Bank failures are not the problem. They are the solution. Banks should fail much more often.

Let's start by imagining we lived in a sane world, one in which deposits and payments were fully disentagled from the credit and investment functions of banking. "Banks", in this world, are credit investment funds, some of which might be unregulated and fully private, while others would accept development funding from the state on subsidized terms. As with contemporary banks, managers of state-subsidized funds be required to put up a first-loss equity stake. The state would monitor and regulate these funds to prevent private managers from taking heads-I-win-tails-I-walk risks with the state's largesse.

What should these funds look like? Should they hold large, diversified asset portfolios like a contemporary G-SIB?

No, they should not. If the state is financing credit and investment funds, they should be small, undiversified specialist funds. Why? Because the state diversifies its portfolio at the aggregate level. There may be a private benefit to fund managers, but there is no social benefit, from individual funds being diversified across sectors. There are large social costs, however, to diversified investment funds.

Delegated investment management is an industry, unlike most domains of human excellence, where you want incentives to be very sharp. Managers should do well only when they actually invest well, from the perspective of the principal whose funds are delegated. Managers should suffer financial loss when they choose poorly. Managers may prefer to manage diversified portfolios, because managers are human beings who are risk-averse, and a diversified portfolio can reduce managers' risk at modest cost in overall returns. But investment managers should not be hired on the terms they prefer, but on the terms that serve their principal. The state's interest is to hire the most informationally qualified people to invest in a particular domain — which might be an industry, a locality, or type of borrower — and then to incentivize them to invest as well as they are capable within that domain. Of course managers would be required to put together a diverse portfolio within their own specialty. But any effort they devote to diversifying outside of their specialty diverts from the state's object, which was to subsidize a particular sort of economic development. The state must simultaneously regulate managers to prevent them from taking overly risky bets within their domain, and to prevent them from employing personally valuable but socially costly strategies that dilute incentives to discover and carefully monitor investments that would not occur absent their partnership with the state.

The state should prefer small managers to large. It's impossible to keep incentives sharp at a large, diversified investment fund. Firms like JP Morgan Chase are communist bureaucracies, in the pejorative sense. Every individual decision-maker in a large investment firm strives to manufacture a kind of personal put option from the raw material of office politics and diffuse responsibility. If things go wrong, well the decision wasn't really theirs, was it? There was the committee. On the other hand, decision-makers at large investment firms famously manufacture for themselves call options on speculations for which they take credit while things look good. They negotiate bonuses based on gains which the principals on whose behalf they invest have not yet realized, and very often never will.

Small manager-equityholders have a harder time playing these games of paying temporary gains to themselves and shifting eventual losses to others. If they screw the state, they are identifiable. Their transfers are not laundered through vast layers of middle management and HR dross. And the state can be vindictive. Equityholders might screw one another, but at small, private firms there is no seperation of ownership and control. Shareholders have incentive and capability to monitor one another.

The most important reason to prefer small investent funds, however, is because large-scale funds are stupid. Large banks and investment funds are stupid in a very particular, very destructive way. They rely far, far too much on "hard information". They are evidenced-based. Fucking idiots!

An employee at a large bank or investment firm can't get away with lending "on a hunch". They must have credit scores, good collateral, documented income streams, dossiers full of stuff whose ultimate meaning is "I cannot be blamed should anything go awry. Whatever happens, the basis for my decision was impeccable." A large-scale bank won't long retain loan officers who can't justify their decisions with hard data everyone can inspect and nod along with in the power-point.

At a large bank, it will never cut it to go before the loan committee and say "Yes there's no collateral, and limited credit history. But I've known Duane and his family for a long time. They are serious and connected to the community, and the business plan is promising." But it is exactly this kind of loan that creates the greatest social returns. The true source of economic development is speculative but discriminating monetization of human aspirations and capabilities. You turn people with nothing but a work ethic and a great idea into proud pillars of the community by making available the resources they require to succeed. The more a borrower lacks — the less collateral they have to offer, the further they are from holding a sexy degree from Stanford — the more social upside there is in their success.

The very best loans are the ones that cannot be justified at all in terms of hard information, but are made anyway on the basis of very good soft information. Big banks are simply unable to lend on soft information, due to bureaucratic imperatives, and a need to manage legitimate ethical concerns. (Is this "soft information" just nepotism? Are we "discriminating" on the basis of some hypothetical je ne sais quoi of investment quality, or is it really just race?)

