As a rule, progressives place little trust in market institutions and are always the champions of government intervention in the economy. This they argue is the only way to protect consumers, ensure competition, and protect the little guy from the greed and excesses of capitalism. Among the favorite targets are banks and the financial services sector in general. Without strict regulation from the state, they say, there would be no limit to the corruption and fraud committed by Wall Street against the folks on Main Street.
The fact that the financial services sector is the most heavily regulated industry in the world seems to make difference. If such government regulation worked as we’re told it’s supposed to, banks and other financial institutions should be the most consumer-friendly and beloved of all businesses. And yet they’re not.
This should come as no surprise, however. Given how tightly controlled the market is, there is little room for firms to adapt to consumer preferences, and the larger institutions have virtual control over the political and bureaucratic processes that direct the industry. Furthermore, the banking system, through fractional reserves, makes establishing business along the lines of a more transparent nature next to impossible. As a result of the state’s intervention, banking has become less about providing a valuable service, as Jeffrey Tucker explains:
There was a time when banks operated like normal businesses, performing a service in exchange for payment, while clearly delineating what part of people’s deposits were at risk (and, therefore, paid a premium) and what part were security (and, therefore, a service to be paid for). But central banking and fiat paper money have confused the issue to the advantage of the financial system, but to the disadvantage of depositors….
This backwards, bankrupt system is what allows the expropriation of Cypriot depositors (or at least the rationale for such a thing) and those of other nations whose governments are so entrenched in the financial system, and so desperate to remain attached to their hosts. In order to truly bring the sort of outcomes progressives claim to want — consumer protection, honesty, and fairness — they should divest themselves of the notion that the state is the only means to achieve such ends.
Again, if intervention could bring about these outcomes, we ought to see the banking industry as the most popular of all. Instead, we find that the most unregulated (at least as far as the state is concerned) markets are the most friendly to consumers, and the most responsive to their needs. This is because the market does regulate itself, to an extent far beyond any government planner can.
Finally, something that always seems to emerge in discussions about the role and legitimacy of government is a rather awkward claim: we’ve never had a truly free market (usually expressed as “that’s never been tried”) along with a warning of how terrible life would be like in a free market. This dissonance is patently absurd, especially coming from individuals who are driven almost entirely by empirical evidence. It’s high time to divorce the marriage between the state and the banks, and give the market an opportunity to do what the state can never do: serve humanity.