is the primary action large banks are paying lobbyists to prevent. This indicates it is probably the most effective way to protect banking customers. 

In lieu of that best solution, your idea of stripping down bank functions to core banking services is a good second option. Banking should be more like getting oil changed in a car. You pull in for a specific service, and though they may try to upsell other services, in the end, you only pay for the services with a small premium added for their overhead, free coffee, and waiting room magazines. Jiffy Lube has no right to leverage the oil in my crankcase and gas in my tank while my car is under their control, and so it should be with banks. 

As with the FCC, banks should operate based on licenses that are periodically reviewed and include public input. If they do not act in the public interest, those instances are made public and become part of the review process.

Citizens also have the power to do end run or flanking maneuvers to counter banking abuses. Pay cash where that makes sense. My wife has already noticed more people paying cash at checkouts, though lower credit limits may be a factor in some cases. Hold assets that maintain value. China's request for citizens to accumulate a small portion of their wealth in precious metals may be a good long-term action for anyone with the ability to safely secure valuable assets. 

To counter the low interest rate paid to savers, cut out the middle-man and make loans directly and privately to credit-worthy people. The saver will make more money from the borrower than on a CD, and the borrower will have a legal document with all details outlined in a uniform font size. The only reasons to use banking services is added safety, convenience, and lower risk than putting together private deals. Banks have reintroduced risk, inconvenience, and the question of safety. Sure, going back to local, private lending  will starve the banks of deposits, but once they are whittled down to a manageable size, they will be just the right size to fail.      

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#2) On December 04, 2009 at 6:12 PM, starbucks4ever (97.24) wrote:

It's a political problem, not regulation vs. deregulation problem. When we have president who cold-shoulders the bankers, they will have a tough time no matter if it's regulation or deregulation. And vice versa, when the president is a bankers' puppet, both regulation and de-regulation will be carried out is such a way that banking CEOs will own islands. Moral: look carefully which party you vote for. Oh, I forgot, there's only two :) Tough luck then.

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#3) On December 07, 2009 at 6:45 PM, TMFKopp (98.42) wrote:

@amassafortune

Overall, agreed.

"Banking should be more like getting oil changed in a car. You pull in for a specific service, and though they may try to upsell other services, in the end, you only pay for the services with a small premium added for their overhead, free coffee, and waiting room magazines."

Well, yes, except that Jiffy Lube has to (for the most part) pay true free-market prices for the inputs in its business (oil, oil filters, etc). The cost of capital for banks is very highly dependent on where the Fed sets its rates.

Matt

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