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Of
course, it is desirable for equity capital to be
“sufficient” with regard to amounts loaned. In fact, in the
19th century, equity capital most often represented 60% to
80% of banks’ balance sheets. Banks lent the funds that
belonged to their shareholders and the high (and desired)
ratio of equity capital was a formidable guarantee of
stability both for those shareholders and for a bank’s
clients. Bankers were therefore real capitalists—that is to
say, owners of capital. As such, they were responsible.
In our time, it is
imagined that economic development can be based on credit
instead of equity capital. Meanwhile, a large part of credit
is created ex nihilo, through expansionary monetary policy,
and not through voluntary saving. At the same time, the
decline of capitalism—itself often a result of government
intervention—has resulted in the fact that the major banks
are no longer run by capitalists, owners of capital, but by
managers who, not themselves assuming shareholder’s risks,
are tempted to maximize short-term profits.
In the 19th century
capitalist world, more stable than the current financial
world, bank credit was the result of decisions made by bank
shareholders. In our own, statist time, the exact opposite
happens. An arbitrary equity capital ratio is imposed that
merely mimics a true capitalist world, but this leads to the
emergence of financial bubbles. Credit institutions maximize
their credit amounts and then, through manipulation, try to
present an equity ratio that satisfies the regulation. A
regulation that imposes a result will never be an adequate
substitute for the free play of decisions made by
responsible (that is to say, capitalist) human beings. This
is why the constant appeals we hear these days in favour of
stronger regulation of financial markets are unfounded.
Of course, we can
reproach financial institutions for not having been more
prudent. This results from the institutional structures of
our time that we have just gone over. But this also reflects
the fact that information can never be perfect: a capitalist
system is not perfectly stable, but it is more stable than a
centralized, statist system. This is why, instead of
condemning the supposed instability of financial capitalism,
we should condemn the extraordinary imperfection of monetary
policy. We can regret that the managers of major banks were
not more clear-headed and did not more carefully evaluate
the risks they were taking in a world where monetary policy
is fundamentally destabilizing. But it is precisely and
especially this destabilizing character of monetary policy
that we must deplore. Let us then stop hurling groundless
accusations at capitalism and instead search for a way to
free financial markets from the grip of government.
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The harmful effects of this policy were aggravated by several
phenomena. First of all, the sense of responsibility for undertaking
risks was dulled because it was implicitly admitted that the public
authorities would not allow major bankruptcies in times of trouble
(which has been partially confirmed by the current behaviour of the
American authorities). In particular, the two large purveyors of
“subprime” credit, Fannie May and Freddie Mac—initially created by
the American government—enjoyed privileged government guarantees
that led them to undertake extremely excessive amounts of risk.
