Here’s John Allison, ex-CEO of BB&T and Ayn Rand enthusiast, arguing for a fully private banking system. As a second-best solution, Allison suggests taking away Fed discretion by having it more or less mechanically target a growth rate for the money supply, abolishing deposit insurance, and getting rid of GSE chimeras like Fanny and Freddie.
I think I agree with most of Allison’s prescriptions, but it’s not clear to me how we get from here to there. Which leads to my worry.
The first step in the direction of a laissez faire system of finance would seem to be getting a whole lot more people to think more like John Allison. But I’m afraid that the realistic prospects for this point of view are rather limited. Suppose everyone open to supporting a laissez faire financial system does. That surely gets us to a less regulated financial system, but not to a fully laissez faire financial system. And this is where the theory of the second best really comes into play.
The theory of the second best says that if any of the conditions for optimality are absent, the next best scheme could be one in which even fewer of the conditions for optimality are met. In any case, whether a particular mix of regulation and market incentives is better or worse really depends on the details. More vs. less regulated is not really the issue in a mixed system. The overall structure of incentives governing the scheme is the issue. (For example, as Matt Welch argues, the U.S.’s incoherently mixed health-care system is in many ways worse than France’s more clearly socialist system.) And I have very little confidence in my ability to predict or evaluate the nature of the mix in the world in which the ratio of free marketeers to technocrats improves.
I’m not sure what to say about this, other than that thinking too hard about it is a bit paralyzing, and so one might as well continue to just say what what thinks would be best as if we were designing a system from scratch. But I think it’s good to recognize that it may or may not be a good thing if lots of people come to agree with you, even if you’re right. Does that make sense?
Much more John Allison here.