The nanny state world is characterized by a growing list of regulations and government supervision of business in an effort to fix the most recently observed problems. The price of such protection is the increased cost of doing business, which tends to crowd out small businesses and favor large ones, which can more easily absorb the compliance costs. The benefit is often difficult to detect. Has Dodd-Frank really made it feasible to fail our largest banks (now larger than they were just before the Great Recession), i.e. are they no longer too big to fail?
The self-governing, liberal state—"Liberalism unrelinquished"—is characterized by a government that sets and enforces the rules of the game (contracts, bankruptcy, property rights, etc.). The number and length of laws and regulations needed are dramatically fewer and infrequently adjusted. Rent seeking opportunities (exploitation of government regulations for private gain) are thus much smaller. Firms succeed or fail on the basis of how well they satisfy the needs of their customers and fix any problems along the way themselves.
In this note I illustrate these alternative directions—the liberal state vs. the nanny state—with an area of the growing regulation of business that has received considerable attention in recent years—banking supervision and the closely related area of monetary policy. I discuss the structure and regulation of banks in relation to my earlier proposals to replace discretionary monetary policy with a simple rule: "Real SDR Currency Board"
- banking supervision,
- reserve currency,
- monetary anchor,
- nanny state,
- liberal state,
- market discipline,
Available at: http://works.bepress.com/warren_coats/31/