Chris Baus

Start your own bank

I've been refilling my reader with blogs, both old and new. It is a discussion for another day, but I miss blogging and believe the medium is due for a renaissance of sorts. While refreshing my reading list, I scanned an article by Matt Mullenweg that caught my attention. Matt considers starting his own bank.

From a professional standpoint I read two types of blogs, technical and financial, and only at the fringes do they meet. So when a decidedly technical blog takes on a financial topic, I take note. As a bit of a disclaimer, I am techy, and my current work does not involve traditional banking per se.

In this entry Matt outlines a reasonable, if optimistic, model for starting a new bank. Outside some notions about how the FDIC insures deposits, he approaches the problem as most internet technologists and entrepreneurs would: by assuming that the industry is dictated by market forces. What I think is telling is the tone of his own commenters, many of whom discussed the regulatory hurdles involved in starting a bank.

Even if Matt, with what I assume is a sizable book of contacts, could overcome the hurdles needed to start a bank, it is safe to say his initial vision would have to be scaled back significantly. For instance it is difficult to envision how he could pay market rate interest by keeping much larger reserves than all his competitors (who are also FDIC backed). This is why I feel compelled to revisit my arguments against regulating the internet.

Warren Buffet in the last few years has made significant investments in railroads as he has believed the fundamentals of the industry had improved as a result of deregulation in the 80s and 90s (disclaimer: I own a small position in BNI). But if an internet tycoon decided to switch careers start a railroad, I believe he or she would be shocked by the regulatory roadblocks, dating back to the railroading heydays of the late 19th and early 20th century, that they would still face. During the dot com boom, the valuations of many internet companies were compared to the early days of the railroads. While many scoffed and claimed the "new economy" (boy does that term now seem dated) was different, the analogy was pretty reasonable. I believe we are now entering the maturity and regulation phase of the internet and will face many of the issues that the railroads faced in the post war 20th century.

As someone who deals with the implementation of financial regulations day in and day out, I find myself in agreement with Peter Schiff's recent comments regarding the opening of his first mutual fund. While I can find reason in some of the regulations, a lot, and I think many who work in the industry would have to agree, have resulted in increasing costs and decreased the amount of unbiased data that is available to average investors.

Again this is why I caution against regulations on the internet. While many of us are quick to request increasing the regulations on other industries (such as health care), I think we would be appalled if the same level of regulation was applied to our business. While the price fixing regulations on the railroads had a lot backing in their time (and surprisingly still do), they basically put the entire industry in bankruptcy, and the same thing could happen to network providers.

But overall Matt's proposition gives me hope. Hope that successful internet entrepreneurs will want to apply the same techniques they've applied to their businesses in other domains. That they will see their propositions as adding value and not taking away value, which will ultimately lead to a switch in view point. Regulation doesn't always provide the most value for the most number of people, and innovation will continue beyond the technology industry.