Russ Roberts did the interview live.

I was in the audience, and I stammered out this question”

I’m trying to figure sort of what makes Canada’s banks stable, and the thing that comes to mind is charter value, that the–you only have 5 of them, and they are profitable, and so they don’t want to lose their charter, and so maybe that stabilizes things. First, I wonder if you agree with that. And secondly, if you do, what are the forces that keep that from happening in the United States? I think you mentioned the populist sentiment–people don’t want banks to be profitable. The government wanted to use banks for redistribution purposes. Should we be trying to head toward a system where banks have valuable charters and if so, how could we head that way?

I did not think that they answered the question well. When I was at Freddie Mac, the CEO, Leland Brendsel, was very clear on the fact that the company had a valuable charter that it needed to protect, and this included not taking excessive risk. That changed after I left. In part, it was a new CEO. In part, it was a political environment in which Congress was even more convinced than the private sector that there was no such thing as a loan application that you should turn down.

A lot of the banking deregulation in the 1980s and 1990s was designed to make banking more competitive. The quasi-monopoly power of “unit banks,” which Calomiris and Haber have such contempt for, was ended. But the result was to weaken the value of bank charters, which may have induced banks to take more risk. Gary Gorton made this point a few years ago.

In any event, if I had it to do over again, the question I would ask is, “What explains Switzerland?” Because a lot of their thesis is that banks emerge in order to feed government demand for borrowing to fight wars. Switzerland famously has a significant banking sector, but I don’t see it as having arisen to help finance Swiss imperialism.