A remarkable observation

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02-28-2013, 09:03 AM

Winged Wheeler

Libertarian Resistance

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A remarkable observation

"For much of the nineteenth century, when banks were partnerships whose owners were fully liable for their debts, it was common for banks to have equity on the order of 40 percent or even 50 percent of their total assets. Around 1900, 20–30 percent equity for banks was common in many countries. These equity levels were not mandated by any regulation. Rather, they emerged naturally in the markets in which the banks' owners and managers, depositors, and other investors interacted. The decline that occurred subsequently in the twentieth century was closely related to governments' needs for finance in World War I and to the development and repeated extensions of the various safety nets by which governments support the banking industry, from explicit guarantees provided by deposit insurance to the bank bailouts and implicit guarantees for too-big-to-fail banks."

Admati and Hellewig "The Banker's New Clothes" (178)

02-28-2013, 05:16 PM

jungle

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That was then and this is now. Now is another story.

03-01-2013, 04:28 AM

742Dash

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You do not have to go back that far. The conversion of investment banks from partnerships to public ownership is very recent -- and a disaster for everyone except their senior management.

03-01-2013, 07:13 AM

Winged Wheeler

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Quote:

Originally Posted by jungle

That was then and this is now. Now is another story.

What I thought was interesting was that the market, in the supposedly unfettered days of 19th century capitalism, actually provided a better banking system than the federal gov't/TBTF regime that we have now. To be sure, depositors without access to lawyers were at risk in the 1800s. But we now have a mature and robust civil tort system (probably too mature and too robust) and lack of access to a lawyer is not an issue in the US. Operating banks as general partnerships, regulated by civil law, would solve many of the problems we've seen in the last decade.

I understand that there is no chance of the federal government going for this, but it is another example of a market based solution to modern problems.

WW