One of the stupid tropes in American finance policy debates is envy of the Canadian and Australian banking systems. Canada and Australia have fucking terrible banking systems! Yes, if you concentrate all of banking in a few hyperdiversified megalenders and put a regulatory moat around the sleepy cartel, you can avoid failures and crises. But you'll mostly lend against solid collateral — real estate, mineral rights, the wage stubs of stable employees. You'll end up with economies too reliant upon resource extraction, primary goods, and housing bubbles. I love Canada and Australia, as countries and cultures. But they have not been, broadly speaking, economies a developed country should wish to emulate. Their human-capital-hungry immigration policies are laudable, but perhaps it is not a coincidence that countries whose banking systems are structurally incapable of making the most of domestic human capital seek to import it so aggressively from elsewhere.

If we think of a banking system as the means by which the state mobilizes resources to subsidize economic development, it is clear that the state should want a vast ecosystem of tiny banks, whose incentives are sufficiently sharp they can be trusted to lend and invest based on soft information. The state ("regulators") would be constantly monitoring these banks, both to ensure they don't resort to casino finance (that is, make bets that either generate huge returns or collapse catastrophically), and to monitor asset performace. Lots of these small banks would "fail".

Small, undiversified banks are simple to understand, easy to monitor and supervise. Banks whose assets fail to perform, whose loans experience defaults at a cost near or beyond managers' equity stakes would be taken promptly into receivership. Failures of these tiny undiversified banks would be common. But they would not be very expensive. On average, over the public's full portfolio, asset quality would be high. The state would finance many little banks across a huge range of domains (industries, locations, borrower types), and end up with a diverse, high-performance development portfolio.

Okay. But we don't actually live in this world where banks are only subsidized investment funds. In our fallen, real world, the same banks we rely upon to make risky loans issue the deposits that the public understands as its money, and operate the payment system. In this real world, wouldn't undiversified, frequently failing banks be disruptive and dangerous? Aren't we better off with Jamie Dimon's perhaps faddish and uncreative banking, if that prevents financial panics and collapses?

No!

The case for small banks that fail fast and frequently is even stronger while we (stupidly) rely on private bank deposits for everyday money and payments. When bank failures are perceived as disruptive events that shake public confidence and provoke recessions or even depressions, bank regulators' incentives get very confused. The job of bank regulators ought to be to ensure that banks lend well, both in the sense of getting their money back, but also in the sense of supporting economic development. But when bank failures are infrequent events that risk panicking the general public, regulators' incentives tilt entirely towards preventing and suppressing failures. This harms the public in two distinct ways. First, in the name of "safety", regulators encourage banks to lend conservatively against marketable collateral, short-circuiting their crucial development role. Second, when, inevitably, banks fuck up, despite any legal commandment, regulators do not engage in "prompt corrective action". They do not quickly react to balance-sheet problems and take banks preemptively into receivership. The system must be seen to be stable! Regulators' incentives are to delay, to allow banks to "gamble for redemption" on the theory that bankers' redemption would also be the public's. A bank failure averted, they tell themselves, is perhaps an economic depression averted. When big banks are in very deep trouble, regulators' incentives are to loot the public in some technocratically obscure manner that doesn't look too obviously like a tax. After all, which is worse, to skim a bit from the masses in order to recapitalize the banks, or to risk a new Great Depression?!

While bank failures are infrequent and spectacular, regulators prefer financial institutions to be vast and diversified. Both diversification and sheer complexity reduce the likelihood that regulators will be forced to recognize a failure and then — frighteningly, embarrassingly — intervene.

Big banks do a terrible job, on the asset side. Economic growth has been declining in the United States in lockstep with consolidation of banking. (Correlation is not causation, but when there's blood on the knife, it's hard not to draw inferences.) Bank scale and diversification are harmful to the public interest. They blunt banks' incentives and capability to extend high-quality, soft information loans over the full range of industries, localities, and borrower types upon which economic development depends. By the time regulators are forced to recognize that megabanks are in trouble, the holes in their balance sheets are deep indeed, and the cost to the public of filling them — whether via an overt bailout or a covert tax — will be large.

