What's To Be Done?

The recent shenanigans at JP Morgan Chase have revived calls to break up the banks and bring back Glass Steagal. Considering that the former is coming from the National Review should give everyone some pause. Yet Kling begins down a path here that I think is worth exploring. Actually, it reminds me of another debate which ultimately proved that having two such diametrically opposed viewpoints locked in a narrow minded ideological struggle is fruitless.

Like the seemingly endless debate between Keynesian and laissez faire economics, realism and liberalism (in terms of foreign policy) were locked in opposition as to how to deal with the Soviet Union. Realism explained the world as being in a constant state of anarchy and only through military power and constant distrust of other states will order and peace prevail. Liberalism called for international cooperation amongst the states of the world through peaceful, non-militaristic means.

Both of these ideologies completely failed to predict the collapse of the Soviet Union. One day, the Soviets simply gave up. It was not due to military pressure nor was it due to an international cooperative entity like the UN. It happened because of new thinking and out of the box ideas beginning with the simple fact the world's structure isn't set in stone and is, in fact, constantly in flux.

It is this sort of constructivist thinking that should be applied when considering the relationship between government and the financial sector...indeed, government and the free market in general. Neither Keynesian nor laissez faire economic theories (nor the various offshoots) can adequately explain the global marketplace today. Returning to the type of regulation called for Paul Krugman may not be effective for a wide variety of reasons. And clearly allowing banks like JP Morgan to continue to take the risks that they do isn't an option either. So, let's take a look at ideas from each of the pieces I've linked and see if there is a solution.

First Kling.

I believe that our best hope lies somewhere other than making our largest financial institutions impossible to break. Instead, I think we need to make our financial system easy to fix.

This would eliminate the need for more and more regulation. Kling's idea is to restrict the size of banks but I'm not sure that's the best way for it to be implemented. Wouldn't that be detrimental in the increased competition of the global marketplace?

Next we have the editorial staff at the Trib Review calling for a return to Glass Steagal. Why?

As The Small Business Authority puts it, "We ... need to get back to a capital asset pricing model where high-risk ventures are financed with a higher cost of capital and not government-guaranteed deposits ... ."

If the cost of capital were higher, wouldn't that make the system easier to fix? I honestly don't know. That's why I'm asking.

That brings us to Krugman.

It’s clear, then, that we need to restore the sorts of safeguards that gave us a couple of generations without major banking panics.

Exactly. But again, not the way he is suggesting with more government backed guarantees. Safeguards need to be in place but what sort of form should they take?

The reason why I am asking here is that I want to try to see if we can chuck the old schools of Keynes and laissez faire and adopt some new thinking and new ideas based on the identities that have been defined by the global marketplace.

Falling back into old ideological traps simply won't serve us.