In the aftermath of the failure of Silicon Valley Bank and Signature Bank, everybody is trying to figure out what happened, who’s to blame, and what can be done to prevent it from happening again.

One of the most popular “solutions” is more bank regulations. But in his podcast, Peter Schiff explained why regulations are the problem, not the solution.

During a congressional hearing on the bank failures, a common refrain from Democrats was that it was caused by “deregulation.”

“Deregulation! Deregulation! Deregulation! Like the D in the regulation is the problem. The D is not the part that’s the problem. It’s the regulation that is the problem, and deregulation, to the extent that we actually had any, didn’t cause the problem. If we had any deregulation the problem is we didn’t deregulate enough.”

Politicians would have us believe that if we just had more bureaucrats overseeing banks, there wouldn’t be anything to worry about. They think that some politically connected people they appoint to a government job will somehow be so smart that they can figure out the problems and protect everybody.

They’re not. Chances are the regulators are dumber than the people that they’re regulating. Because, if the regulators were smarter, they wouldn’t be regulators. They could make a lot more money in the private sector.”

The best and the brightest aren’t the regulators. And competency isn’t generally the most important criterion in government hiring.

Also, the government sector has very little accountability.


Nobody cares. If you screw up in government, nobody loses any money.  I mean, the public loses money. But the politicians don’t care about that. So, you’re never going to have the most competent people in government. That’s why you want the free market to regulate banks, as well as everything else.”

People often claim that advocates of the free market don’t want any regulation. But Peter said that’s not true. In fact, the free market is another way of regulating behavior and conduct.

You can have the government regulate, or you can have the market do it. When the market does it, it works a lot better than when the government does it. In fact, when the government basically usurps the job that would be better done by the market, they short-circuit the market safeguards. They basically prevent the markets from doing their job and regulating, and they substitute the judgment of these incompetent bureaucrats.”

So, how can the market regulate banks?

The same way the market regulates everything — competition and individual self-interest.”

In a truly free market, people wouldn’t just put their money in a bank without doing some homework.

That’s your hard-earned life savings. You’re not just going to throw it into any old bank. You’re going to do some research. And even if you’re not competent to do the research yourself, you’re going to make damn sure somebody else did the research, and you’re going to follow their lead and subscribe to that service.”

Meanwhile, banks would know this. They would value their reputation for safety and soundness. Bankers would be rewarded for sound, prudent stewardship of deposits.

I’m going to succeed as a banker by nurturing my reputation for sound, prudent banking. So, in a free market, the banks that are the most sound, the most prudent, take the fewest risks are going to be the ones that succeed because they’re going to gather the most deposits, and those riskier banks, well, they’re not going to make it. That’s the free market.”

But in a government market, the FDIC ensures all of the deposits. After the collapse of SVB and Signature Bank, the government made it clear that the insurance limits now go to infinity.

The result?

Who cares where you put your money? No bank is safer than any other bank. No matter what they do, no matter what hair-brained scheme they concoct, your money is safe.”

In effect, the government has eliminated competition based on safety and soundness. Bankers are no longer rewarded for playing it safe.

He’s not going to get any more customers by avoiding risk than he will by assuming risk because the government has taken that out of the equation. So, that is why there is so much risk. That is why the banks are so insolvent.”

The government has replaced free market regulation that would rein in risky behavior with government regulation that encourages risky behavior.

Of course, this system empowers government people. That’s why they don’t want a free market. They want to be able to appoint people of their choosing to “oversee” everything. This gives them power.

They don’t want a level playing field. They get power by tilting that playing field.”

In this podcast, Peter goes on to talk about a very interesting point that came out during the congressional hearing regarding bank “stress tests.”

**By Peter Schiff


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