Even while our money is held as private bank deposits, the public interest would be better served if they were deposits at small banks that fail frequently, but without inconvenience or cause for panic by depositors. Now that all deposits seem effectively to be insured by the FDIC — thank you Silicon Valley Bank! — it would be better if the public held those deposits at little, not-so-diversified, specialist banks capable of lending against domain-specific soft information. Dump Jamie Dimon and his corrupt communist bureaucracy! Remind regulators that their job is not to avoid bank failures, but to insist upon them, promptly, frequently, without pain to the general public.

Banks absolutely should fail, all the time. It shouldn't be a big deal. It's spells of enforced stability that make banking both dangerous and stupid.

Financial regulation is to public lending precisely what loan covenants are in the private sector. They are similar mechanisms intended to serve the same function: to prevent shareholders from exercising their customary control rights in ways that, in expectation, would transfer wealth from debt investors to equity holders rather than or in addition to increasing the aggregate value of the enterprise.

A leveraged firm is, from the perspective of shareholders, a call option on the assets of the firm. Equity holders maximize their wealth by taking large risks. If those risks work out, shareholders get to appropriate the increase in the value of the firm. If the firm crashes and burns, well, sure shareholders lose their stake, but their stake is only a fraction of the resources they had used to build their lottery ticket with. Lenders eat most of the loss.

When shareholders swing for the fences, they enjoy all the fruits of victory, but creditors bear the cost of striking out. In expectation, creditors lose money on big risks. Creditors' upside is restricted to the interest payments they've contracted for, so their interests are maximized when the firm chooses the least risky path that would just cover those interest payments and repayment of the debt. Ambitions any risker than that increase the probability of nonpayment without doing creditors any good. However, riskier ambitions increase potential earnings beyond debt service, earnings that equityholders get to keep if the risks pay off. So risk-taking amounts to transfer from creditors to shareholders. As risk increases, the expected value of creditors' investment declines (because the probability of default rises), while the expected value of shareholders position rises (because the possibility of a big payoff increases).

Creditors "sign up" to a certain degree of risk-taking by equity holders when they agree to lend to a firm. The firm presents its business plan. Firms must take some degree of risk to generate the operating profits from which interest will be paid.

But once the contracts are signed and the money is lent, what is to prevent shareholders from changing their business plan and adopting a much riskier strategy that effectively loots their creditors?

Well, when the lenders are private, they insist upon "debt covenants" in the lending contracts. These give creditors leverage to usurp shareholders' control rights as soon as it seems like shareholder risktaking may be putting repayment in jeopardy. What kind of "leverage"? Usually, they allow the creditors to demand full and immediate repayment, which the firm which has borrowed to spend and invest, is unlikely to be able to provide. So, when covenants are violated, shareholders and lenders enter into negotiation, and shareholders ultimately have to do whatever creditors say to avoid being sued into bankruptcy.

In a better world, public lenders could do the same thing. They could protect their interests via debt covenants. Unfortunately, most public lending is opaque and covert: it takes the form of public guarantees of private debt, rather than public lending directly. In this case, the notional lenders (bank depositors, for example), have no reason to negotiate debt covenants and monitor adherence to them, because the notional lenders could care less. They are not on the hook for the loss. The actual bearer of risk, the public guarantor, is not directly a party to the contracts, and so cannot negotiate covenants either.

Thus financial regulation.

There are lots of different kinds of financial regulation, for lots of different purposes, sure. But the main thrust of financial regulation is simply to do for public guarantors exactly what covenants do for private debt contracts. Just as private covenants are negotiated so that creditors can usurp control from shareholders early on in the dangerous-risk-taking process, financial regulation aspires to prompt corrective action, under which regulators exert control before shareholders can put too big a hole in balance sheets that the state guarantees. Private creditors take control by threatening to accelerate repayment of their loans. Public regulators use a variety of tools, from compelling management to perform specific actions in order to reduce risk, to taking the indebted firm into receivership and operating it themselves.

