Financial Prohibition?

Yahoo! Finance reports that some "world bankers" at the Bank of International Settlements (BIS) are making the following pernicious argument:

Financial products should be treated like medicines and sold to consumers only when they are certified safe to prevent a repeat of last year's financial meltdown, the world's central bankers said on Monday.

Later, the article elaborates on this position, although not to the degree that it should have.

The BIS was alarmed by how a collapse in the value of opaque and complex securitised products propelled the world's financial system into crisis. It said in its annual report all financial products should be registered like medicines.

The safest instruments would be available to everyone, a second tier only to people with authorization, like prescription drugs, and a third tier to a limited number of pre-screened individuals and institutions, like experimental drugs are.

A final tier would be securities deemed illegal. [bold added]

Too bad the authors allowed themselves to be fooled by the paternalists of the BIS into focusing on what they say they want the government to treat like what. In fact, the BIS is proposing that governments treat private citizens like children regarding their own finances, much as they currently do now regarding their health.

This is outrageous on many levels, most obviously at that of the practical consequences, which stems from the deeper, moral level.

First, consider the consequences of drug prohibition...

Something doesn't go away just because the government decrees it illegal. It simply goes underground. Then a black market creates worse problems. Since sellers cannot rely on police to protect their property, they arm themselves, form gangs, charge monopoly prices, and kill their competitors. Buyers steal to pay the high prices.

In the context of financial products, if you judge a given product worth the risk of your own money, you will have the "choice" of passing up that opportunity and obeying the law -- or assuming the newly-added risks (e.g., of legal troubles, having to deal with criminals, and having no government protection of any contracts you might ordinarily make) that come with illegal activity.

And then, there's regulation of medicine. We'll confine ourselves to just the first four items of a top ten list of ways the FDA threatens or injures our health in the name of protecting it:

1. The FDA adds billions to the development cost and price of new drugs.
2. The FDA delays the availability of new drugs for years.
3. The FDA prohibits the use of new drugs that treat conditions for which other drugs are available, regardless of how much better they might work for some patients.
4. The FDA withholds new drugs -- even those that passed initial safety tests -- from terminally ill patients, in the name of preserving safety. When one of these patients wins access to the drugs by going to court, the FDA, apparently in a relentless effort to protect the health of the dead, appeals the ruling until the patient dies, at which time the appeal is of course dismissed.

Do we really want the same kind of "protection" for our financial health?

And next, consider the fox being proposed as guardian of this hen house. Alex Epstein of the Ayn Rand Institute, writing about the financial meltdown about a year ago, begins answering a crudely-put question by Fortune Magazine.

"What were they smoking?"

A major part of the answer is: government bailout crack.

For decades our government has had a semi-official policy that large financial institutions are too big to fail--and therefore must be bailed out when they risk insolvency--a policy that creates perverse incentives for them to take on far more risk than they otherwise would. "Too big to fail" is implemented through a network of government bodies that protect financial institutions from the long-term consequences of their decisions at taxpayer expense--a phenomenon we can observe right now. [bold added]

If we're going to draw an analogy between financial products and pharmaceuticals, the least we should do is draw the right one. The government has been playing the part of dope dealer and, by that simple observation, anyone should be very leery of any proposal to expand its involvement in our personal finances!

But the outrage hardly ends there, although that might be enough to give most people pause. The real outrage is that the proper function of government, the sole social entity that can legally wield physical force against individuals, is the protection of individual rights, and that the calls by the BIS for the government to restrict how we spend our own money are direct calls for the government to violate our property rights instead.

Man is the rational animal, and reason is his tool for survival. The government is supposed to ensure that each man is able to exercise that faculty to the fullest extent that he wishes, so long as he respects the rights of other men to do so. This is why it is wrong for the government to dictate the behavior of individual men. This is why when it does so, it ultimately leads to results inimical to our survival.

The bankers of the BIS might argue that poor financial decisions multiplied across an economy millionsfold are harmful to individual investors, and they would be correct. But were they to look further, they would see the hand of the government at every step of the way. Government policy has encouraged and even mandated foolish financial behavior on the parts of countless individuals. And government bailouts compound the injustice and slow the economic recovery by taking money from the responsible in order to insulate the irresponsible from the consequences of their own actions.

The government depriving people of opportunities is not the solution to the problem of the government encouraging people to take unnecessary risks. The solution is to get the government out of the financial sector altogether.

-- CAV