Banking, as regards regulation, is a special case.
If a taxi company or a pizza company goes belly up, people shake their heads sadly and move to a competitor. The free market is the best arbitrator.
If a chain of banks goes belly up and people's life savings are gone, you get rioting in the streets. That's the kind of situation that let Hitler into power. For the sake of preserving civilization, governments act as the de facto underwriters of bank deposits. This free insurance is an effective subsidy, and people don't give you free money without demanding control to go with it, so it's inevitable that governments end up having a say in how the banking business is carried out.
People put their fucking life savings into Bitcoinica. If that starts happening on a large scale - if Bitcoin becomes a major currency, and people have the opportunity to put their life savings into bitcoin banks - then bitcoin banks will start being regulated, just as fiat currency banks are. As a libertarian, I'm not entirely happy about this, but we have to deal with the world as it is, not as it should be.
The reason that bank runs and failures are so destructive is because of the state build cartel, driven by central banking. That was built in order to prevent competition and to let fractional reserve(which is in essence fraud) to run wild.
The only reliable way to ensure stability in banking is to separate it from the state and let the free market do what it does in every industry known to man, weed out stupidity and fraud.
Except, of course, that there's no way to tell as an ordinary customer whether your bank is genuinely secure or just following cargo-cult security until they get hacked and lose all their money. There's also no way to make sure that your bank isn't using fractional reserve banking until there's a bank run and it fails.
And that's assuming people are rational and wise. They're not. For example since the Bitcoinia failure, the free market has lead to a whole bunch of Bitcoin users investing in something that has all the hallmarks of a ponzi scheme and accusing anyone who points this out of trolling and slandering the guy running it.
The competitors of a bank practicing fractional reserve and cargo-cult security would have a major incentive in pointing that out, in order to gain market share.
The free market does not lead people to nothing. What 'it' does is to reward lucrative (i.e. economical and profitable) behavior and to punish stupid ones. It is a form of social organization with an embedded stabilizing mechanism.
The same could be said of centralized banking, or centralized anything, as could be more easily seen on the more socialist economies of the soviet block.
Given that, let the people invest their money as they see fit, and punish fraud (including fractional reserve banking) as the crime it is. Simple solution.
If a taxi company or a pizza company goes belly up, people shake their heads sadly and move to a competitor. The free market is the best arbitrator.
If a chain of banks goes belly up and people's life savings are gone, you get rioting in the streets. That's the kind of situation that let Hitler into power. For the sake of preserving civilization, governments act as the de facto underwriters of bank deposits. This free insurance is an effective subsidy, and people don't give you free money without demanding control to go with it, so it's inevitable that governments end up having a say in how the banking business is carried out.
People put their fucking life savings into Bitcoinica. If that starts happening on a large scale - if Bitcoin becomes a major currency, and people have the opportunity to put their life savings into bitcoin banks - then bitcoin banks will start being regulated, just as fiat currency banks are. As a libertarian, I'm not entirely happy about this, but we have to deal with the world as it is, not as it should be.