Fundamentally, private debt covenants and public financial regulation are the same thing. They are means by which creditors of leveraged firms try to ensure shareholders can't loot them by building tripwires that allow creditors to usurp control from shareholders when shareholder risktaking threatens creditor interests. They look different, they take different forms, because private creditors can regulate within debt contracts that they sign, while the public sector offers finance primarily via guarantees, and so must impose its regulation outside of the contracts that borrowing firms and their notional creditors devise.

Banks are not private businesses.

Yes, of course, they do pretend to be. They are listed on stock markets. They take the organizational form of a private business. Their profits are definitely privatized.

But their risk is borne almost entirely by the state. Beyond a small sliver of equity and bonds sits a vast ocean of "deposits" that the state guarantees, explicitly via "deposit insurance", tacitly far beyond that.

"Deposit insurance" itself is a pretense. Recall that the first thing FDIC did during the 2008 financial crisis was more than double its insurance limit from $100,000 to $250,000. What kind of insurance company increases the limit of the insurance it provides at just the moment claims become likely to be made? What kind of insurance company lets you multiply your insuredness for free if you perform bureaucratic busywork that does not in anyway mitigate the underlying risk, like split your deposits between an account in your name and a joint account, or form a trust that's still yours unless you die?

FDIC is not "limited deposit insurance". When it was founded, perhaps it was intended to be that. But by the early 1970s, as the strict prudential regulation that emerged during the Great Depression was slowly whittled away, anyone paying attention came to understand that the state's role in banking goes far beyond an insurance product, maybe on slightly subsidized terms. With an insurance company, it's usually a bit of a struggle to get claims paid. The companies are trying to minimize payouts. With FDIC, it is an extraordinary event when even notionally uninsured depositors are not made whole. It does occasionally happen! But it is the exception, not the rule. It results from the sin of keeping deposits beyond FDIC's notional limit in a bank so minor and insignificant that its customers can be sacrificed to the project of maintaining appearances. It must appear that FDIC is an insurance company with a statutory obligation to minimize costs. It must appear that banks are private companies that are required, as many businesses are, to purchase certain insurance products in order to protect customers or workers.

Whether the resolution of a bank — or, more usually, a cluster of banks, since bank failures are not independent events — will ultimately be cheap or costly to "the taxpayer" depends almost entirely upon regulation and supervision prior to the resolution. FDIC (and the Treasury, and Fed) can play various games to limit the impact of resolution on the Deposit Insurance Fund, like levying fees to other banks that will be passed along to taxpayers in their role of bank customers (or that would be, if bank profits were disciplined by competition). But the cost of a bank resolution will always be the size of the hole in the banks' balance sheet that supervisors have allowed to emerge before resolving the bank. All FDIC can do is allocate (or obfuscate) the cost.

That said, bank resolutions needn't be costly! When supervisors do their job — when the state uses the tools at its disposal to aggressively manage this risk of banks that the state almost entirely bears — banks are prevented from taking risks that will make the bankers rich if things work out, but leave a crater in a balance sheet they walk away from if things don't work out. When supervisors actually do take "prompt corrective action", they can prevent balance sheet holes from growing very large, and so minimize the cost of resolving a bank.

Bank resolutions needn't be costly, though of course often they are. The bank failures attending the 2008 financial crisis and the 1980s S&L crisis were not cheap.

But people spend far too much energy worrying about the cost of bank failures, and far too little worrying about the cost of bank survival.

Banks are not private businesses. Their risk is borne almost entirely by the state, so the state tilts the playing field to ensure that overt, embarrassing, disruptive bank failures are suppressed. No one objects (except the bankers) when this takes the form of supervision and prudential regulation. But the most costly forms of state support take the form of subsidies that the state can pretend are not "taxpayer funded", but that impose quiet costs on the public anyway. Do you remember when the Fed retroactively rewrote millions of lending contracts so that banks could charge more interest and recapitalize? Do you remember when the nation debt doubled in less than four years, precisely so that large banks would not have to be resolved? Yes, Virginia. Bank failures, actually, are much less expensive than the things we do to fill holes in bank balance sheets so we need never acknowledge their failures.

Apropos nothing, check out this Bank Term Funding Program! Valued at par. ¹

Meanwhile, since we pretend banks are private businesses, we let shareholders and managers siphon off wealth while banks take risks on behalf of the state, and then again as they skim from the opaque subsidies the state pours into them when things go sour.

