My letter to the Philadelphia Inquirer re: Wanting to jail the wrong bankers

Dear Sirs:

Mr. Joseph N. Distefano’s column “Should some bankers be in jail?” targets the wrong the bankers.  Sure, private sector banks made what ultimately came to be revealed as bad loans, but why would they do this?  There is no quicker way to lose money than to loan it to someone who cannot pay it back.  The real cause of the banking crisis is central bank intervention to lower the interest rate below the natural rate set by the market.  Central bankers, Keynesians all, believe that such action is necessary to provide full employment and economic prosperity.  But the interest rate is the method for the efficient allocation of scarce savings.  Artificially lowering the rate makes it appear as if more savings are available for extending credit to the next, less creditworthy tier of borrowers.  It is a fiction.  Fiat paper credit is not the same as real credit, which can only be created by real savings.  Central bank intervention to lower the interest rate gives less incentive to savers while making it appear as if more credit is available to less worthy borrowers.  If any bankers should go to jail, it should be central bankers.
Patrick Barron
This entry was posted in News/ Lessons. Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *