For the past couple of days, I have heard someone on television decry, “Where are the new banks?” This is a logical question from the standpoint of simple economics in that as bad firms service the public there is an incentive for entrepreneurs to form new businesses to compete with the failing firms, take market share, and allow the public the opportunity to belong to a firm that is successful.
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The problem with this analysis is that it relies on no barriers to entry. And while I think that there are not significant formal barriers to entry, such as permitting, compliance etc., to starting a new bank, the unspoken barrier to entry is freezing out the formation of new participants.
The entrepreneurs of finance are not small thinkers – just as no true entrepreneur is. They see something small growing to something big, and doing it by providing superior value to the customer over long periods of time. Think Sam Walton, Steve Jobs. These leaders see themselves as fulfilling a public need by providing excellent products or service to the customer.
If one thing has been made perfectly clear, it is that the giants of the banking industry – who have offered poor products and have exercised poor managerial decisions – will not be allowed to fail. Since the old firms will not be allowed to fail, by default, the new entrepreneur will not be allowed to succeed to their fullest capacity.
The people who would look to start a new firm that would be successful are not looking to have their growth and their potential to succeed capped. Given a choice to be involved in a business where success is capped, or do nothing, they choose to do nothing. It simply is not worth the risk. This is not limited to banks – you may have noticed there are no new car companies being formed. There is no real competition for Amtrak. Intervention by the government in all these cases was premised on the idea that they must be saved in order to protect the public from the negative effect associated with their failure.
<o></o>Yet we continue to intervene and subsequently create a disincentive for new participants to enter the fray. We continue to do the same thing and expect a different result. Washing out the bad actors in any industry is the foundation for continued success of the productive members of that industry. When we support the weakest of an industry in the name of public good, we only ensure the decline of the public good. <o></o>
So to answer the question posed earlier: There are no new entrants. There will be no new entrants so long as the success of the industry participants is determined not on the decisions of management, or the end product to the consumer, but on public good as determined by non-market participants.
<o></o>
The problem with this analysis is that it relies on no barriers to entry. And while I think that there are not significant formal barriers to entry, such as permitting, compliance etc., to starting a new bank, the unspoken barrier to entry is freezing out the formation of new participants.
The entrepreneurs of finance are not small thinkers – just as no true entrepreneur is. They see something small growing to something big, and doing it by providing superior value to the customer over long periods of time. Think Sam Walton, Steve Jobs. These leaders see themselves as fulfilling a public need by providing excellent products or service to the customer.
If one thing has been made perfectly clear, it is that the giants of the banking industry – who have offered poor products and have exercised poor managerial decisions – will not be allowed to fail. Since the old firms will not be allowed to fail, by default, the new entrepreneur will not be allowed to succeed to their fullest capacity.
The people who would look to start a new firm that would be successful are not looking to have their growth and their potential to succeed capped. Given a choice to be involved in a business where success is capped, or do nothing, they choose to do nothing. It simply is not worth the risk. This is not limited to banks – you may have noticed there are no new car companies being formed. There is no real competition for Amtrak. Intervention by the government in all these cases was premised on the idea that they must be saved in order to protect the public from the negative effect associated with their failure.
<o></o>Yet we continue to intervene and subsequently create a disincentive for new participants to enter the fray. We continue to do the same thing and expect a different result. Washing out the bad actors in any industry is the foundation for continued success of the productive members of that industry. When we support the weakest of an industry in the name of public good, we only ensure the decline of the public good. <o></o>
So to answer the question posed earlier: There are no new entrants. There will be no new entrants so long as the success of the industry participants is determined not on the decisions of management, or the end product to the consumer, but on public good as determined by non-market participants.