It is a good thing, not a bad thing, that the risk of aggregate investment is ultimately borne by the state. I am sometimes asked whether I really believe that our choices are to tolerate something on the verge of fraud or revert to goat-herding. The answer is no, I don't believe that. Even though historically private bank finance emerges — very productively! — at the edge of fraud, we now have states that can overtly undertake investment risks on our collective behalf that we as individuals would not consent to take with our own resources. The state already is the bank. What's left is to acknowledge that and, importantly, to devise an institutional structure for state-backed development finance that is not so obfuscated and corrupt and shell-gamish as contemporary banking, but that also avoids the pathologies of politicized lending.

Once upon a time, I might have been persuaded that it's good that banking camouflages as private finance while it covertly mobilizes the resources of the state. The theory is that it's much better to have investment mobilized on commercial terms than on political terms, and the pretextual privateness of contemporary banking permits that. You don't want a world in which state resources are allocated based on political connectedness or populist fads rather than investment quality.

The proof is in the pudding, though. The contemporary "private" financial system is shit. It can mobilize resources stupidly — secured against collateral like real-estate, or against least-common-denominator "hard information" like credit scores. But it no longer performs its most essential task: ferreting out and funding good uncollateralized loans. It creates rivers of financial flows from the poor and disorganized to the rich and well-connected. It has profitably, but contrary to domestic public interest, underwritten the near total offshoring of critical industrial capabilities in ways that overtly public finance, whatever else its flaws, would never have allowed. It finances consolidation of industry, and helps organize shareholders into tacit cartels. Despite its privateness and supposed commercial orientation, contemprary finance is hardly immune to cronyism.

For all the obvious pathologies of our politics — in part because those pathologies are obvious and public — I think we would be better off reorganizing finance, disentangling deposits and payments entirely from risk investment, ensuring credit availability by having the state explicitly support investment funds dedicated to forms of economic development we decide are prosocial.

Of course there will be scandals. It is an institutional reality that private sector business aggressively markets itself as virtuous, despite its unhidden thirst to maximize the rents it can extract, while the public sector is subject to eternal scrutiny, under which every failure to live up to an ideal of public spiritedness is treated as discrediting of the entire enterprise. But the public sector succeeds at least partially at virtues that the private sector does not even pretend to attempt. The private sector is precisely in the business of doing the self-interested things that in the public sector get called corruption. It's just not labeled corrupt, because treating aggressively in ones own self-interest is what's expected!

A better financial system would include investment funds whose private managers, like contemporary banks, enjoy outsized gains in exchange for exposure to first loss on state-financed investment. But there would be no prevarification about where the money is coming from. It is coming from the state. It is a mobilization of our collective risk-bearing capacity, towards ends that the broad public supports. The composition of our aggregate investment portfolio — the most important edifice that we all collectively construct — would not be pawned off on anonymous market forces. It is the responsibility of the democratic state, however imperfect our democracy remains.

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See also Robert Hockett and Saule Omarova

Tonight the US Treasury, Federal Reserve, and FDIC delivered a joint statement in order to staunch the panic provoked by last week's resolution of Silicon Valley Bank. (ht Steve Herman).

Regulators shocked the market last week, not because SVB was shut down and put under FDIC receivership, but because initially it seemed like regulators were going to only insure up to the formal $250,000 limit of FDIC insurance, which would leave SVB's many business customers unsure of when and how much of what they had thought were safe bank deposits would ever be recovered.

Today's joint statement returns us to the post-Great-Financial-Crisis tacit status quo. During the Great Financial Crisis, regulators created an expectation that customers — at least customers of not-tiny banks — would not lose a penny even of their uninsured deposits in a bank failure. By law, of course, uninsured deposits are, well, uninsured. FDIC is supposed to resolve banks at least-cost to the taxpayer and if that means stiffing uninsured depositors, well, so be it. But in practice, regulators post-GFC have understood that stiffing uninsured depositors makes no sense in our brave new world of banking, and have publicly fretted whether inadequate precautionary regulation might place them in the position in which they found themselves last week, where they might feel they have no choice.

To be clear, I think that Treasury, the Fed, and FDIC have done the right thing here. Once upon a time, the rationale for limited deposit insurance was that large depositors, whether rich individuals or big businesses, should monitor the operations of the banks they entrust with their money. Bankers who took unsound risks would face market discipline, losing the major depositors without whom they have little capital to risk.

