With a Central Bank, Bank “Deregulation” Can Be a Bad Thing

Leading Federal Reserve policymaker Stanley Fischer has hit out at plans to unwind banking regulation, calling it a “terrible mistake.”
President Donald Trump and republican politicians have advocated the repeal of Dodd Frank, a major piece of post-crisis legislation, and the loosening of some capital and liquidity requirements in a bid to ease banks’ ability to lend.
In an interview with the Financial Times on August 16, 2017, Fischer said that loosening capital and liquidity requirements is dangerous and could lead to a new economic crisis. “I find that really, extremely dangerous and extremely short-sighted.”
While Fischer is not a friend of a free market, in this case I am in agreement with Fischer’s comment.
A True Free Financial Environment vs A Central-Bank Controlled Financial System The proponents for less control in financial markets hold that fewer restrictions imply a better use of scarce resources, which leads to the generation of more real wealth.
It is true that a free financial environment is an agent of wealth promotion through the efficient use of scarce real resources, while a controlled financial sector stifles the process of real wealth formation. The proponents of deregulated financial markets have overlooked the fact that the present financial system has nothing to do with a free market. What we have at present is a financial system within the framework of the central bank, which promotes monetary inflation and the destruction of the process of real wealth generation through fractional reserve banking. In the present system the more unrestricted the banks are the more money out of ‘thin air’ generated and hence greater damage inflicted upon the wealth generation process. (With genuine free banking (i.e., the absence of the central bank) the potential for the creation of money out of ‘thin air’ is minimal).

This post was published at Ludwig von Mises Institute on Sept 15, 2017.