"Banks are special"

Everyone interested in finance is now talking about the recent announcement by JP Morgan that it somehow managed to lose $2 billion in the past six weeks. In a recent opinion article, Paul Krugman asserts that this is precisely why we need more government regulation:

Just to be clear, businessmen are human — although the lords of finance have a tendency to forget that — and they make money-losing mistakes all the time. That in itself is no reason for the government to get involved. But banks are special, because the risks they take are borne, in large part, by taxpayers and the economy as a whole. And what JPMorgan has just demonstrated is that even supposedly smart bankers must be sharply limited in the kinds of risk they’re allowed to take on. [emphasis added]

So do you now understand? Banks are special.

The beef I have with Krugman is not that I think businessmen are superior to government; far from it. No, the beef I have is that I believe, as a hopeful believer in the classical liberal tradition, that our ultimate political goal should be to create a society which is less dependent on people with power, not more dependent. Krugman either thinks there is nothing wrong with a system in which we are forced to pay for the mistakes of cocky financiers, or else he simply thinks such a system is inevitable. I refuse to accept either premise.

As libertarians constantly remind us, if big businesses will at some point inevitably screw us all over, then isn't the same true of big government?

How do we liberate ourselves from a power structure which forces the many to pay for the mistakes of a few? It seems to me we need to reexamine the purpose of law. Almost everyone in contemporary political discourse assumes that one of the major purposes of law is to prevent bad things from happening. So confident are we in our ability to control the world around us, using the incredible technological and political tools developed in the modern era, that we feel certain that someone ought to be able to steer this monstrous ship away from those icebergs. (You'd think we'd actually learn something from the Titanic.)

We need a more chastened approach to law. The purpose of the law is to administer justice. This concept is still not lost on most people. We understand that if we have been wronged, the person who has done the wrong ought to compensate us. It is not possible to change a person's motives, but we can punish bad behavior.

Sometimes, however, the question is not so much whether a person has committed any wrong, but rather who should be responsible for what happened. A man who risks his own money in a business venture has not done any wrong to anyone, and probably has good intentions. However, if the venture goes bad, then justice does not provide him any claim on anyone else's money to reimburse him. He may ask others to be merciful, of course. But is stealing from someone else in order to help this man really an act of mercy? That, in effect, is what the government does whenever it bails out failed businesses. And how much more insulting is this practice, since the businessmen being shown "mercy" hardly deserve our pity!

For this reason, the best way to constrain government is to demand from it only justice, not mercy. The purpose of government is not to "steer the boat," as it were. Its sole purpose is to arbitrate between individuals who will sometimes fall into irreconcilable conflict. Its purpose is to decide the boundaries of responsibility so that individuals aren't forced to pay for the consequences of actions to which they had no prior connection, and then to enforce those boundaries. This is clearly not a trivial task, but it is a fundamentally different task than the one demanded by a majority of the American public today. It has nothing to do with control, but only with justice.

Doubtless someone will say that mercy triumphs over justice. A fine Christian sentiment that is, but mercy can only be shown by someone with power. The vision proposed by America's founders is one in which the government is not an institution of power, but of service to the people. God can have mercy on us because he has some rightful claim on us. If we admit that the government can have mercy on us, we give government a place which only properly belongs to God! Nothing belongs to the government other than what we have given it, or what has been taken from us. What an act of mercy for government to steal from the many in order to give to the few!

Like Krugman, I believe that if government is to insure the banks against all possible failures, it ought to demand that these banks act within the bounds of reason, so that they don't harm the public. But the question is whether the government has the authority to insure the banks in this way. The question is whether anyone has the right to claim a position in society that is "too big to fail," or too important not to be supported by the public. Such a position is what used to be called privilege, before the term came to be abused in modern discourse. The American dream, in my view, was to have a society in which the notion of privilege in this sense was all but totally destroyed.

It is not possible to prevent mistakes. It is not possible to prevent evil. Regulations will only slow down the conscientious. Those who have respect for what is right and prudent will either work around such regulations or ignore them. When people speak of the need to "regulate," they have already assumed that there is such a thing as privilege. And that is a tragedy.

Rather than regulations, we simply need law. "A government of laws, and not of men," as Madison said. In the short run, laws do not prevent evil men from doing evil things, but they do give the common man the power to stand up and be compensated for the wrong done to him. One hopes that in the long run, this has the tendency to prevent evil, since at least people will seek to avoid bad consequences. But what is there to prevent a man from doing as he pleases, when he knows that he has a place of privilege in society, and someone will always pick up after his mistakes?

I don't know how to successfully reform the power structure we have mistakenly built in this great civilization of ours. All I know is what kind of direction we ought to move in. It seems to me that so-called "liberals" like Krugman have abandoned the classical liberal vision of a world without privilege. My only guess is that they have all but abandoned thinking about the long run in favor of using their technocratic abilities to help as many people as they can in the short run. We shall see what is the fruit of their bias.