But in practice, this just doesn't work. Even regulators, who are highly trained specialists with privileged access to internal bank data, struggle to evaluate the soundness of modern banks. A midsized business that keeps $1M in the account from which it has to make payroll each month has zero real ability to keep honest a profession deeply schooled in the financial dark arts. If we insist that uninsured depositors take losses when their bank fails, the outcome won't be better disciplined banks, but a run to the banks that are hardest of all to discipline, the ones widely understood to be "too-big-to-fail". Despite tonight's walkback by regulators, the chaotic resolution of SVB may have already made that very bad result inevitable.

What I do take issue with is Treasury/Fed/FDIC's claim that "no losses will be borne by the taxpayer" as they make uninsured depositors whole. Not to put too fine a point on it, that's bullshit. It's a particular strain of bullshit that has grown both common and destructive in the policymaking community.

Treasury/Fed/FDIC say no losses will be borne by the taxpayer because they will levy a "a special assessment on banks, as required by law" to recover FDIC's losses. But who, pray, will pay for that "special assessment on banks"? It is not an assessment on the personal wealth of bank managers or shareholders. Some bank managers are billionaires, but they will pay no more of this "special assessment" than you or I. What will happen is all deposits will become effectively mutually insured by the industry as a whole. Every bank's costs — whether paid up-front as explicit FDIC deposit insurance premiums or paid on the backside as "special assessments" — will increase. Banks will have to recover this new cost from customers, in higher fees, higher lending rates, or lower deposit rates.

Sure, there will not formally be a new tax to cover these costs. But in substance, the tax-paying public will experience higher expenses or foregone income. This habit of declaring "no new taxes" in form, while tacitly imposing taxes in substance, deprives the public of any capacity to design the tax, to shape its incidence, and to hold accountable those who provoke the costs the tax must recover.

This is not the only case where policymakers launder taxes through what are ostensibly "private insurance premiums". Health care is riddled with this tactic. Whenever policymakers cap the "out-of-pocket cost" for a drug or medical procedure without also capping the cost billed to insurance companies, they are simply socializing whatever cost the billers impose via a "tax" that gets embedded all of our monthly premium payments. Whether any particular medical cost should be "socialized" or concentrated on the recipient of the service can be a subject of heated debate. (I'm on the side that says most medical costs should be socialized.) But regardless, we need to manage the cost we pay in aggregate for medical services, however we divide the hit. Capping out-of-pocket costs but not capping costs billed to insurers may perversely lead to increases in aggregate cost, as larger costs spread over the whole insurance base escape the outrage and scrutiny that concentrated costs provoke.

It's better when we impose costs the public will have to bear as overt, explicit taxes than to let policymakers impose costs through private intermediaries then pretend "no losses will be borne by the taxpayer".

One way or another, the public, or some part of it, will have to bear the cost of unlimited deposit insurance. The clearer it is that you and I and all of us are on the hook whenever any bank's hunger for yield leaves any deposit unbacked, the more likely we are to adopt actually sensible policy, like disentangling the deposits and payments system entirely from private risk investment.

In my post on how why higher education is shockingly right-wing, some libertarian commentators didn't like this:

If "left" and "right" have any meaning at all, "right" describes a worldview under which civilized society depends upon legitimate hierarchy, and a key object of politics is properly defining and protecting that hierarchy.

"Left", on the other hand, is animated by antipathy to hierarchy, by an egalitarianism of dignity. While left-wing movements recognize that effective institutions must place people in different roles — sometimes hierarchical, sometimes associated with unequal rewards — these are contingent, often problematic, overlays upon a foundational assertion that every human being has equal dignity and equal claim to the fundamental goods of human life.

That, dear reader, is about the best and most concise explanation of left and right as you are ever going to get.

But my libertarian friends hate it! Here's Tim Worstall:

Therefore markets – and free markets more especially – are not a right wing idea. For the entire point about the free in free markets is that absolutely anyone gets to try overturning that hierarchy. And, often enough, succeeds. Apple fucked over AT&T rather nicely, Whitney’s cotton gin entirely shafted the linen and wool weavers, Aldi and Lidl cost Sainsbury’s shareholders billion upon billion.

