Yesterday morning, a Modern Monetary Theorist tweeted part of a 2017 interview he did with Warren Mosler, one of that school’s leading proponents and benefactors. As the clip was titled “Against Free Banking: The Liability Side Isn’t The Place For Market Discipline,” yours truly couldn’t resist a look-see.
Having heard just about every conceivable argument against free banking, I frankly did not expect to gain much; but I got even less than I expected. The promised argument “against free banking” consisted of little more than the tired old assertion that, without comprehensive deposit insurance, banks, no matter how sound, are bound to fall victim to runs:
What happens is, you know, somebody starts a rumor in social media that they saw the bank president’s wife taking money out of the bank, so all of a sudden there’s a panic, everybody tries to take their money out, and the bank fails… And the market in all its wisdom has decided that bank needs to fail. It’s always for some reason that’s highly suspect… Even the banks that failed in ’08 and were liquidated, on a look back, they were not insolvent. It was just liquidity issues…
Apart from the quaint bit about the banker’s wife, and misinformed particulars concerning bank failures in 2008, there’s nothing special about Mosler’s statement, except for its source. Many believe as he does. But most don’t pretend to be experts on money and banking, or to have given any serious thought to the topic. What little they know they might have learned by watching It’s a Wonderful Life or Mary Poppins (or, in the case of the more studious, both).
In contrast Mr. Mosler, a hedge-fund founder and engineer by trade, does claim to be an expert on money and banking. What’s more he commands a large following. So one might expect him to display a little more knowledge of his subject than one might gather from a couple old movies. Alas, he doesn’t. And so, instead of enhancing others’ understanding of runs, he throws the weight of his authority, such as it is, behind what amounts to little more than a hackneyed folk tale.
That folk tale — call it “The Great American Banking Myth” — has played an outsize role in shaping bank regulations, first in the U.S. itself, and eventually worldwide. And not for the better. On the contrary: we have the tale to thank for much of the rot afflicting so many of the world’s banking systems today. Consequently it cries out for a thoroughgoing debunking. Though a single essay can hardly suffice, I hope this one can stand as an abstract.
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