Which means that the left embraces markets as those hierarchy overturning engines that they are. Right?

Ah, Tim. Markets are not just ideas. They are actual practices and institutions, which occur in the context of real societies and lived circumstances.

Free markets were indeed a left-wing practice, several hundred years ago, when an ascendant bourgeoisie, bound only by the spontaneous organization of market logics, overturned the feudal hierarchies that had dominated Europe until then.

Markets can be anti-hierarchy, and when they are, yes, they are on the left! "Classical liberals" used to be at war with the traditional right, remember?

But what if, today, we talk about Marin County.

Marin County, for those who don't know, is an exclave of San Francisco. It's the spit of land immediately across the Golden Gate Bridge from the city proper. It is breathtakingly beautiful. Its towns — places like Sausalito, Mill Valley, Larkspur, San Anselmo, Fairfax, and Tiburon — are contemporary paradises: safe, culturally lively, brimming with small-town charm but only a short drive from the big city.

And Marin County is impeccably progressive! Everywhere you go, you will see the signs:

Perhaps Tim and I would agree that there's something a bit hypocritical in all this progressivism. Everyone really is welcome in Marin! (Well, not in Bolinas, that's a different story.)

Everyone is welcome, but a modest home will cost you a couple of million dollars. Those charming towns are incredibly segregated, racially and economically.

The residents of Marin, like university professors, are perfectly sincere in their progressivism, as far as it goes. Yet, the residents of Marin assiduously defend exclusive access to extraordinarily desirable places to live without erecting a single physical gate. All they need is the housing market, under land-use rules that serve both to preserve the very real charm of their communities and to keep housing scarce.

Perhaps that's not the market Tim would prefer! But it is the market we actually have.

Matt Yglesias sometimes describes his YIMBY preferences with respect to land use as Latin-America-style land reform. And he has a point! If Marin housing markets were made "free" in the way that Matt, and I suspect Tim, would prefer, then they might have a left-wing, anti-hierarchical valence!

But that is not our world. In our real world, social hierarchies are primarily inscribed via market processes.

Quoting myself yet again (fucking narcissist):

[W]hat it means to live in a stratified society, precisely what it means to live in a stratified society, is that there are objective correlates to position along dimensions that individuals and communities cannot themselves choose. There are positional dimensions whose importance is a social fact, not arbitrary, but real as social facts are, by virtue of their consequences. In such a society, positional goods with desirable correlates, inherently scarce and inelastically supplied, become extremely valuable. In some societies, those goods may be rationed by custom, or by heredity, by caste or race. But to the degree that a society is “liberal” and capitalist, they will be price-rationed, as they largely (but incompletely) are in our American society.

In a stratified, liberal capitalist society, the ability to command market power, to charge a margin sufficiently above the cost of inputs to cover the purchase of positional goods, becomes the definition of caste.

If libertarians restricted their support for markets to arrangements and circumstances when they are anti-hierarchical, well, then they would be of the left!

But very obviously, they do not in practice do that.

Libertarians share exactly the same pathology as university professors and the smiling residents of Marin County: They flatter themselves that they stand in opposition to vicious social hierarchy, and find true-enough narratives by which to spin their allegiances into support for equal dignity. But their actual practices, the institutions they inhabit and animate and from which they earn their succor, belie all that.

Contemporary libertarians are, um, quite disproportionately winners under current market arrangements. And they assiduously support those arrangements. They do not, for example, condition their support of markets on the rigor of actual competition, so that economic rents don't accumulate. Libertarians are not like a certain stripe of socialist, whining that socialism has never really been tried. Libertarians say that capitalism has been tried, and it works great.

But under actually existing capitalism, Matthew effects rule the day. Markets may be notionally "free", but past winners (humans, not just firms) have tremendous advantage. Certain classes of people understand that market arrangements are likely to continue to deliver to them security and abundance, but will sadly deliver those goods less adequately to other groups whose ongoing misfortune, despite occasional bootstrap stories, we can pretty well predict.

Markets, under these circumstances, become a locus of hierarchy, rather than a challenge to it.

Which is why, despite protestations about loving freedom and encouragements to individual pluck, contemporary libertarians quite correctly identify as of the right.